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KNOWLEDGE HUB

How the pandemic is changing the chemical industry

Natalia Ermakova, Managing Director, Head of Industrial Customers Coverage of Sberbank

Many chemical industry entities have survived the lockdown and emerged unscathed, while others are even experiencing higher demand. How can one tap into this?

Small companies are growing, big ones are perfecting their business processes

Almost all other economic sectors consume chemical products, including industries that are experiencing business growth amid the pandemic. Thanks to this demand, the chemical industry is facing the ongoing crisis quite confidently. Nevertheless, changes in the usual structure of demand and supply have triggered a transformation.

Large enterprises reacted to the economic shake-up by improving their readiness to reorganize business processes. The pandemic has proven that, besides supply and demand, the principles of business organization are also important for sustainability. It is vital to have local partners, be able to change your product line quickly, manage stocks and liquidity of raw materials flexibly. For top managers, KPIs are being put in place to measure digitization and the share of outsourcing in a company’s business.

Small companies that have managed to become suppliers to growing industries face the cost of rapid growth. In need of support and the establishment of communication with banks and the state, they join trade unions and associations, such as the Russian Chemists Union, Delovaya Rossiya, and the niche commission of the Russian Union of Industrialists and Entrepreneurs. Having access to high-quality consulting services to avoid growing pains throughout intensive development is also crucial for them.

Internal demand and export

A significant production share in agricultural chemistry is export-oriented. When the borders were closed, the export market for fertilizers shrank significantly, which was coupled with a huge increase in consumption inside the country.

For example, in the first quarter of 2020, Phosagro increased its fertilizer supplies to the Russian market by 50% year-on-year, up to 1.2 mln metric tons. However, higher domestic demand might also be part of a longer-term trend, as in 2015 these supplies accounted for more than one-half of the annual volume.

To meet the growing demand, manufacturers are launching electronic trading platforms that allow for direct contracts with medium-sized and small farms. Larger buyers purchase fertilizers on exchanges much more often: by early May 2020, the volume that was sold there was twice as high as for the entire 2019.

Many manufacturers have refocused to operate in the domestic market. During the spring tillage in 2020, several major players in the mineral fertilizer market increased their supplies within Russia by 30–40%. A domestic market revival like that would have been impossible without import substitution of food items, which was followed by investment in agricultural technologies and conscious farming.

In the long term, domestic demand will not be able to fully compensate for the market capacities of China, India, and Brazil. But against the backdrop of closed borders, it allowed stakeholders to compensate for the absence of foreign markets.

To maintain revenue, chemical manufacturers are also working to cover new consumer segments and are adopting technologies to drive customer base. For example, a large Russian petrochemical holding company has started creating an e-platform for direct sales of products to small and medium-sized businesses and small shipments. Sberbank’s Loan in the Basket (Kredit v Korzine) service is integrated into this platform, providing additional delivery flexibility. Buyers can take out a loan to pay for products, which is part of the platform’s functionality.

The demand for the Sberbank AST e-trading platform, which is being used as a platform for transactions, has also grown. The venue lets users open a current account, receive a bank guarantee, or money to make an earnest payment to participate in auctions.

In some segments, on the contrary, exportation opportunities have expanded due to higher dollar exchange rate. For example, methanol production is backbone for many sectors of the chemical industry. Methanol is used in the production of rubber, high-octane boosters, formaldehyde compounds, and drilling in the form of hydrates. The end consumers of methanol are entities engaged in tire, woodworking, oil refining, and oil and gas industries.

All of these sectors have felt the pressure of the crisis one way or another, which was especially noticeable in the second quarter of 2020. Methanol prices collapsed following gas and oil prices. Metafrax GC, one of the largest methanol producers in Russia, has resolved the issue of maintaining revenue by redistributing sales in favor of export supplies, mainly to the United States.

Smart optimization

Business processes optimization goes beyond cost cutting, it’s also about finding new opportunities. To create the right optimization strategy, it’s important to evaluate the market regularly to learn which industries will recover faster, which will receive more subsidies and government stimulus checks, and which, on the contrary, will be under pressure. Outsourcing solutions enable you to maintain your current infrastructure while minimizing fixed costs.

Several pilot projects are already being implemented together with SBER Solutions, a Sberbank ecosystem company that provides professional financial and HR outsourcing services, including customized industry solutions.

For example, one of the largest Russian plants that produces polyethylene and polypropylene is mulling over a smart office. The latter can monitor electricity costs, control air conditioning systems, and use other methods to cut administrative expenses. Despite the fact that this is a completely new business project, the company is already thinking about optimizing business processes.

During the pandemic, the costs of transport logistics became fixed for many enterprises even though their revenues were unstable. SberLogistics, Sberbank’s logistics operator, makes it possible to outsource logistics in the challenging conditions of today.

The technological processes of large industry enterprises, such as SIBUR, EuroChem, Aсron and others, were already highly automated at the beginning of the crisis. But digitization of the business processes that support the main production was rarely a priority before the coronavirus lockdown.

Today, digitization is part of major changes, including new requirements from regulatory authorities, banks, and environmental services. For example, the exchange of documents with the tax bodies will soon be completely electronic.

Banks are also switching to digital document management with borrowers, which encourages companies to change. Environmental transformation requires additional control measures and automation of production processes.

Giving up spontaneous development

While large chemical holdings are digitally transforming systematically and consistently, small and medium-sized businesses often face the fact that business processes can’t keep up with growth. A company’s systemic management is replaced with spontaneous responses to emerging problems.

To prevent business growth challenges, companies need to understand how its competitors work and what global trends can now be adapted in Russia and its business environment. At moments like that, companies need a competent consultant to choose the right form for future development. After a company is diagnosed, the consultant can point out some growth points, vulnerabilities, ways to cut administrative expenses, and expand sales channels.

Small and medium-sized enterprises will now be consolidating within subsectors in the chemical industry. For example, companies that depend on the pharmaceutical industry as a consumer of components. The ecosystem can develop similarly in the dietary supplements production. Low-tonnage chemical production has great potential for development due to its strategic importance and import substitution trends. It is very important not to miss your chance and go to the next level to turn a small or medium-sized business into a large one.

Sberbank and its partners, Strategy Partners, who are experts in strategic and operational consulting, are ready to help business with this.

How can Sberbank help during the transformation?

The pandemic has shown that the conventional approaches to increase efficiency by streamlining costs don’t always work, and you need to develop flexibility, look at broader alternatives, and quickly adapt to changing market demands. I’ve recently taken part in the INNOPROM international industrial forum where I stressed that Sberbank’s key mission is to help customers realize their aspirations and goals by providing confidence and reliability. Moreover, Sberbank aims to support businesses in their daily tasks, in particular to help optimize business processes. For this purpose, the bank has expert teams who help find synergies. The customer can focus on the main objective, i.e. meeting the needs of its target audience, while many other things can be outsourced to a reliable partner.

Today, Sberbank is more than a lending organization, it’s an ecosystem which has services and solutions to address the issues at many stages of the customer journey. Thanks to years of experience, we know the problems entrepreneurs can face, and we develop product offerings intentionally, which will enable businesses to resolve issues as efficiently as possible.

Sberbank has gone through a transformation in recent years and achieved a lot of optimization goals. Prior to that, the bank had put much effort in its R&D, attracted resources of many labs, and invested much money. As a result, Sberbank managed to get an invaluable experience, create technology solutions and tested approaches to increase business efficiency. We are ready to offer these solutions to our customers and scale the approaches we’ve mastered outside the financial sector. When buying them, customers get the results of the intellectual work of one of the most technologically advanced banks in the world.

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