How Chemical Companies Can Mitigate the Impacts of the War in Ukraine

By: | Category: Distribution / Manufacturing, ERP

Earlier this year, as the world economy continued reopening, the US chemical industry was poised for a strong recovery. But just when chemical companies thought they could catch their breath, Russia sucked the air out of the room.

How the conflict in Ukraine will ultimately impact US chemical manufacturers remains to be determined. But in the short-term at least, the effects are increasingly evident in the form of new supply chain disruptions, higher material costs, and rising energy costs. Chemical companies may feel a bit helpless in the face of these challenges, but there is a path forward. When companies invest in their business management software, they are better able to weather uncertainties through a combination of cost-saving efficiencies, increased agility, and insight into production costs that allow for dynamic pricing.

Supply chain disruptions

The chemical industry’s supply chains, already reeling from the pandemic, are receiving another blow as a result of the war in Ukraine.

Many notable companies across a variety of industries are excluding themselves from the Russian market in protest of the conflict. While the closings for retailers, automobile manufacturers, energy giants, and finance companies will be painful, the chemical sector may be impacted the most. Already, major chemical companies like Dow, BASF, and Solvay are curtailing or suspending operations in Russia. For example, around 80% of all screening compounds used in drug research and development are made in either Ukraine or Russia.

Prior to the war, chemical products accounted for 9% of all Ukraine’s industrial exports. An assessment performed by the Ukrainian Chemists Union in April 2022  found that  around half of all chemical companies were behind Russian lines or actively in the war zone. For those companies still operational, exporting their products to global markets is virtually impossible in the midst of the crisis. The blowback is already being felt in Europe —  the German chemical industry is predicted to fall into recession due to the war.

Production stoppages, voluntary embargos, and logistics challenges all add to significant disruption to the world’s chemical supply chain.

Higher raw material costs

Just as supply chain challenges predated the war in Ukraine, prices were already on the rise. There are myriad factors contributing to the increases, including both of the other challenges highlighted in this article — constrained supply chains and high energy prices. Some chemical companies were predicting prices to stabilize during 2022. Those predictions were thrown out the window when Russia invaded Ukraine, as a significant portion of the raw materials used in the chemical industry are sourced from these two countries. European Union chemical manufacturers are already feeling the pinch, and it’s only a matter of time before US chemical companies feel the impact.

Shortages in the supply from Ukraine will certainly drive raw material costs higher. Ukraine exports Aluminum Oxide and Hydroxide and Silicates (among many others) commonly used in by the industrial chemical, pharmaceutical, and construction industries — together a significant slice of the economy.

Increasing energy prices

Here too, energy prices were on the rise before Russia’s invasion, but since the war began, energy prices have increased again. As a result of trade and production disruptions caused by the Russian invasion of Ukraine, the World Bank is forecasting a 50% rise in energy prices this year. It expects the price of crude oil to reach its highest level since 2013 and an increase of more than 40% compared with 2021.

Rising upstream energy prices will not only reduce consumer demand but will also reduce profit margins for chemical makers and make it difficult for chemical businesses to pass on higher expenses.

What’s a chemical company to do?

Successful chemical companies that survived the pandemic learned a few valuable lessons that will serve them well for the duration of this current crisis.

They learned that they need rapid access to decision-making data. They closely monitored their supply chains, production costs, sales trends, and customer activity. While many raised prices, they did so strategically and immediately measured the impact. Successful chemical companies leveraged automated workflows, configured notifications and alerts, and invested in integrated best-of-breed applications including ERP, CRM, HRMS, and eCommerce platforms. Many engaged Managed IT Service providers to reduce their internal technology burden and promote secure remote access.

Importantly, these successful companies also learned to make more with less. As logistical issues delayed imports and arrivals, they doubled down on resourcefulness, expanding their supplier circle and existing partnerships to shorten lead times and bridge the gap on missing components.

In short, successful chemical companies that invest in next-generation technology to drive operational efficiency, agility, and both upward and downward scalability. The world is an increasingly uncertain place. Technology is essential to allow chemical companies to navigate the uncertainties and remain profitable.