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Impact of COVID-19 on Chemical Businesses

Impact of COVID-19 on Chemical Businesses

Chemicals | Apr, 2020

The outbreak of the COVID-19 virus is already disrupting economic activities in the world and the chemical industry is no exception. The pandemic has brought with it the third economic and financial crisis of this century and resulted in over 155,052 deaths and 2,266,586 positive cases in 210 countries and territories around the world as of 18th April.

Impact of Epidemic on Indian Industries

India has faced the largest trade deficit with China with imports roughly four times the exports to the country.

Organic chemicals, surgical & optical instruments, electrical machinery & mechanical appliances and plastics are five items that comprise of 28% of the total imports from China and disruption in the supply chain can adversely affect end-user industries which use these items for production or finished products.

Onset of COVID-19 in the Hubei province, which accounts for sizeable chemical industry, has disrupted the production of chemicals; thereby, contributing to increase in prices of chemicals in global and regional market. The palaver situation is stressing on companies to look for alternatives, presenting an opportunity before Indian manufacturers like United Phosphorus Limited, PI Industries, SRF Limited and Navin Fluorine International Ltd., among others, to capture larger market share.

In Indian chemical industry, 37% of organic chemicals, 13% of inorganic chemicals, 28% of dyes and over 36% of pharma products are imported from China. Pharma industry in India is no different with 67% of active pharmaceutical ingredients or APIs being imported from China. Furthermore, in case of APIs like vitamins, anti-diabetes, antibiotics, reliance on the neighbouring country is more than 80%. Typically, companies in the pharmaceutical sector maintain a buffer stock of APIs for 2-3 months, so there is no immediate concern but if the disruption lasts any longer, the companies dependent on Chinese APIs will be exposed and it will negatively impact the production.

Challenges Before Chemical Companies amidst COVID-19 Outbreak

Right after the outbreak of the virus, chemical manufacturers are facing supply chain interruptions and global travel restrictions in addition to quarantined workforce. Majority of companies have either reduced production in the country or temporarily shutdown their plants.

  • According to Independent Chemical Information Service (ICIS), demand for Chinese chemicals reduced by 15-20% as companies exercised their own restrictions on travel to or from China. For instance, BASF, a German chemical company had to send 2150 tonne of toluene di-isocyanate (TDI) to destinations in Europe, after several Chinese clients delayed delivery of the products.
  • The production got curtailed with an increase in the input prices that is impacting the margins of different transactions. Companies that have entered into a prescheduled delivery contract with various global and domestic clients at predetermined prices would be forced to execute them while procuring the raw materials at a higher cost.
  •  China is the major hub for the raw material required for the production of chemicals, worldwide and government restrictions can impact the profit margins of the companies. Polymer producer Covestro predicts that its earnings for 2020 will dip by USD65 million because of the Chinese government’s restrictions on manufacturing plants during the outbreak of COVID-19 virus.
  • Chinese chlor-alkali plant’s operating rates have declined due to the virus crisis resulting in shutting down of at least four plants, two in Anhui province, one in Hubei province and one in Shandong province with combined annual capacity slightly over 1.5 million tons (chlorine basis). One Chinese producer reported that they have no caustic to offer to the spot market because they are operating at only 50% rates and all their production is therefore directed to the domestic market. Other chlor-alkali end-use segments reported to be operating at low rates in China such as chemicals production, printing and dyeing.

Measures to be Taken for the Recovery of Chemical Industry Post Lockdown

Presently, topmost priority is to minimise the loss of life and health but the pandemic is going to trigger a major economic crisis in chemical industry as well, which will require a combined, co-ordinated international effort to takedown the challenge. Governments in different countries should ensure more international co-operation in response to the impact on the chemical businesses. They should focus more on international co-operations and different government bodies should bring joint policies, rather than taking them in an uncoordinated way and dealing with them individually. They should finance an immediate buffer to economies for cushioning the negative impact and speed up the recovery due to this outbreak. To handle the impact of COVID-19 on chemical businesses, following measures can be adopted by the governments in various economies:

  • Upgrading Innovation and Technological Capabilities of the Industry: Chemical industry needs a major overhauling or upgradation to handle/overcome the negative impact post COVID-19 outbreak. One approach can be improving the technological capabilities, for instance, Wanhua Chemical invested in R&D and developed its own methylene-diphenyl-diisocyanate (MDI) technology, turning the company into world’s largest MDI producer.
  • Ease in Financing: As the chemical industry is under pressure due to the outbreak of virus which has affected businesses severely, governments should provide credit across the industry and the interest rate should also be decreased in order to help the industry recover again. Additionally, governments from across the globe are working on providing package of policies in order to uplift their economies, which saw a major dip due to the COVID-19 outburst.
  • Allowing New Investors in the Chemical Industry: Opening the industry for new investors will help the companies bring back the operations back on track. Encouraging privately owned enterprises (POEs) to establish wholly owned operations can help the industry to fight back and nullify the effects of COVID-19 on the chemical industry.
  • Speciality Chemical Companies Building Strategies: As the outbreak of the COVID-19 virus, undoubtedly has pushed the chemical industry few steps back, a detailed analysis of each individual business strategy in the context of megatrends can help the companies to restore everything back to normal. The declining contribution margins can be checked through improved pricing, and better portfolio and contract management, which will help companies to fight back amidst this pandemic.

The impact of the coronavirus pandemic on the chemicals sector could be far reaching, depending on the extent of its reach and the period of chemical plant shutdown, globally.

The primary response of most chemical companies has been quite appreciable. Major players in the chemical industry have extended their hands to help people suffering from COVID-19 by providing donations. They are also supporting their employees by providing insurance coverage, exercising precautionary measures against COVID-19 and providing rational support. Some consumer segments have even witnessed massive sales amidst this outbreak such as disinfectants, masks, antiseptics, gloves, personal protection equipment, etc. This may turn out to be only a short-term business effect but could also start an unending trend. Demand for packaging materials also increasing globally, as many people are staying indoors and rely on home delivery of packaged food instead.

Chemical manufacturers in numerous countries are reporting progress in their efforts to keep businesses running in despite major losses due to the pandemic. Firms with operations based in China are getting their facilities functional again, and those dependent on raw materials from China are hoping to receive the materials as they re-route supply chains.

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