Bulk Distributor Jan/Feb 16 | Page 3

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