Producers have shifted strategy quickly in response to dramatic shifts in the landscape driven by the coronavirus disease 2019 (COVID-19) pandemic and collapsing energy prices.
Near-term impacts are expected to be significant, but companies are adapting operating and commercial strategies in response to the COVID-19 crisis.
Companies are braced for severe near-term demand impacts from COVID-19 but are hopeful that more normal conditions will return in the second half. “The order book is strong but there is a bifurcation,” says Howard Ungerleider, president and CFO of Dow. “Our portfolio is heavily tilted toward consumer-driven applications such as packaging materials, cleaning ingredients, personal care items, and healthcare applications. Demand for consumables and consumer goods is very robust,” Ungerleider says. “Where we are seeing lower demand is anything that touches durable goods. Many automotive companies around the world have shut down, and there are other areas like appliances, white goods, furniture, and bedding where we’re also seeing a demand disruption.”
Huntsman president and CEO Peter Huntsman also sees mixed trends depending on end market. “I think that we’re going to see a volume drop in the second quarter commensurate with GDP, but it’ll be mixed. Automotive will be much worse than GDP and we think construction materials will be better.”
Conditions remain extremely volatile. “It’s too early to call, but we’re probably dealing with at least a first-half issue,” Ungerleider says. “In the back half of this year, we will get back to a more normalized macroeconomic environment but it’s going to take some time.”
China: First in, first out?
China, first into the crisis and likely the first out, offers a possible preview of conditions over the next couple months. Demand drops were severe in February and March, but orders have strengthened in April. “You can see about a 20–30% reduction in demand in China in February and March,” Ungerleider says. “That could be the order of magnitude, certainly for durable applications, for what you might see in other regions over a four- to eight-week period.” China has bounced back in the early second quarter, he adds. “We’re seeing strong demand and a strong pull on assets in China in April.”
Huntsman sees a quick return for most lost volume, but full recovery may take a while. “Globally, I think you’re back within 15–20% of [pre-crisis] demand fairly quickly, within 4–8 weeks,” Huntsman says. Recovery for the balance “may be more muted and take a few quarters to maybe a year. It will come back as fast as the consumer does. I think there has been a fundamental change in global consumer psychology in the US and Europe,” Huntsman adds. “Consumers have seen how quickly their fortunes can vanish. I think that when it comes to buying an automobile or furnishing a home, they may think twice. It’s not that demand doesn’t eventually recover, but it’s going to take some time.”
Huntsman also sees China leading global recovery. “China is going to come out of this much sooner than other parts of the world,” Huntsman says. “I think the United States comes next. I’m fearful that Europe is going to be lagging in any sort of recovery.”
Auto, aerospace impacts
PPG Industries also notes a varied impact. “As you can imagine, this crisis is affecting PPG’s global businesses in many ways, some of which will extend beyond the current crisis,” says Mark Cancilla, PPG vice president, environment, health, and safety. “Automotive production has stopped in many countries, the aerospace industry has been dramatically impacted, and vehicle traffic has been dramatically reduced, dampening demand for some of our products. In many facilities around the world, we’ve adjusted production to account for a significant reduction in customer demand and lighter economic activity. In some instances, this means we have temporarily closed manufacturing facilities.”
Some of PPG’s other businesses have seen an increase in activity. “Our packaging coatings business, which supplies coatings for containers for the food and beverage industries, is experiencing solid growth,” Cancilla says. “PPG also supplies coatings products for the medical, electronics, and building supply industries, which are currently in high demand. Demand for our antimicrobial and biocidal coatings products are growing at a rapid rate as well, and we continue to actively seek opportunities to donate these products to assist with disease prevention.”
PPG has also taken action to reduce cost across the organization. “As the economic impact of the COVID-19 pandemic evolves, PPG will continually review its business to ensure the company is positioned to meet the needs of our customers and conserve cash, while preparing to emerge a stronger company once more normal business conditions resume,” Cancilla adds.
