Pain in the Chemicals Supply Chain

By Jonathon Wright

We have learned a lot about the global supply chain from COVID and the war in Ukraine. However, the fundamental forces reshaping global trade are far more deep-seated. We believe it is important that our clients have a holistic understanding of the forces both short-term, midterm and long-term that will redesign supply chains.

Chemical supply chains are not easy to reconfigure due to the asset intensity of the industry. The factors listed below make it imperative that companies understand and have visibility to their current suppliers.

Additionally, it is important to understand alternative suppliers and know the short-term alternatives. In the longer-term investments in capacity and a regional design may be important to help mitigate the vulnerability.

At Roland Berger we believe companies need to take a holistic view on their supply chains and understand the risks inherent in their current configuration.

The pandemic and global manufacturing

The Covid-19 pandemic illustrated to us the extent to which global manufacturing has become truly interdependent. The early days of the pandemic revealed a host of supply chain issues, including:

• Exposure of global dependance on China – such as for personal protective equipment
• Single point of failure – example of such are swabs from Lombardy
• Criticality of common technologies – as seen in the semiconductor industry. Impacted US and European auto OEMs missed target sales in 2021: Ford missed out on an estimated 1.25 million sales and Volkswagen fell short of planned production by 1.15 million. Japanese and Korean car companies appear to have been more insulated by the shortage given their proximity to China
• Lack of visibility at the Tier 2, 3 and 4 levels
  

The war on Ukraine and global energy

The Russian invasion of Ukraine has exposed the weakness in the global energy system, and in particular the high dependence that Europe has on Russian gas.

• Oil prices have risen to 120 USD per barrel
• European gas purchases may be required in Rubles
• Gas deliveries to Finland, Bulgaria and Poland have been cut
• Gas deliveries to the Dutch and Danish are under threat

It will take at least ten years for Europe to reconfigure its energy systems to eliminate this dependence upon Russia.

Ukraine, Russia, and world food security

This year, some are predicting that we are likely to see the worst global famine of the last hundred years. Russia and Ukraine are both major producers of wheat and sunflower oil.

• 12% of global calories are produced in Ukraine and Russia
• Odessa port is blocked and mined
• India and Argentina have already banned wheat exports
• According to the Food and Agriculture Organization (FAO), 26 countries rely on Ukraine and Russia for at least 50% of their wheat imports. These include countries in Africa’s Sahel region, where 6 million children are malnourished and 16 million people in urban areas are at risk of food insecurity, according to the UN World Food Program (WFP)

Natural disasters and extreme weather

It is clear that we are now facing an increasing number of natural disasters and extreme weather events. These events all impact supply chain. For example, the 2021 hurricane and flooding of Houston led to protracted shutdown of chemical capacity on the Gulf Coast, which exacerbated already existing supply chain problems.

These weather events include sustained routes and harvest failures, which will further impact the global food shortage that we are likely to experience in the latter half of 2022.

ESG-Environmental, Social, and Governance

Increasing concern about ESG issues will have major impacts upon the supply chains. Concerns about forced labor, child labor and exploitation of native peoples are having an increasing impact on Western companies.

Additionally, reducing transportation of raw materials, partially manufactured goods, and finished products may be one of the most straightforward ways to reduce our carbon footprint.

Fundamental changes in the pattern of global manufacturing

During the 2000s and up until 2015, there was a general trend to move manufacturing to China due to its low wage and low-cost environment. China is no longer a low-cost economy, and reshoring and near shoring may now make economic sense. We anticipate significant investment in the new low-cost economies, such as Vietnam, Cambodia, and Indonesia as global supply chains are optimized.

National security and security of supply

We are now seeing a change in the geopolitical landscape, as China is clearly on its own path and unaligned economies such as Russia are exploiting global uncertainty. This makes it almost inevitable that on a forward basis, national considerations will be taken into account as supply chains reconfigure. This will be particularly important around food, pharma, electronics, and battery technologies for electric vehicles and energy storage.

Inflation defense

Companies are facing headwinds from inflation across all sectors, and vendors are passing these on to producers. However, inflationary pass throughs often over-estimate the real impact of commodity and labor inflation on the vendors’ cost structure.

Monitoring vendor financial health

Inflation and high(er) interest rates coupled with a looming recession is putting a significant share of companies at high financial risk. This may very well lead to a slew of bankruptcies in late 2022-end 2023, which means companies need to work collaboratively with their vendors to assess their financial viability and put measures in place to ensure alternative sources of supply if the vendor financial health is poor and risk of vendor bankruptcy is high

In conclusion we see all of these forces acting in such a way that our clients must take a purposeful and considered evaluation of their future supply chain structure. This restructuring of the supply chain needs to be based on a firm fact base. Businesses will need to understand how the forces we have described will influence them. Then they will need internal alignment across the business to plot a path forward.

At Roland Berger, given our cross industry view, we are well placed to help our clients understand the risks they face and help them prepare for the future.