Impact of COVID-19 on Oil Field Specialty Chemicals in Chemicals and Materials Industry
Specialty chemicals are those chemicals that are defined based on their performance rather than their composition. Their primary function is to enhance the working of the product. Specialty chemicals play a significant role in strengthening oil field applications such as drilling, cementing, stimulation and production additives. Swiss specialty chemicals maker Clariant stated that the continuous declining profit reflects the intensity of coronavirus across the globe. Also, the ongoing oil price war has made it more severe.
Most of the industries were shut down from the beginning of January 2020, which has restricted both demand and supply for specialty chemicals. As per the top economists, "the U.S. chemical volumes are expected to fall 3.3 percent in 2020 before rising 5.2 percent in 2021. Basic chemical volumes will drop 2.9 percent in 2020 before rising 6.7 percent next year. Chemical shipments are expected to fall 10.0 percent in 2020 before rebounding by 7.8 percent in 2021. Anticipated declines reflect struggling end-use markets and export customers for the U.S. chemistry products".
When the entire world faces the effects of the COVID-19 pandemic, the oil prices drop drastically when OPEC and Russia disagreed on production cuts. This imbalance in supply and demand has depressed the needs of chemicals and refined products globally. China being the largest producer and supplier of most of the raw materials or inputs in many industries, the coronavirus outbreak in China has disrupted the entire economy. After China, the specialty chemicals industry will be affected severely in India and the U.S. Currently, India contributes to around 3% of the global chemicals sales. Thus, any impact on the country's economy will impact the entire industry.
GLOBAL IMPACT
The entire chemical industry, including aromatic chemical compounds, has witnessed a decline of more than 5% earlier this year. This decline percentage has increased to around 20% as the effect of coronavirus has intensified. The primary reason behind the continuous decline is raw material and labor shortages and government-mandated plant shutdowns. Also, the dual impact of the pandemic that resulted in shutdown and the March 2020 oil price collapse has exacerbated the oversupply situation that some of the U.S. chemical producers already faced. This resulted in a dip in demand in both local and global markets. Additionally, the sudden outbreak of the second wave has again hit the market and the supply chain was into the building zone, which got demolished once again. The appearance of new variants of COVID-19 has still positioned a threat on the market.
The oil field specialty chemicals sector is considered a broad ecosystem that depends on various raw material inputs such as oil, gas, coal, minerals and bio-based materials. Apart from this, any impact on end-user companies will have massive implications for the industry.
Many big oil, gas and chemical companies are managing this challenging time by reducing capital and operational expenditure, which has come down to suppliers and oil field service companies. This may result in liquidity crises for inefficient and highly leveraged companies. If the prices of oil remain depressed, the U.S. shale producers will be under strain. It may also result in the diversification of more significant and healthier companies into other energy segments.
IMPACT ON DEMAND
After the coronavirus outbreak, inconsistency has been noticed in demand for oil field specialty chemicals across distinct segments. As per the IEA's Executive Director, Dr. Fatih Birol, "the coronavirus crisis is affecting a wide range of energy markets including coal, gas and renewables but its impact on the oil market is particularly severe because it is stopping people and goods from moving around, dealing a heavy blow to demand for transport fuels. This is especially true in China, the largest energy consumer globally, which accounted for more than 80% of global oil demand growth last year.
While the repercussions of the virus are spreading to other parts of the world, what happens in China will have significant implications for the global energy and oil markets. In the short run, the demand for oil field specialty chemicals will ultimately depend on how quickly governments move to contain the coronavirus outbreak, the success rate of the efforts and most importantly, what impact the global health crisis has on economic activity.
