What influences the price of chemicals

There is an overwhelming number of challenges that modern chemical companies must overcome. Profit margins are under severe pressure as a result of concerns about the ever-changing prices of key inputs and the increased volatility of global financial markets. In this article, we look at what influences the price of chemicals.

Covid 19 and lockdowns across the globe

The first three months of 2020 marked a dramatic shift in the oil, gas, and chemicals markets. Since these sectors were already facing difficult longer-term trends, the simultaneous effects of the COVID-19 linked economic slump and the oil price fall had a significant impact.

Environmental impact

In addition, the industry has been and continues to be impacted by customers’ increasing concern for the environment that has prompted the energy and chemical industries to investigate decarbonisation methods, reevaluate their holdings, and start diversifying away from hydrocarbons.

There has been a shift in consumer priorities toward products that are more environmentally friendly.The chemical industries’ most important end markets—the automobile and building supply industries—have been affected by these shifts.

Digitisation

The widespread adoption of digital tools is influencing profound changes in the nature of work and the workforce. Many businesses in these sectors have benefited from the adoption of cutting-edge methods of market sensing, operation optimisation, and “in silico” simulation. Companies’ existing digital technologies provided an advantage, but were often still insufficient for the level of remote working and cybersecurity that suddenly became necessary after the unexpected arrival of COVID-19 and the subsequent closure of plants and work sites.

Oil price

As a result of shifting geopolitical conditions, oil prices soared in March 2022, surpassing USD 110 per barrel. The effects of COVID-19 on demand, hurricane damage, harsher regulations, and increased operating costs, among other factors, have led to the closure of more over 1.3 million bpd of refinery capacity in the United States since 2019. Oil price fluctuations are being exacerbated by the present sanctions imposed because of the situation in Ukraine. The rising cost of oil has a domino effect on the prices of other inputs, including those used to produce chemicals and petrochemicals.

Inflation

Inflation has soared alongside oil prices in recent months. When prices of commonly purchased goods rise due to inflation, customers cut back on their spending, which dampens demand. The demand and supply dynamics in the final industries that make use of these chemicals determine the extent to which each product is affected.

About 40% of polypropylene is used to make white goods and parts for cars, both of which will grow more slowly as inflation rises. On the other hand, polyethylene is mostly used to make packaging film, food and drink packaging, and grocery bags, which are less affected.

Investment in real estate has slowed as a result of growing inflation, which has had an effect on the demand for building materials like paints and plastics. Similarly to the price of oil, which has been steadily climbing. Demand for polymers and other construction-related chemicals could be affected by slowing growth in the real estate and construction industries.

Supply chain restraints

The supply chain is under stress due to a confluence of factors, including rising demand, problems at chemical plants around the world, and a lack of available means of transporting essential raw materials. Epoxy resins and solvents are two of the raw materials used in South African paint manufacturing that are often sourced from Europe.

According to CEPE estimates, the price of solvents has grown by as much as 123% since January of last year, while the price of critical components like epoxy resin has risen by 60%.

Raw material suppliers allegedly breached their contracts due to the Covid-19 lockdowns, which led to the shutdown of several European operations, citing force majeure.

Transport costs

High oil prices have also increased transportation and freight expenses in the chemical industry, which were already significantly higher in 2022 than pre-COVID levels. A number of circumstances contributed to this, including the lockdown in Shanghai, increasing crude costs, a dearth of container ships in Asia, and a scarcity of drivers in Europe.

Russia

The chemical industry has seen a spike in manufacturing costs.  Major production interruptions will occur in Europe because of the continent’s reliance on naphtha, roughly half of which comes from Russia. Refineries along the Druzhba pipeline supply about 10%-13% of Europe’s total ethylene capacity and 10%-12% of Europe’s total propylene capacity, thus tightening sanctions might have a significant impact. Consequences for regional producers’ margins would be negative.