INDUSTRY INSIGHT

Impact of COVID-19 on the specialty chemicals industry

Specialty chemicals play an important role in maintaining public health and safety and national security. How is COVID-19 impacting the specialty chemicals segment, what are the recovery recommendations, and what are the lessons for the GCC specialty chemicals industry?

In the beginning of 2020, the world became faced with one of the greatest economic, financial, and social crises: the COVID-19 pandemic. While the complete impact is yet to be fully known, it is the chemical industry, and in particular specialty chemicals, that have played an important role in maintaining public health & safety and national security. As the pandemic unfolded, the specialty chemicals industry continued to put forth efforts to meet urgent supply needs caused by COVID-19, including increasing the production of chemicals and materials used in disinfectants, hand sanitizers, and personal protective equipment. Many chemical companies were producing these vital products with the intention to donate the majority of them to health care systems and government agencies. Such chemical companies include Dow Chemical, which donated sanitizers, LyondellBasell which donated a key ingredient for sanitizers IPA, Huntsman which produced sanitizers for charity purposes, and INEOS which built two new plants to produce sanitizers for free distribution to health authorities. These are just some of the examples in which chemical producers have stepped up to support the fight against COVID-19.

“As the pandemic unfolded, the specialty chemicals industry continued to put forth efforts to meet urgent supply needs caused by COVID-19, including increasing the production of chemicals and materials used in disinfectants, hand sanitizers, and personal protective equipment.”

Source: McKinsey, March 2020

“Together with other suppliers, the specialty chemicals used in the automotive industry are expected to be hugely impacted.”

Impact of COVID-19 on the specialty chemicals segment

During the last few months, the specialty chemicals industry, like others, was focusing on managing safety, operational risks, supply chain disruption, and coping with financial obligations. Thanks to the essential nature of production, chemical manufacturing continued through the pandemic. Regardless of the situation, the population still needed to eat, drink and wash, and therefore packaging played and continues to play a critical role over the coming months. Therefore, we expect low impact of COVID-19 on the packaging industry.

As the world continues to be concerned about health and safety, growth in sales of industrial and institutional cleaners (I&I), disinfectants and sanitizers are higher than usual. For example, demand for hand sanitizers and disinfectants in January 2020 increased by 1,400% compared with December 2019. Therefore, as demand grew, makers of household cleaning supplies and hand sanitizers were ramping up production.

Current market conditions are bringing long-lasting negative consequences in the construction sector. Disruptions include cancelled and delayed projects, and declining demand for non-essential projects related to entertainment and sports facilities. This impacts demand for necessary construction chemicals such as concrete admixtures, asphalt emulsions, waterproof coatings, and insulation foams, among many others.

The electronic specialty chemical producers are preparing for the medium level impact as well. Despite manufacturing and shipping challenges, the electronics industry has been mostly spared from disruptions. Nevertheless, short term disruptions in manufacturing are still expected as governments are ordering shutdowns of non-essential production.

Additional pressure is experienced by the already stressed automotive industry. Experts forecast unprecedented and almost instant stalling of demand in 2020. The European automotive industry is temporarily shut down, including brands such as Volkswagen, Audi, SEAT, Ducati, Porsche, and others. Even with resumption of production, companies that relied on Chinese parts and materials will still be vulnerable and may still be shut due to a lack of parts. Together with other suppliers, the specialty chemicals used in the automotive industry are expected to be hugely impacted.

What is next for the specialty chemicals industry?

As economies are gradually reopening for business, companies are turning their attention to recovery. There are many diverse dynamics across industries which will impact the specialty chemicals industry in the mid-to-long-term. Based on recent discussions with chemical companies, we see executives asking the following tough questions: How will long-term demand pattern look like? Should we invest in new capacity of certain products and in certain markets? How will the M&A market look like?

As the market stands now, we forecast the following developments in the chemical industry over the mid-term (2-3 years). In general, demand for specialty chemicals is expected to return to the historically projected GDP multiplier. However, segments which rely on macro trends for their growth are more likely to return to their normal long-term growth course.

