The Russia-Ukraine conflict and the resultant sanctions have significantly driven up oil and gas prices, which are a key input ingredient for chemical manufacturing both for energy and as a feedstock. This is increasing costs for chemical manufacturers, especially those found in Europe. Investing in new technology solutions by these companies is a good way to offset increasing costs, in addition to identifying new sources.
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The Cost of Conflict
The current armed conflict in Ukraine is causing significant disruption for markets worldwide. Among these is the chemicals market, which is currently paying a heavy price as oil and gas prices reach unprecedented levels. The chemical manufacturing industry is uniquely exposed to these price increases, with its reliance on oil and gas for both energy and as feedstock.
Russia is the third largest supplier of oil and the second largest supplier of natural gas. Europe is a significant customer in this market and, in 2021, two-fifths of gas and more than a quarter of its oil came from Russia. Germany, Europe’s largest chemical manufacturer, was a particularly heavy user of Russian gas, accounting for 55% of its supply. It was a similar case for the country’s oil supplies, with Russia providing 35% of its usage.
A High Price Is Being Paid by European Chemical Manufacturers
The Russian market is no longer a viable source for oil and gas for European companies due to extensive sanctions. This is forcing chemical manufacturers to find oil and gas elsewhere, and the restriction in global supply and economic uncertainty has driven up prices significantly.
The problem of this increased cost is twofold for chemical manufacturers. Increased energy prices are painful for energy-intensive manufacturing processes, such as chemical manufacturing, and gas and oil represent a significant energy input for many chemical companies, 50.2% for those in the EU27. Furthermore, oil and gas are primary feedstocks for chemical manufacturing, so increasing prices for these products has a compounding effect on chemical industry costs.
While this may provide an opportunity for European chemical manufacturers to transition over to using renewables as an energy source, this is not likely to be a rapid or cheap solution, particularly when the current usage of oil and gas accounts for such a large proportion of energy usage. Moreover, this would only offset the cost increase associated with energy usage in the manufacturing process. The increase in feedstock price would still remain.
Increased oil and gas prices are piling on top of the pressures highlighted in ABI Research’s Digital Transformation in the Chemical Industry report (AN-5621), including calls for increased sustainability and significant labor constraints. Faced with dramatically rising costs, the need for increased efficiency has never been more critical for chemical manufacturers.
Even if EU manufacturers can fully pass on increased costs to customers, they will continue to become increasingly uncompetitive compared to their Asian and Middle Eastern competitors. However, the likelihood of company’s being able to fully pass on costs to consumers is not guaranteed, as the high volatility of commodity prices makes it hard to consistently adjust product prices to reflect rapid changes in costs. Sales in the chemical industry are usually structured as long-term repeat orders, especially for base chemicals, reflecting part of the manufacturing value chain. Regular shifts in pricing will create extensive downstream impacts for chemical customers costs and can lead to unsatisfactory relationships. Chemical companies may, in some cases, have to honor past established sales contracts, and even if they can push increased prices through, they may risk reduced or loss of business.
Rather than just shooting up chemical prices, European manufacturers need to find and invest in ways to make their operations more competitive. Technology presents a potential solution to this issue.
Technology to Help Soften the Blow
New technology solutions can help ease the burden of these increasing prices on European chemical manufacturers; however, high-cost and long-term digital implementations are not viable in this situation. Cost-effective and quick to implement solutions are what the European chemicals manufacturing industry desperately needs.
An excellent example is Siemens Xcelerator, which provides a way for chemical manufacturers to rapidly engage with digital transformation projects. Recently, the portfolio has been released as Software-as-a-Service (SaaS) (see ABI Insight “Siemens Xcelerator Portfolio Graduates to Software-as-a-Service”), known as Xcelerator-as-a-Service (XaaS). This evolution allows customers to scale and adapt to market conditions, with manufacturers able to use a given element of the solution to meet particular requirements at a specific time. Siemen’s wide range of solutions are available over the cloud and can be quickly implemented. Such a solution is of great support to chemical manufacturers facing the uncertainty of market conditions during the conflict, with the portfolio being able to mold itself to the challenges being faced by a given company.
It is essential for European companies to vigorously engage with digital transformation if they want to maintain competitiveness with Asian markets, particularly China. Chinas’ refusal to cut ties with Moscow and implement economic sanctions means that Chinese chemical manufacturers still have access to cheap oil, with Moscow selling at a heavily discounted rate as it desperately attempts to unload supply. Therefore, the Chinese market is not only avoiding the suffering faced by the Western chemical manufacturing market, but is actually benefiting from it. This allows China to continue to drive growth in its global share in chemical markets, a market in which it was already the largest player.
Currently, the outlook for the European market is grim. The region was already ceding overall market share to the Asia-Pacific region, and the longer this conflict continues, the faster that shift may occur. Digital transformation, as it stands, might be one of the last sticks left in the dam holding back Asia-Pacific dominance in the chemicals market.
As for technology suppliers looking to identify sales opportunities, demand from both Western and Eastern markets look strong over the coming years, albeit for slightly different reasons. For the West, the need to remain competitive will push further digitalization investments. Their Eastern counterparts, expecting robust growth and expansion, will be looking to capitalize and push these gains with technology investments.