The global supply crisis: can analytics provide a way forward?
ICIS chemicals roundtable series – Chemicals and the global supply crisis, December 2021
"Supply is by far the number one concern right now. We've had unbelievably strong demand for several reasons. Starting with giving four or five trillion dollars into people's pockets, guess what? They have money to spend.
Then you have supply and production issues, related to COVID and natural disasters, along with a lack of containers, or containers being located in the wrong places. So, there are a whole slew of things that are impacting the supply chain."
As global food, chemicals and gas prices reach record highs and volatility shows no signs of abating, no consumer, company or government is immune to the impact of the world’s supply chain and logistics crisis.
Driven in part from the disruption from the COVID-19 pandemic, and partly due to pre-existing industry challenges, logistics firms have struggled to gain a foothold out of the crisis, leaving a valuable part of the supply chain at a prolonged – and unforeseen – standstill.
With e-commerce booming at the end of 2019, and consumer home deliveries peaking into 2020, the logistics industry entered the pandemic already under strain. The unprecedented rise in online consumer spending in the wake of lockdown measures, and continued lack in storage capacity at ports now continuing through 2021, only serve to exacerbate the impact. With high shipping and container costs, and warehouse and lorry driver shortages, a perfect storm has hit multiple commercial supply chains at force.
Chinese trade associations that are responsible for producing 80% of the world’s shipping containers are now manufacturing record numbers in response to the crisis. According to the Financial Times, current levels of production are at an estimated increase of two-thirds compared to 2020 volumes.
Malini Hariharan, Market Development Director for the APAC region at ICIS, gives her thoughts on the crisis:
“Certainly, I think supply chain disruption is the biggest challenge at the top of everyone's mind since the second half of last year. The initial expectation was that these problems would be resolved by, at least, the early part of 2021, whereas the crisis kept moving. Now, even as we head towards the end of the year, it's very much still an issue for the majority of the industry. While the pressure is easing, it's possible that the scars of this may continue.”
Recently, over 15 chemicals experts at ICIS met to discuss routes out of the crisis, what the long-term, or permanent, industry implications might be and where ICIS can support. How can chemicals companies build their strategies over the short and long-term? How can business leaders limit the risk and impact to their business using forecasts and pricing data?
Speak to us to find out more about ICIS' chemicals forecasting and analytics:
The challenge of uncertainty
“The questions we get from clients all underscore that market complexity is only increasing by the day – the number of data points, the number of factors and price drivers that have to be analysed, has just multiplied.”
Malini Hariharan, Market Development Director, APAC, ICIS
Despite the timing of COP 26, the main sentiment surrounding current market conditions in petrochemicals is one of ‘firefighting the uncertainty’ of the immediate, short-term supply challenges, while balancing long-term objectives at more of a distance. Kieran Cosgrove, Director of Petchems at ICIS, states that companies may need to channel further resources and staff towards shorter-term issues, with longer-term challenges, such as sustainability, inevitably losing pace.
Where margin analytics and price forecasts can support among this uncertainty, is in providing context on what constitutes as a ‘short-term’ trend. What do our experts see as a relatively rapid blip in the market, and what are the trends that will be ongoing, deserving more attention and resources over a longer timeline? The depth of context provided by our internal teams working together, and the underlying fundamentals in the forecast data, are designed to scope out the detail and deliver this business context:
“Clients want the context of what's happening around the number and they also want the “so what?” Thank you for telling me this price went down by three cents, but what’s next? That's what the ICIS Analyse margin analytics and forecasts products provide for them.
It's the breaking news and the thought leadership and analysis about what moves markets even years from now.”
Monica Lugo, Senior Product Manager, ICIS
“I think that COVID showed us how interconnected the energy and chemicals markets are, and if that you break a link somewhere, you can get a problem somewhere you really don't expect.
When James, who covers Olefins, is asking why Naphtha is short, he comes and talks to me in refining supply, I talk to my colleague who looks at jet fuel – which James knows little about - and he explains that because of COVID, all the airline travel is gone, and that squashed all the refining capacity.
