Chemical Industry: Insights & Opportunities

Executive Summary

The chemical industry has historically struggled with pricing its products and earning healthy margins. This problem has only gotten worse in recent times due to intense competition, increasing demands from customers, consumers, regulatory  agencies, and the accelerated pace of change driven by unprecedented market conditions.

To complicate matters, many chemical companies had to slash prices during the last recession to retain customers, and while markets slowly returned, prices did not. One example of this, that we will discuss in more detail, is that a chemical company saw sales bounce back by 37%; however, EBITDA only improved by 1%.

A key factor is often that chemical manufacturers have little or no visibility into their customer needs and struggle to keep up with their changing demands. These changes are typically due to alternative sources, environmental consciousness, and most importantly, the rapid acceleration of digital commerce that has intensified with the lingering effects of the pandemic.

Without access to real-time data, chemical companies will not be able to anticipate their customers’ needs, price optimally, or gain market share. It also contributes to the lack of confidence chemical companies have in setting value-based pricing. Many in the industry just don’t know the value of the products they offer, so they often price purely on gut feel, further impacting margins.

How can chemical companies gain visibility, earn healthy margins, grow market share, and exceed their customer expectations?  The answer lies in digitally transforming the end-to-end sales process with true artificial intelligence. Doing so enables chemical companies to be proactive to customer needs and offer the right products, in the right quantities, with optimal prices, and sold in the way their customers want to buy. It also enables chemical companies to price optimally based on customer demand and willingness-to-pay, detect opportunities, maximize wins on long-term contracts, and improve the buying experience.

This paper explores the challenges faced by chemical companies and discusses the actions businesses should take to thrive in this new digital selling environment. It then discusses how these actions enable chemical companies to win on the new competitive front— customer buying experience.

Finally, the paper discusses how PROS AI-enabled pricing and selling solutions, founded on data science and over 35 years of deep industry insights, enable chemical companies to improve margins and  revenue.

Key Challenges Faced by Chemical Companies

While the overall chemical industry is expected to return to growth, manufacturers are still realizing plummeting profits due to supply and demand volatility, commodification pressures and intensifying competition, both from traditional players and new entrants. The majority of this growth will come through new markets and will only attract more entrants, increasing competition, further driving down prices. Dr. Michael Reubold, Managing Editor of CHEManager, states: “With the rapid growth of newly industrialized economies and rising standards of living in many developing countries, the center of gravity of the global chemical industry is shifting. As traditional Western players are facing increasing pressure from rival producers and local players try to capture a larger share of the global market, specialty chemical companies around the world must find new ways to grow and compete.”

To combat new competition, changing customer expectations, and the difficulty of achieving growth, chemical companies must now begin optimizing the entire value chain by harvesting new insights from customers.

The COVID-19 pandemic has placed additional pressures on chemical companies on multiple fronts, including demand, productivity, and the supply chain. This current environment further emphasizes the paramount importance of digital transformation in overcoming low efficiency and pricing plateaus.

The New Normal

Due to the COVID-19 pandemic, there has been disruption on demand, impact on global supply chains, and unprecedented hits on stock prices.

In the immediate weeks following the initial outbreak, the chemical industry share price index dropped farther and more intensely than it had in previous cases. By March 20, 2020, COVID-19 had resulted in over 135 plant shutdown announcements around the world.

During this time, the chemical industry was also pushed into oversupply due to demand destruction, with demand for chemicals in the automotive, transportation, and consumer products sectors falling by up to 30%. Global chemical production witnessed a ~3% decline in March 2020 due to raw material and labor shortages, as well as government mandated plant shutdowns.

The accelerated pace at which the global pandemic has affected the industry shows how digitization is no longer a competitive advantage, but an industry standard. Companies must now shift focus on data-driven innovation throughout the entire business model: using data to understand customer demand, identifying competitive and cross-sell opportunities, understanding the price variance for various customers, and scaling value-based product pricing and profitability.

