How does decline in oil prices affect Chemical Business?Tradeasia International Pte Ltd

Why are oil prices falling?     

• Heavy investment was spent in developing oil due to high crude oil prices and fall in gas prices then. This has led to the current situation of the overproduction of crude oil

• Free market economy caused the prices to fall in order for the demand and supply level to reach equilibrium, thus forcing out the highest cost suppliers

Impact on 4 areas of Chemical Business

• Petrochemicals

• Building Materials

• Indirect Costs

• Agrochemicals

Petrochemicals   

• Fall in oil prices is advantageous for chemical business in Asia and Europe which focus on ethylene products which are manufactured from oil-based naphtha.

• Petrochemical derivatives such as polyethylene has become cheaper due to the drop in oil prices.

• Certain petrochemical construction projects might be put on hold but not withdrawn due to sunk cost.

Building materials   

• Materials required for the manufacturing of paints and coating be cheaper

• Construction materials derived from crude oil will be cheaper and lead to a stronger economy for the construction sector

Indirect costs 

• Fall in oil prices lead to capital cost inflation in equipment prices and contractor support in the chemical industry

• Most chemical business have deferred or cancelled their capital projects in a bid to lower operating cost. This leads to some costs falling back in the short term for chemical companies that share the same suppliers.

Agrochemical 

• Fall in feedstock margins and limited price pressure

• Take time to see profits in some sub-sectors further downstream from oil-based feedstock for crop protection

What can chemical business do?  

• Make short and mid term plans during times of oil prices volatility.

• Enlisting the entire company in lowering general and administrative costs to form a leaner organization. Tightening supply chain, increasing manufacturing efficiency and negotiate for long-term feedstock contracts for oil products like ethane and naphtha would help to enhance price resilience.

• Focus on investing in new markets through R&D (Research and Development) and M&D (Merger and Acquisition) to seek out new competitive advantage. Chemical trading business like Tradeasia International does not just focus on buying and selling chemicals but diversify its services into shipment planning, logistics, export documentation and banking, insurance and technical support. Conventional accounting appraisal tools such as net present value used in chemical business will be of limited results. Therefore, a diversified investment portfolio can help to sustain chemical business during low oil prices level.