As a result of geopolitical uncertainty and market risks, companies will start re-evaluating feasibility and profitability of large investment projects. With billions of dollars on the line and multiple parties involved, we anticipate delays in large projects under development. Nevertheless, we still anticipate that chemical companies will continue to grow organically through expansions of its capacity. However, this expansion will become more targeted and follow more well-defined growth opportunities. Consolidation, divestiture, and privatization in the specialty chemicals space is likely to accelerate as a result of value chain disruptions caused by COVID-19.

The global downturn’s speed and severity have significant implications for the supply chains of global manufacturers. In the specialty chemicals industry, prices and orders are under tremendous pressure. Additionally, many producers experienced supply and delivery disruptions from-and-to regions effected by COVID-19. In the medium to long term period we expect specialty chemical producers to start serious reconsideration and adjustment of their supply chains, which may include potential moves regionally and consideration of going local in their value chain.

“In the medium to long term period we expect specialty chemical producers to start serious reconsideration and adjustment of their supply chains.”

Source: McKinsey, GPCA Analysis, March 2020

“As commodity producers in the GCC will start to formulate specialty chemicals strategies, we need to recognize that it will begin from the consideration of raw material options.”

Current economic downturn brings significant disruption which brings enormous pressure on the ability of the chemical sector to maintain profitability, cash flow, and shareholder value. Companies will be able to survive and thrive during this challenging time only if they will be able to manage and maintain vital cash flow.

The Digital Revolution and Industry 4.0 is widely discussed over the recent years. However, it is now when companies will be really pressured to do more with less and will start looking at investing more in information technology, and digital solutions to increase efficiency.

Lessons for the GCC specialty chemicals industry

While the region is dealing with the effects of COVID-19 on the wider economy, long-term diversification strategies are still in place. Forward looking chemical producers are assessing their opportunities in the specialty chemicals segment. As commodity producers in the GCC will start to formulate specialty chemicals strategies, we need to recognize that it will begin from the consideration of raw material options. More liquid feedstocks will be required in the region to produce additional products in C3, C4 value chains to enable more downstream development. This would allow a more gradual shift towards the specialty chemicals business for GCC producers.

Beyond expanding their own production, many chemical companies underestimate the extent in which they must be involved in developing a local market for specialty chemicals, especially in difficult economic times. First, it is about developing the right products at the right price to help drive local demand growth. By working closely with existing end user segments, companies can bring in new customers who previously bought specialty products overseas and understand which segments of the specialty chemicals market they could tap into first. Second, having a strong foundation in the chemicals business, GCC companies can be more creative in meeting downstream challenges. In order to create more opportunities for downstream industries, some companies have already created investment arms tasked with supporting downstream investment. For example, Sabic has established Nusaned Investment in 2017 to provide opportunities for investors in innovative and pioneering industrial sectors in Saudi Arabia. This example signals GCC chemical producers’ shift towards a more proactive downstream development strategy as an extension to product diversification. This is also an attempt to create a new growth model structured beyond the borders of the chemical industry.

As GCC chemical companies continue moving further downstream on the value chain, they will be faced with more complex customer requirements. While the commodity chemicals business is mainly focused on commercial terms, the specialty chemicals business is largely focused on the customer relationship. Technical support, development cooperation, and the ability to meet specific customer requirements are all critical factors. Therefore, the specialty chemical business requires skills enhancement, deeper technical knowledge of the product and its relevance to the customer, and stronger R&D functions. Depending on the required depth of technical support to end user industries, newcomers to the specialty chemicals business may consider using emerging technologies to support them with customer interactions. They can build digital ecosystems that enable several players to work in tandem towards a common business objective, including technical support, R&D, and customer service orientation.

To summarize, GCC chemical players need to be ready to employ a number of instruments in order to become successful in the specialty chemicals business, especially in the post-pandemic environment. These measures are necessary to ensure success at growth rates that are not less-than what they have seen in the past with their commodities business. Companies that have the ability and willingness to make necessary moves will be better placed for success in the fast-evolving specialty chemicals market. Regional companies cannot afford to miss out on the potential of unlocking these opportunities.

“GCC chemical players need to be ready to employ a number of instruments in order to become successful in the specialty chemicals business, especially in the post-pandemic environment.”

To learn more about the GCC specialty chemicals sector, read the GPCA report released in July 2020 entitled, “Unlocking the Potential of a Specialty Chemicals Industry in the GCC”. The full report is available exclusively for GPCA members.

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