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Chemical manufacturer must cope with oil price shocks

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  • Published date: January 7, 2021
    • Assolna, Goa, India
    •   [ #36206 Ad Views - 48 ]

Impact of oil price shock on chemical manufacturer

The oil price shock is far more than just another management problem that executives of chemical manufacturers have to deal with. Crude oil and petrochemical products are inseparable. The impact of oil price usually has three effects on chemical manufacturer.

Cost structure. Crude oil is a major cost driver for the petrochemical industry, as many of the key chemical components of the industry's products (such as aromatics, ethylene and propylene) are produced directly from petroleum or its derivatives (such as naphtha and LPG). In addition, some chemicals, such as chlorine, are produced by means of high energy consumption, which is strongly related to the oil price. Changes in oil prices have a direct and significant impact on the cost structure of these chemicals.

Pricing mechanism. For most commercial chemicals, the production cost of marginal producers is the main driving factor of market price. The impact of oil price will affect the production economy of marginal producers, so it will also affect the price level of commercial chemical products. These price changes, in turn, affect the downstream use of generic chemicals as inputs by specialty chemical manufacturer, but the extent of the impact is increasingly large time delays (Table 3). In addition, price changes can enable some downstream chemical producers to find alternative opportunities. As the relative price of some chemical intermediates changes (for example, when the oil price falls, the price of polypropylene may be lower than that of HDPE).

Demand model. Sudden changes in oil prices may change the spending patterns of individual consumers, and their disposable income will increase or decrease. In the medium term, the new oil price environment is beginning to affect the investment decisions of consumers and enterprises (such as buying a house or building a factory). As oil prices fall, initial spending is focused on consumables, such as food. If oil prices continue to fall, investment in durable goods and fixed assets will increase, as will the expenditure on chemicals used to produce durable goods and fixed assets. Of course, if oil prices pick up, the opposite will happen.

It is important to recognize that changes in demand are usually gradual and have less impact on the entire industry than the cost and price related impacts of the above oil shocks.

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