In the uncertain economic recovery prospects, the global chemical market is even more unpredictable. The sharp fluctuations in the prices of raw materials are normalized, which has seriously affected the profitability and stock performance of some top chemical companies. On February 13, Amit Gautam, the head of Booz & Company, predicted that this trend is likely to last until 2015 or even longer. He suggested that chemical companies adopt flexible practices in many aspects such as raw material procurement, industrial chain extension, and product sales to ensure considerable profits.
Amit said that the challenge of price fluctuations is not limited to a single chemical field, but affects the entire industry, including the entire value chain of raw materials, intermediate products and polymers. Due to the increased uncertainty in the European chemical market, the company's lack of investment in power companies has led to an imbalance in supply and demand in the industry. At the same time, some chemical companies have not yet foreseen rapid growth in the Asian market, reduced inventory due to the economic recession, and increased price fluctuations in the spot market.
ICIS data shows that the quotation cycle for some raw material suppliers has become one month or even one week, which is far shorter than the traditional first quarter to six months. Since the shortened quotation cycle is significantly affecting the profitability of chemical companies, Amit cautions companies to pay close attention to this. At the same time, price volatility may change the industrial structure of the chemical industry over the years.
In the past, many companies have focused their efforts on raw material procurement and forecasting the price of raw materials in order to reduce the impact of cost fluctuations. Amit said that if this short-sighted approach is continued, companies may avoid individual price risks, but they will not be able to solve all the problems, nor will they be able to reduce the risk of new volatility. Therefore, if chemical companies want to solve these systemic challenges, they should not only make a fuss about raw material procurement. Amit emphasized that if a chemical company wants to maintain stable and sustainable profitability in the face of price fluctuations, it must develop a comprehensive strategy that includes determining the main source of price risk in the entire value chain. Amit proposes to assess the criticality of various raw materials and the possibility of price fluctuations through supply and demand balance, innovation speed, supplier demand, and annual sales.
According to these indicators, Amit proposes that in order to protect the most critical raw materials from price fluctuations, companies need to re-examine contracts signed with suppliers, paying particular attention to reducing loopholes in contracts and reducing spot transactions with suppliers. Share price risk. In addition, companies must re-evaluate sales contracts to avoid the possible economic losses caused by rising raw material costs when they sign long-term fixed-price contracts with customers. Amit emphasized that chemical companies must consider how to transfer some of the risk of potential cost fluctuations to customers, so that product prices and consumer price index (CPI) linkage, to significantly reduce the risk posed by the overall price fluctuations.
At the same time, if chemical companies can independently produce some of their raw materials, rather than relying entirely on buying from the upstream, they can avoid price risks in some supply contracts. Amit said that in order to reduce the price fluctuations caused by basic materials, the development of alternatives to other chemical materials is a good long-term choice. For those products whose price volatility may be strong, it is necessary to invest additional R&D funds. In the past six years, the price of glycerol has been much more stable than that of propylene. Therefore, the production of epichlorohydrin using glycerol is less costly than using propylene derivatives.
Amit also pointed out that when the risk of price fluctuations is unavoidable, companies can implement financial risk hedging and mitigate “residual risks†by direct hedging of related commodities. Although this is more risky and more complex than investing in raw materials, in some cases, indirect hedging is also a good choice.
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