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Implications of Corona Crisis on Global Chemical Supply Chains and New Demand Scenarios

Dr. Kai Pflug, Shanghai, Senior Expert - Chemicals Markets & China, ChemAdvice GmbH

Note: This paper is a progression of an article published in the magazine CHEManager in April 2020.

Executive summary

Covid-19 will likely have a substantial impact on many strategic and operational issues of chemical companies. In particular, global chemical supply chains will be reevaluated, with the goal of reducing the risk resulting from reliance on single, often distant suppliers. Furthermore, Covid-19 may lead to demand shifts that need to be incorporated into the product planning of chemical companies.

Like most industries, the global chemical industry is currently strongly affected by the outbreak of Covid-19. The effects were initially visible in China as the coronavirus spread there prior to the United States and Europe. China`s chemical industry is gradually returning to a more normal situation as the number of infections there has declined - chemical prices on average increased substantially in May 2020. However, the impact on the chemical industry in other countries is still increasing, while they take precautions to limit exposure. Apart from such relatively short-term impacts, the coronavirus will also have a long-term impact on global chemical companies, in particular, on their supply chains and their sales prospects.

Supply Chain Impacts

Covid-19 will likely lead to an acceleration of attempted risk reduction in supply chains - something that had already started way before the virus struck. The main previous drivers were the US-China trade conflict and the tightened environmental regulation in China, both of which led to supply chain disruptions. Covid-19 further emphasizes the need for companies to reduce the risk of relying on distant suppliers, particularly if concentrated in an individual country.

China started tightening its environmental regulation as a consequence of the 13th Five-Year Plan (2016-2020), which led to some disruptions of global supply chains, such as in the case of dyes. When China's top dyestuff maker Hubei Chuyuan, with a 30% global market share in some dyes, was shut down for environmental reasons in 2016, prices of some materials such as H-acid rose by several hundred percent.

Disruptions due to the coronavirus affect a much larger number of chemicals, which are of much higher importance than dyes. For example, in 2019, the proportion of US imports of medicines that came from China included 95 percent of ibuprofen, 91 percent of hydrocortisone, 70 percent of paracetamol, 40 to 45 percent of penicillin, and 40 percent of heparin, according to data from the US Commerce Department.

While so far, the US supply of pharmaceuticals from China has not been severely impeded, Covid-19 has highlighted the inherent risk of depending on overseas supplies. Consequently, industry magazine C&EN concludes "What the pandemic has done is wake up regulators and world leaders to the extent to which China dominates the world's supply of active pharmaceutical ingredients and their chemical raw materials. An ongoing industry effort in the US and Europe to rebalance the pharmaceutical chemical supply chain is likely to be energized by government initiatives to ensure domestic production of drugs."

In some way, this is ironic as currently supply of APIs from China may be the most stable in the world, as the country is much less affected by Covid-19 than most other API-producing countries. However, political support for producing pharmaceuticals is likely to strengthen. For example, in a response to the growing reliance of the country on API imports from China, the Indian government recently approved an investment package worth 1.3 billion USD to increase the local production of APIs. And for agrochemicals, Indian media warned that sales of some Indian companies could be at risk if the virus-induced supply delays of agrochemicals from China persisted, creating another incentive for localization.

Even before the coronavirus outbreak, many chemical companies tried to reduce their reliance on sourcing from a single country (which in most cases happens to be China). For example, in a bid to reduce dependency, a German producer of specialty chemicals has reported frequent enquiries from customers for chemicals now sourced from China - though the much higher cost of these chemicals sourced from Germany prevented a larger shift in suppliers in the pre-Covid-19 word.

In another example from our consulting practice, a US company producing household equipment in China is trying to shift the supply of a coating needed in their Chinese plant from the US to China. This example illustrates that the aim of the ongoing supply chain arrangements is not necessarily a shift away from China at all costs. Rather, it is about limiting the number and importance of cross-border movement of goods. So, for chemicals currently imported to China by Western companies and sold there, Covid-19 could actually lead to production localization in China.

At the same time, Indian specialty chemicals companies are also positioning themselves as alternatives to China. Given that the situation in China is already improving, it now seems ill-advised to focus solely on avoiding China as a source. However, the basic concept of reducing a high reliance on a single source (be it a company or a whole country) still holds true.

Global chemical companies will need to widen their network of suppliers, and it is likely that annual reports of chemical companies covering the year 2020 will have extensive sections on reducing supplier risk in the case of unforeseen events, such as the coronavirus pandemic. While many of the past efforts to reduce the risk of overreliance on individual suppliers or countries had negligible impact due to the associated cost increases, the current situation may make companies much more willing to accept these costs than in the past.

New Demand Scenarios

Perhaps the most interesting strategic question for chemical companies is whether the coronavirus will lead to a long-term shift in demand. Short-term shifts are likely, as governments try to alleviate the negative economic effect of the coronavirus outbreak. For example, in a bid to support the industry in the face of the virus, China has recently extended subsidies and tax breaks for new-energy vehicle purchases for two years- good news for chemicals suppliers for these products. China also announced that it will modify the environmental supervision of companies to help resume production that was disrupted by the coronavirus epidemic, giving firms more time to rectify environmental problems (though emphasizing that overall standards will not be lowered). And China increased export tax rebates on many chemical products, including a 13% export tax rebate on ethylene, propylene and ethylene glycol, to ease the pressure on companies hit by the coronavirus outbreak.

The chemical industries in other countries will presumably benefit from similar stimulus measures, whether aimed directly at the industry itself or at important customer segments. In the US, $2 trillion in stimulus has already been approved to bolster the economy; providing aid that will positively impact much of the economy and prevent demand from plummeting to levels not seen since 2008.

However, these short-term shifts are not likely to be highly relevant for long-term strategy. Other issues may turn out to be more long-lasting. For example, single-use plastics are currently being promoted as highly hygienic materials, overriding some sustainability concerns. Will public perception revert as the panepidemic eventually subsides, or will there be a long-term preference for single-use materials? Similarly, given the acute severity of the virus, will global warming ever be regarded as such a significant life-and-death issue by a substantial proportion of the population once this pandemic subsides? There are already several positive signs of reduced air pollution in many regions of the world -- what effect will this have on demand for cars, plastics, or other chemical based products? Will the focus be much more on rebuilding the economy to pre-virus status, with much less desire for a fundamental shift? Will automotive demand recover, as suggested by the current situation in China? The right strategy for many chemical companies will certainly depend upon gauging the right answers to these questions.

Dr. Kai Pflug is a Senior Chemicals Market Expert with a focus on China and Asia. He is located in Shanghai and offers more than 25 years of Chemicals Industry experience including 16 years in China.



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