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In the news every day we see the changes in economic activity in the upstream oil & gas exploration and production business caused by the significant drop in oil prices over the past several months.
Peter Cox Director, Global Chemical Industry
Peter notes that the chemical industry, with its vast diversity ranging from production of oil-based petrochemicals and plastics to the high-tech specialty and consumer chemicals, has learned to live with the VUCA environment—Volatility, Uncertainty, Complexity and Ambiguity. It seems that it has been and will always be the order of the day in the chemical industry, but producers are becoming more clever and proactive in dealing with this current environment.
He describes some of the risks chemical producers face today beyond the drop in crude oil prices including geopolitical unrest and its many implications as well as China’s continuing growth slowdown and uncertain outlook. Production costs of basic chemicals and plastics are highly dependent upon the price of energy and energy-derived feedstocks. In the Americas, the American Chemistry Council reports that chemical production continues to expand.
The combination of both of these factors can represent as much as 75% of the total cost of the end product. Given this fact, lower oil prices are taking most chemical and polymers prices down worldwide. No doubt this will compress profit margins in commodity chemicals, even as input costs from oil and its derivatives decline.
On the other hand, as you move further downstream into the specialty and consumer chemicals realm, their profit margins have actually improved due to the lower oil prices and the return on investment (ROI) has subsequently also improved. Chemical companies that are likely to benefit include those that manufacture products such as industrial coatings, adhesives, alcohols, fibers and solvents.
Source: ICIS.com, Whitepaper: Budgeting for Uncertainty
For example crude derivatives like propylene are a key raw material for paint and coatings companies. Propylene derivatives can be found in adhesives, coatings, floor tiles, and polyurethanes.
The European Chemical Industry as a whole is seen as the highest production cost region. The lower oil price has provided some relief and improved margins as was seen with the industry confidence level as well as the production capacity utilization reaching the highest levels in three years.
Also positive on a macroeconomic level, the ISM’s Purchase Managers Index is at a current level of 53.50 which is an increase of 2.20 or 4.29% from last year and is higher than the long term average of 52.79. For this index, anything above 50% signals expansion.
The chemical industry has always been robust because of its diversity and it has always been good in looking at improving itself in the face of unfavorable odds. Continuing to focus on improving the performance of assets will be key for the industry’s success. Depending on the industry subsector, this could entail:
Automation can do much to improve chemical manufacturing operations and to ensure companies can be ready for continued VUCA times ahead so they can be flexible and profitable for many years ahead.
You can connect and interact with other chemical industry experts in the Chemical industry group in the Emerson Exchange 365 community.
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