Evolving Customer Needs

Customer needs continue to evolve, and the pace of this change has been accelerated by the pandemic. Meeting these new requirements is complicated and time-consuming, requiring a great deal of investment. At the same time, chemical companies are often removed from the end-customers, so they develop, and price based on gut feel. This may have been fine in the past; however, as technology advances and new competitors bring innovations, the entire value chain is under pressure to deliver “better, cheaper, faster.” Whether it is the auto, agri-food, electronics, or construction industries, all are under intense pressure for more durable, environmentally sustainable, smarter, and valuable products.

Only the chemical companies with new and agile go-to-market models, offering a digital-first, optimized buying experience, will survive, recover, and thrive.

Demand Uncertainty

Without actionable insights, demand is always unpredictable. This is further complicated due to trade wars, global pandemics, and geopolitical challenges. This lack of demand visibility creates several challenges from production planning all the way down to pricing and quoting. Over-production means too much inventory, which ties up cash and leads to heavy discounting when moving excess inventory. Under-production presents a different problem— lost opportunities, revenue, and market share. Additionally, a general downturn in demand, coupled with ongoing oversupply in commodity chemicals, drives weaker pricing that makes achieving organic growth difficult.

Increasing Raw Material Costs in the Chemical Industry

The cost of raw materials is often the most significant single component in the cost of chemical products and can account for as much as 35 - 40% of the net sales.9 In 2019, EY reviewed the top 20 chemical players and found that they were only able to pass on roughly 25% of any cost of goods increase to the customer.10 Given that freight costs have risen in the past few years and are likely to remain about 12% more than recent numbers, this highlights the significant effect of pricing on revenue growth.11 To mitigate and account for demand uncertainty and increasing costs, it is important that chemical companies look into their pricing processes and capabilities. Unfortunately, chemical companies have rarely seen pricing as a key priority.

Chemical Companies Lagging in Digital Transformation

Digital transformation is essential to both reducing costs and improving revenues and margins. A new digital approach enables chemical companies to provide actionable insights that help manage demand, improve sales and pricing processes, reduce risk, and optimize employee productivity, all of which reduce costs and maximize profitability. According to Deloitte, data availability and processing hold considerable potential for expanding efficiency and productivity in the chemical industry.12 Digital transformation, however, goes beyond cost-cutting, into selling the way customers want to buy, and creating differentiation through an optimized buying experience. Procurement professionals across industries are increasingly demanding digital platforms providing them ease, convenience, historical transaction visibility, and the ability to manage their purchases. A recent EY Commercial Transformation Survey indicated that 64% of chemical manufacturing companies with 5 - 15% revenue growth are customer-centric.

Untapped Potential of Dynamic Pricing in the Chemical Industry

Compared to other industries, chemical companies have less confidence in their pricing decisions and are less likely to change prices regularly. According to research conducted by Bain & Company, only 2% of chemical companies strongly agree that they consistently set prices at the right level. Only 4% strongly agree that they can increase prices regularly, with the customers’ knowledge and expectation. Chemical companies rarely consider pricing as a top priority. However, setting prices based on real-time monitoring of market dynamics helps producers track metrics over time, set their prices at appropriate levels, and identify willingness-to-pay. Further, Bain’s research shows that improving pricing capabilities typically adds 200 to 400 basis points to the bottom line, impacting an industry where margins average 10 -12%.15 Dynamic pricing introduces best-in-class market intelligence and foresight about downstream demand and upstream supply, a feature particularly valuable in this sector, given its sensitivity to raw material prices.16 Designed for the chemicals industry, where commodity costs are subject to constant price fluctuations, PROS empowers organizations to adopt agile pricing processes by negotiating formulas, instead of fixed prices, for a specific contractual period. Dynamic price recalculations are performed dependent on the business’ needs and customer agreements, making sure both sales teams and customers always have access to the most current pricing information. This allows for higher price flexibility, competitiveness, and profitability in a volatile marketplace.