Industry has quickly put crisis response and continuity plans in place to maintain safe operations and ramp up production of critical supplies. Ungerleider says Dow’s executive committee meets daily for 15–30 minutes to review and assess current conditions. A larger group of Dow’s top 30 business leaders meets weekly for a deeper dive. Senior management is also meeting with all Dow people leaders on a weekly basis. “We’re finding new and creative ways to stay connected and engaged,” Ungerleider says. “In the last two weeks, I think I have been on every video platform.”
Dow’s manufacturing sites continue to run well, he adds. “The vast majority of our assets around the world are running,” Ungerleider says. “There’s a few assets around the world where we will have a logistics issue or a lack of demand, but for the most part, we’re running all of our assets.”
Dow has adapted quickly to meet urgent needs. “We’ve never produced hand sanitizer but within about a two-week period, we’re now producing it in five different locations around the world,” Ungerleider says. Dow is producing between 500,000 and 1 million 8-ounce bottles of hand sanitizer per month. The company is taking steps to ramp up other supplies tied to health, hygiene, and medical applications.
Producers say they are seeing supply chain and logistical bottlenecks but nothing that cannot be addressed. “We have a war room set up for site logistics and our supply chain,” Ungerleider says. “We haven’t seen anything yet that has made operation or deliveries impossible, but we are seeing issues around container availability, truck availability, and driver availability. We’ve been able to mitigate with a lot of manual intervention.”
Preparation has helped mitigate the impact at Huntsman with help of lessons learned from the last recession. “The best way to prepare is to have the company ready before the crisis comes,” Huntsman says. “Nobody could have foreseen this but coming in with the balance sheet we have, learnings from the last recession, and veterans in place who lived through it put us in a stronger position than we were in 12 years ago.”
Huntsman drew on four critical lessons that broadly revolved around maintaining flexibility to handle volatile drops in raw-material prices; transparency in the order books and quickly adapting production in line with demand; ensuring sufficient liquidity; and being prepared for disruptive impacts in areas such as supply.
Huntsman notes that the 2008 crisis saw crude drop from $150/barrel to $32/barrel over the second half of 2008. Benzene, one of Huntsman’s key raw materials, dropped from $4/gallon to $1/gallon over the same period. “Quite frankly, we were unprepared,” Huntsman said. “We got stuck with months of high-priced benzene that took months to wind through and cost us tens of millions of dollars.”
The current collapse in energy prices has seen benzene contracts fall more than 50% in April from March, but Huntsman was better prepared. “We have literally drawn inventories down to where we are running on fumes,” Huntsman said, “Inventories are the lowest they’ve ever been.”
The company is keeping a close eye on order books, so it can match production to underlying demand. “Organizations sometimes bury canceled orders but this time we went proactively to marketing beforehand and said we know this is going to happen. It’s not your fault, it’s a by-product of the economy. Let’s not get stuck with inventory. We wanted to make sure that as orders were canceled, we were aware immediately. We responded very quickly. You have to calibrate manufacturing around canceled orders.”
Huntsman is also in a much better liquidity position, with roughly $1.7 billion of combined cash and unused borrowing capacity at year-end 2019.
Another lesson is to be attuned to disruptive trends. “In 2008, we saw a whole bunch of disruptive trends that kind of happened overnight. One of them in 2008–09 was fracking developing very quickly. All of a sudden we went from being uncompetitive to very competitive [in the US]. I don’t think we’re going to be saved by fracking this time but there is potential for disruptive impacts,” Huntsman says.
Huntsman is also closely tracking capital expenditures. All environmental-, health-, or safety-related investments will continue but other projects will get another look. “The capital budget was approved in January under a completely different set of circumstances. Every project now must be rescrubbed,” Huntsman said. “I’m telling the team if the marketplace doesn’t need the tonnage that we’re building, let’s delay it for 6 or 12 months. We don’t need to be dumping capacity on an oversupplied market.”
By Robert Westervelt
Source: Chemical Week
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