BrazilPetrochemicals takes double hit from oil prices and Covid-19
The petrochemicals sector across the world is dealing with significant disruptions from the Covid-19 crisis, and making matters even more challenging, the sector is now also facing a crude oil price war.
In a major hit for the sector, demand has suddenly dried up in a number of end-markets. Be it the automotive, oil & gas, consumer products, rubbers or a range of others, there has been a severe demand shock as a result of Covid-19 and several major economies across the globe going into lockdown.
“On the other hand, demand for pharmaceuticals, food additives, and disinfectants is peaking,” said Lucas Prat Bertrams, a partner at Strategy& in Europe, meaning that the sector is having to redistribute its supply chain in rapid fashion.
The GCC region backed by the dominating Saudi oil market is among the regions particularly hard hit by the current economic conditions. Speaking to online publication Zaywa, Strategy& Middle East partner Frederic Ozeir, unpacked on why the petrochemicals sector is particularly susceptible to the Covid-19 conditions.
“Whether it is the availability of shift-based operational staff, the imports of critical equipment and services, or the downstream sale and disposal of products, as a 24x7 process industry, the petrochemicals sector is reliant on continuous and global supply chains,” said Ozeir.
Oil prices
Add to this the fact that the sector is currently contending with plummeting oil prices across the globe, and in its slipstream, Saudi Arabia and its allies Organisation of Petroleum Exporting Companies (OPEC) are currently engaged in a price war with Russia and its allies. Neither market is willing to ramp down its oil production as of now, which is sending global oil prices into a nosedive. “Last month, the price of crude oil suffered its biggest drop since the start of the gulf war in 1991,” said Bertrams.
At a global level, this dip is causing shifts in trade dynamics. “The US, losing its cost advantage from shale gas, and the Middle East are most negatively impacted,” said Bertrams. Asia as a whole and China specifically will remain fairly steady, while Europe is likely to win out due to the market’s reliance on the relatively less exposed specialty chemical products.”
These are the unanticipated results, while other changes in the global market will be driven by actors looking to adapt and capitalise under new conditions. For instance, Bertrams predicts that an increasing share of the global petrochemicals supply chain is going to become localised, as companies look to move production closer to their consumers. He points out that trade wars were already sparking such a trend in before Covid-19, and the current scenario will only exacerbate it.
Then there will be those who are currently taking bold risks as they eye long term opportunities. Some of these actors will emerge dominant in the wake of this crisis. “Cash-rich companies that are positively affected may be able to seize opportunities, act countercyclical and come out stronger,” wrote Bertrams.
Deals
Merger & acquisition activity might also get a boost, according to Bertrams, who highlights how the M&A market in petrochemicals had stagnated due to peak valuations before the crisis. A similar representation of new dynamism in the market is that the petrochemicals sector will now examine a host of new business models that are better suited to a constantly changing business environment.
However, these changes might require significant investment, which appears unlikely in light of the cuts to capital expenditure that most petrochemicals companies are making under the circumstances. One particularly concerning consequence of this will be ceased investments in growth sustainability, which were picking up rapidly in the pre-Covid-19 scenario as the petrochemical sector looked at greener operation models.
Bertrams however urges companies to maintain their pre-corona momentum. “Despite these challenging times, the chemicals industry should keep long-term objectives that consider not only economic, but also social and environmental aspects at the heart of its response plan. The chemicals industry can build on a long history of improving our standard of living and should leverage its innovation strength and resilience to enable responsible value chains (from contributing to safe and affordable food and clean water access, to carbon free energy and transportation),” he said.
“The opportunities are also plenty and include technological developments around 3D printing, polymer recycling, green hydrogen as a source of energy, bio-based products etc. Now is a unique opportunity to increase green investments via government stimulus packages and reach the UN sustainable development goals,” he added.
In the short-term, he advises a focus on business-continuity, government relief where possible, and a reassessment of technology investments, exploring M&A opportunities and supply chain structures to ensure maximum output from minimal investments.
