With the weak economy, the conservation of petroleum raw materials provides a lifeline for chemical companies. New digital procurement tools can help capture this impact more quickly in chemical companies.
The price of crude oil has been halved since the beginning of March, creating an important opportunity for chemical companies and all buyers of chemical products to save petroleum raw materials. The use of new digital tools gives these companies an opportunity to capture the impact faster than ever in the oil crisis. But companies should act quickly, because there are already signs that the economic turmoil caused by the coronavirus crisis may severely reduce the profitability of the chemical industry. In general, the chemical industry is one of its own biggest customers. In the current challenging environment, companies will need to do everything they can to cut costs when buying, while maintaining profit margins when selling. Smart purchasing actions and efforts to ensure that the sales team will not lower sales prices may provide a lifeline for more than a few chemical companies.
In the past two months, the fluctuation of crude oil prices below US$30 per barrel was less than half of the average oil price in 2019. With the impact of the coronavirus crisis on oil demand and the ongoing battle for market share among the world's major oil-producing countries, many market observers believe that crude oil prices may still be under pressure in the short to medium term.
For many chemical companies whose profits have deteriorated due to the impact of COVID-19 on the economy and chemical demand, the opportunity to reduce their crude oil-based raw material procurement costs may provide a lifeline. From upstream petrochemical companies to a wide range of specialty chemical companies involving adhesives and sealants, paints and coatings, soaps, detergents and personal care products, the cost of raw materials is a key driving factor for the profitability of the entire chemical industry. In many cases, the raw materials of downstream chemical companies will be the final products of upstream chemical companies. Our analysis shows that crude oil prices may fall by 50%. If handled correctly, the company that generates interest, tax, depreciation and amortization (EBITDA) costs two to four percent of the raw material-related expenses equivalent to 10 to 20% of the revenue income.
Highlights the impact of changes in oil prices on the prices of chemical products. It shows the drop in prices of bulk petrochemical products, polymers, intermediates, and engineering plastics after the price of naphtha fell by 50% during the last oil price crash in 2014. After the sharp drop in crude oil prices in early March 2020 and the impact of the coronavirus crisis on demand, we are now beginning to see similar price drops.
Chemical companies face some important choices in how to implement their procurement strategy to help their business to the maximum extent. In the current challenging market conditions, they should consider carefully reviewing their supply contract portfolio and pricing methods to see if they can save costs. This review can include reassessing the trade-offs between fixed-term contract purchases and spot market purchases, and considering how to optimize the types of pricing arrangements they use for contract purchases.
If the purchasing department expects that market conditions will continue to benefit buyers, they can consider increasing spot purchases instead of promising contract purchases that will last for several months. Another option is that buyers can lock in attractive long-term contracts and pricing arrangements from suppliers. In today's uncertain market, suppliers are seeking to acquire long-term customers in order to withdraw their production in order to maintain plant operations.
At least part of the price at which most chemical companies purchase raw materials is based on an index formula. These formulas automatically reflect the changes in crude oil prices. Although there are weeks or even months of time lag in the current market, they may want to see if they can get more favorable terms from suppliers. For example, many companies usually get substantial discounts on formula-based pricing because they can renegotiate between different suppliers. In today's market, they may have the opportunity to obtain greater discounts and lock in more attractive purchase price conditions, such as obtaining a pricing formula based on the cost of upstream raw materials, or allowing suppliers to agree to a fixed price. At the same time, for non-formula purchases, the purchasing department must ensure that the decline in oil prices and market supply and demand conditions are immediately reflected in the prices they pay.