With the onset of the new year, the world woke up to the biggest pandemic of modern times; COVID-19. The virus has left a long trail of devastation from the time it was first detected in Wuhan, China. Every industry has had to bear the blunt of the fallout as factories, offices and even parliaments were shut down to curb the spread. More than half of 2020 is already behind us, and it is only now that the lockdowns are easing in a controlled manner.
The world was affected and the chemical industry was no exception. As COVID-19 is highly infectious, manufacturing units remained closed to protect the workforce. This put production at a halt and created tremendous pressure on the existing stockpile. It wasn’t long till the pressure was felt everywhere with the disruption of the global chain of supply.
According to the PwC COVID-19 US CFO Pulse Survey, the largest US financial leaders are concerned about the potential global recession in the wake of the ongoing pandemic. About 67% of the top corporates are worried about the financial impact, including effects on results of operations, future periods and liquidity, and capital resources. The rest, about 43% were concerned about the decrease in consumer confidence reducing consumption.
Let us look at how the chemical industry is dealing with the ongoing crisis:
Supply Chain and Operations:
Companies have suffered major disruptions in the global supply chain as logistics and supply chain partners face their own challenges. Demand has taken a huge hit due to the pandemic with the additional challenge of disruptions in production and operations
Many companies across continents depend on China for many chemicals, both finished products and raw materials. However, COVID-19 greatly affected Chinas output. This created a major shortage of raw materials for other companies, that were dependent on China for their manufacturing and delivery of finished products. This disruption in the supply chain was a big hit that caused ripples across the industry. Companies had to cut down on optional and capital expenditure to support operations. This could prove to be unsustainable
To combat the situation, companies began evaluating their supply chains to identify the weak points, like geographical locations in affected zones. The greatest challenge was supply chain visibility and establishing lines of communication. This would make way for improved detection and faster remediation of potential problems. Seeking new solutions has been a positive endeavor.
Tax and Trade:
As per a Statista Report, global manufacturing has declined by 3.1% in March 2020. Although chemical production increased in the former Soviet Union by 1.2% during February 2020-March 2020, most production centers experienced a downturn. Furthermore, chemical production in some categories saw an increase in January 2020 compared to 2019, manufacturing in March 2020 in comparison to January/February 2020 witnessed a decline in all categories. Coatings production decreased by -12.9% during this time period. Synthetic rubber, manufactured fibers, plastic resins, organic and inorganic chemicals, and specialty chemicals all suffered significant losses in production.
Many industrial giants have had to reconsider their options beyond China as the country that served as an important link in the supply chain was also the epicenter of the outbreak. On the other hand, considering other countries would mean major tax, transfer-pricing, and customs implications. Chemical companies can consider taking back overseas funds from foreign subsidiaries.
Earlier this year, the price of crude oil fell significantly. This has been the biggest drop in crude oil prices since the gulf war in 1991. This price drop has caused major changes in chemical feedstock prices. While the Middle East is mostly negatively impacted, the US is losing its cost advantage. Whereas in Asia, with China being the largest importer of crude oil, the impact on Asian countries is mixed as lower input prices are compensated by lower output prices.
De-globalization of supply chains:
The Coronavirus pandemic blindsided many industries. On the other hand, it also made way for change. For a long time, companies around the world depended on the major global supplier for their raw materials. The pandemic exposed the dark side of this arrangement. Now, more chemical manufacturers have started to partly move or ramp-up their production of important chemical supplies and medical goods closer to the end-customers, e.g. pharmaceutical active ingredients and excipients (ingredients and raw materials), disinfectants, masks. Setting up production units closer to home and selling products closer to the end-customer, marks the de-globalization trend kicking in.
The current crisis brought with it pain and lessons. It showed the cracks in the existing system that many considered to be too big to fail. The COVID-19 pandemic has driven people, governments, and organizations, to look at things differently by changing the idea of what is ‘normal’. The threat of the virus is not gone yet, and measures like social distancing and quarantines may as well be the ‘new normal’. Ultimately, the industry has been given a new slate, it can choose to adapt and improve the supply chain or completely change it.