We cover all the commodities and the linkages in detail that even a person in a trading house who looks at Olefins, day-in-day out, can't be expected to know about. We bring all of that together in one space to be understood in a connected way.”
Michael Connolly, Principal Analyst, Refining, ICIS
“When I show our methodology to clients, I explain that we start from Crude Oil, and that we have a team dedicated to Crude Oil forecasts, and we have a team dedicated to Naphtha, and another team dedicated to Monomers, Ethylene and Propylene, that we look at supply, we look at demand in detail. They understand the depth and that they would not have the capability internally or the resources to dedicate to that.”
Lorenzo Meazza, Senior Data Analyst, ICIS
A way forward
"The key question at the moment is: when are we going to get back to normal? But in some markets, normal will never look like normal did before.
In many commodities, we lost a lot of capacity during the pandemic, so supply will always be much tighter than it was before. Some markets have just changed structurally."
Michael Connolly, Principal Analyst, Refining ICIS
In the US, we can see the market volatility play out in earnest this year, as July saw the largest month on month increase for ethylene in 24 years. As seen below, ICIS’ polyethylene (PE) price forecast now projects a 40% decline in US PE prices through Q4 this year.
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The last two decades of driving efficient supply chains, in search of cheaper feedstock, has meant our supply chains have become less capable of absorbing the shocks we have seen in recent times, exposing their vulnerability.
At ICIS, we see companies taking an increasingly analytical and digital approach in factoring in resilience.
Evidently, the ways in which forecasting adds colour to the market trajectory varies depending on the commodity, whether you’re a buyer or a seller, and your specific region. For all nuanced market positions, conversations with ICIS experts, as well as reviewing our forecast and analytics products, can provide some clarity and a way forward.
For example, we are able to assist producers by providing direction on the logistics crisis, which will impact the margin between prices between different regions – at the moment, this is true for Europe, North America and Asia. A typical question here might be: how long will it take for margins to return to normal levels between these regions? An area that Lorenzo Meazzo, Senior Data Analyst at ICIS, frequently discusses with clients:
“The main question I have received in the last year has been around whether margins are going to stay as high as they are now and for how long. At the beginning of 2021, I spoke with a large producer in Europe who felt that there was a pricing bubble, and he was really concerned about the high margins in Europe disappearing in the second quarter 2021. But this didn't happen, and ICIS had forecast that this gap was going to continue. The data and conversations behind it add a lot colour to the market conditions at play.”
ICIS executives also stated that US clients are focusing more acutely on the 30-to-60-day horizon forecast period, due to the increased unpredictability caused by the logistics crisis. This has further complicated strategic decisions as, while there are existing arbitrage opportunities available, buyers are weighing up whether they should take advantage of the low price, when realistically the stock might not be delivered.
With so much price volatility in the market over the past year, there is a clear, accelerated need for the short-term forecast view, in order to successfully navigate through the months ahead, and set plans for the years that follow.
Buyers’ immediate concerns are whether they are going to be able to locate product, at a reasonable price, whether the supply situation is likely to improve or whether the chasm between Europe and Asia will narrow – and when? Are we going the see these markets disconnected in some way in the near-term?
"Many commodity chemical and polymer markets operated in 2021 under the premise of ever-increasing prices amid supply-demand volatility, but that cannot last forever. How these markets diverge in their pathways looks to be a key theme for 2022, and understanding the why’s and how’s of their divergence is critical to finding success in the near term for businesses with the supply chain, as well as setting them up to maximise opportunities in the longer term.”
Jeremy Pafford, Head of North America Business Development, ICIS
For all of these questions, ICIS Analyse forecasting and analytics products can provide data and depth behind the numbers, delivered through insights articles and conversations directly with the analysts themselves.
Whilst markets are increasingly difficult to clarify, ICIS executives encourage calls regarding individual needs and questions, providing an independent, authoritative voice to internal predictions.
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