January/February 2016
Yergin said he did not expect to see oil prices climbing above $100/
barrel any time soon, unless there was some major geopolitical crisis.
For petrochemicals, the IHS vice-chairman remained optimistic. The
industry will benefit from economic growth, and IHS expects to see
40 percent more production a decade from now. The European
industry has benefitted greatly from the decline in oil prices. But
when oil prices go up again, the European industry will be facing
lower cost competition both from the United States and the Middle
East. “Whatever happens, it will be a very complex and competitive
world,” he asserted.
Black gold volatility
Welcoming participants to the usual supply chain workshop on the
final day of the event, Johan Devos, chairman of the EPCA Supply
Chain Program Committee, and European sales manager for
Bertschi, introduced keynote speaker, Theo Jan Simons, a partner at
McKinsey & Company, who is a chemical engineer and worked for
Shell Chemicals before his 20 year career in consulting.
Theo Jan Simons – industry is moving into an era of significantly increased volatility
Over the past 15 or so years, the petrochemical industry has seen
a wave of investment and value creation increasingly driven by
feedstock differentials. For example, he pointed to the booming
Middle East investments from the early 2000s, driven by ethane,
hyper-growth in North East Asia over the past 5-10 years, driven in
part by coal, and more recently in North America, as a result of
shale gas.
In Europe, however, investments have really stood still over this
period. So what we see today, Simons continued, is that the two
main advantaged regions – the Middle East and North America are supplying the world’s high-growth markets. That also means
that a much higher proportion of output is being exported from
region to region on a global basis.
However, we are now moving into an era of significantly increased
volatility, Simons added, and he outlined six factors that are
changing the economic and business context facing the chemical
sector. Four of them are ‘disruptive forces’, including:
industrialisation and urbanisation, which are shaping emerging
economies; disruptive technologies that are impacting many value
chains; an ageing population that will impact productivity and slow
growth; and lastly greater interconnections between regions. The
other two factors are an increasing number of non-economic
shocks – such as climate and hydrologic catastrophes, and
meteorological and geophysical events – and oil price volatility,
which has increased significantly since 2009.
Against this background, Simons noted that the impact of the oil
price drop is differentiated along the chemicals value chain. For
example, a 50 percent increase or price drop has a higher relative
impact at the start of the chemicals supply/value chain and offers
potential longer term benefits at the end of the chain.
Structural supply changes will result in ongoing volatility. Oil prices
are low and likely to remain so for some time. In this environment,
suppliers will fight for market share and there will be an impact on
infrastructure developments, which may impact how the chemical
sector invests or locates. But this development has risks, because of
the levels of supply coming from politically sensitive or potentially
unstable sources.
Driven by this uncertainty, petrochemical investments are slowing
down and there is a potential for supply shortages. Countries are
also seeking self-sufficiency and considering protective measures,
and inter-regional transport is flattening.
Simons said companies need to ensure they can respond
effectively at multiple levels, which requires an understanding of the
potential evolution of future business.
“So how can companies cope with this world of ‘black gold’
volatility and its impacts on chemical supply chains?” he asked. The
answer, he suggested, is by building organisational capability to
respond effectively.
Doing this will require three key responses. First, companies will
need strategic foresight and insight. This means careful monitoring
of oil price indicators for impending shocks. It means regularly
refreshing corporate understanding of the impact of volatility on a
chain-by-chain, region-by-region basis. It means optimising risk
exposure via contracting, financial hedging and feedstock choices.
EPCA Review
It also means developing or fine-tuning dynamic business
optimisation tools.
Second, companies will need to display agility. This means
implementing management processes and tools to monitor and
manage, for example by creating a company-wide control tower to
oversee, connect and co-ordinate different parts of the business. It
means designing a robust global network that can deal with
medium- to long-term volatility. It also means evaluating the current
pipeline of CAPEX investments and long-term innovation
programmes, and building a portfolio of inves F