Soon, before the challenge of the pandemic is over and market conditions return to pre-outbreak stages, specialty chemical suppliers will need to make well-informed structural adjustments and restructure their firms to handle this uneven demand scenario. As per the head of chemicals research at Berenberg, Sebastian Bray," We're only going to hit firm demand for a lot of the value chains by mid-2021 and in absolute terms, in my view, we're only going to hit the same volume of chemicals production globally as we had in early Q1 2020, in Q1 or Q2 of 2022. So the impression is a U-shaped recovery and investors for most of the sub-sectors of chemicals are probably going to adjust the valuation multiples they apply to the sector."
TRENDS THAT EMERGED POST-COVID-19 IN THE OIL FIELD SPECIALTY CHEMICALS MARKET
The major trends that are highlighted after the sudden outbreak of coronavirus impacts companies are:
· The safety of all the parties involved in the business has become the utmost priority.
· Keeping the social distancing in the loop, the demand for the digital channel has increased from consumers.
· The supply and value chain disruptions have highlighted the importance of not depending on one single supply source.
· Adoption of contactless deliveries and transactions has gone up
Until recently, the speed of business-to-business (B2B) trade adoption in oil field chemicals has been slower than in other B2B sectors. In a recent study, two-thirds of 76 chemical industry managers shared their reliance on other market goals or capability constraints as the key reasons why digital commerce has not been embraced more rapidly by the chemical industry to date.
RESTRICTION ON LOGISTIC SUPPORT
As per the current regulations, the emergence of new variants of the COVID-19 virus has prompted many governments to reverse efforts to ease restrictions on travel and transportation. Global logistics has affected very severely and is hampering the entire supply chain. For all aspects of the market, limiting logistics has been the biggest problem. The mobility of persons and goods has been significantly limited. People and cargo were divided between districts, counties, towns or even villages to suppress the virus. In some countries, the trains were also halted and where it began to work, loading and unloading were limited by a lack of human resources, resulting in a decrease of around 50 percent in transport capacity at one point.
Transportation has been seriously impacted. As for cross-border travel by vehicles, the drivers had to be quarantined for two weeks if the route had not already been closed. Vehicle traffic was often constrained by the provinces coming from states or areas where the crisis was worst. Transportation via water sources was the only alternative left, but many ports declined to work and offer their services even in that situation. It is expected that it will take some weeks still before regular activity across the whole industry is resumed. In the meantime, the supply of Chinese oil field specialty chemicals has tightened, prompting prices to the firm both in the domestic and export markets.
TRENDS THAT EMERGED POST-COVID-19
Apart from accelerating trends, many could decelerate as a result of the pandemic.
· To mitigate regional costs, more protectionist strategies will force businesses to 'bring home' supply chains.
· The movement of people across national borders could decrease based on government travel restrictions.
· Increasing health issues and remote jobs may diminish the need for sharing resources and coworking spaces.
· Demand for portable or transient labor has risen for higher-skilled commitments that can be delivered remotely, such as coding and construction. In contrast, social distancing has decreased demand for others, such as transportation and cleaning without delivery.
CONCLUSION
The outbreak of COVID-19 has caused many dislocations to the oil field specialty chemicals market. However, it is expected that as time passes and the pandemic eases, the mobility will increase and once again, the economies will start functioning at the previous rates. This will help the chemical industry to boost up again. From companies' point of view, a more data-driven and analytics approach that covers the impact on 4Cs – (i) Cash, (ii) Customer, (iii) Costs and (iv) Capital will be critical to assess.
The oil field specialty chemicals industry is in the recovery phase. Initially, the industry faced severe outcomes as China was the first country to spread the disease and China itself is the primary producer of chemicals. Because of this, the entire world market was disturbed. China has almost recovered from the disease, the rest of the world is still struggling and thus, the industry is not up to total capacity. Things will take time, but the specialty chemicals industry will buck up soon as they are the pillars of the global economy.
The government, along with the private sector, can play a vital role in reviving the industry. The government is attending to the significant financing needs arising from COVID-19. The private sector can take care of substantial investments and expertise required for the chemical sector in developing countries. Apart from this, strong engagement with governments and local stakeholders will continue to contribute significantly to the sector's development.
