The perfect storm – More headwinds ahead for the chemical industry

The perfect storm – More headwinds ahead for the chemical industry

by avachem, March 26, 2021

Last year, we witnessed an unprecedented global disruption as the pandemic brought supply chains across geographies to an abrupt halt. With the rollout of the COVID vaccines towards the end of
December 2020, we were starting to see green shoots as the consumption slowly started picking up pace. But as the business activity began to pick pace, newer challenges in the post-covid world have begun to emerge.

Increase in crude prices

The year 2020 was like no other for oil prices. The impact on fuel demand due to the pandemic was significant and swift. The demand throughout last year for crude was disorderly and tumultuous resulting in long-lasting implications for the industry. Bolstered by the recovery in global economies, international crude oil prices surged to 13 months high in February led by a positive demand outlook. Supply disruptions in the Middle East also added to the surge.

The skyrocketing prices surged to almost $70 a barrel are now 75 percent higher since November 2020 levels before declining on Friday. Countries that import oil are feeling the heat as the surge in prices comes at a time when they are still trying to attain pre-pandemic growth levels. New waves of coronavirus are already prompting countries to take preventive measures. The rising oil prices will have a Passover effect on the chemical industry as well that depends on crude based derivatives like ethylene, amines, etc. Production competitiveness, trade flows, consumer sentiment, and demand will also be impacted.

Raw material gets costlier

The upward trend in the prices of commodities and manufactured goods have resulted in a 4.2 percent jump in the wholesale price index (WPI) for February 2021 compared to the previous year. This is the sharpest increase in 27 months.

As a result, chemical prices too continue to witness a northward trend. For example, the sharp rise in prices of EDTA acid and Acetic acid in particular will put the most pressure on the profit margins of chemical companies. EDTA acid, which is a key raw material in manufacturing EDTA products, is derived from Amines which again is a crude based derivate. The price of EDTA has already increased. Prices of Acetic acid and its derivatives, which are used in the production of several household applications are up by 53.5%. These rising input costs are unlikely to be passed fully onto consumers.

Surging sea freight Rates

Globally sea freights have risen dramatically in the last 3-4 months to levels unseen in recent years. For example, the sea freight from Tianjin port (China) to Nhava Sheva port (Mumbai) has risen from previous levels of $500-$600 to $2300 for a 20-foot full container load. Similarly, freight rates from Shanghai (China) to African ports like Mombasa, Durban and Lagos have increased by three-fold in just the last 2 months. Freight rates are anticipated to increase further in the next few months as well due to the ongoing issues of port delays, blank sailings and trade imbalance leaning towards exports

The onset of the pandemic disrupted trade significantly driving up the costs of shipping goods. With people around the globe unable to travel, there has been an unlikely surge in demand of goods. However, the demand for shipping these good has outpaced the availability of containers in Asia. 

Due to the pandemic restrictions, there is limited availability of dock workers and truck divers resulting in significant delays in the turnaround time. Containers in large numbers have been held up at ports across USA, Australia and New Zealand. As a result, India is staring at a container shortage. The situation is dire enough for manufacturers in East India to transport their wares 1,000 km by road to Mumbai in the West instead of Kolkata in the East, since Mumbai’s port has containers available to ship their goods while Kolkata does not.

Texas energy sector faces a freeze

A winter storm sweeping across Texas and nearby regions in February chipped off at least a fifth of the USA’s refining output and at least a million barrels of crude production. The southern state not typically hit by extreme cold, was unprepared for the resultant damage that ensued forcing refiners with oil processing facilities along the Gulf Coast to halt operations.

Icy roads halted the trucking, the loss of power cut electricity to oil pumps and saltwater disposal facilities and in some instances even wellheads froze affecting production of crude derivatives and other chemicals.

Brace for impact

Due to the unprecedented levels of uncertainty, costs across value chain are expected to rise. The effective demand-supply gap is anticipated to exacerbate the supply chain of raw materials and add to the already inflated prices the industry is witnessing.

As a preventive measure, chemical companies are shifting from long term contracts to offering only spot pricing with short price validity. They too anticipate prices to increase further by another 25%. With the multiple headwinds the industry is facing, it is difficult to predict till when the outlook will remain volatile. As a responsible player in this segment, at AVA chemicals we will continuously strive to offer reasonable pricing to our valued business partners. We suggest procuring the materials required for the month of March and April 2021 sooner rather than later to avoid the higher prices that are anticipated.

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