Feature Article - Navigating 2025: Strategies for chemical companies to tackle market turbulence
Submitted by:
Andrew Warmington
Garth Hoff of Pricefx outlines how speciality chemical companies can manage volatility, market shifts, and strategic realignments in 2025
Speciality and agrochemical markets are expected to see continued volatility even during a period of general stabilisation. Disruptions and other unforeseen events driven by geopolitics, trade policy and post-COVID shifts in consumer demand will be some of the factors most likely to drive short-term shocks in demand and pricing in 2025.
Policies changes in regulations put in place by new administrations globally are adding to uncertainty. New tariffs and duties can have far-reaching implications for international trade, taxation and industry regulations across the board. Given the broad reach of speciality chemicals in pharmaceuticals, consumer, food and ingredients, cosmetics and other consumer markets, volatility is a major concern.
It is possible that these threatened actions will not materialise but only serve to be a stalking horse for ongoing negotiations on free trade and other economic policy exchanges globally. Tariffs are widely expected to increase or create increasing uncertainty. Will these materialise or are they simply sabre-rattling from governments looking for negotiation leverage?
From a pricing perspective, winning companies will have systems and processes in place that allow for maximum agility. Commercial, finance and pricing teams require tools and processes in place in order to be responsive to fast moving development, market and competitive changes, to mitigate risk and seize opportunities to avoid margin compression.
Frequent changes in costing structures and tariff rates requires structure and automation to avoid non-compliance issues and avoid margin compression. Delays in implementing changes caused by increased market volatility, including cost allocations or tariffs, drive down overall margins. There is a significant opportunity to mitigate this margin compression risk using improved processes, strategies and automation.
Market shifts
Speciality chemicals sellers that rely on the electric vehicle (EV) and automotive sector are already experiencing shifts in market demand. Commodity chemicals have been strongly impacted in 2024 by these shifts in building products and base chemicals sectors among others given shifts in demand and rebalancing in the post-COVID environment.
High demand in in home and building products, automotive and other sectors have given way to high competition and an overhang in supply that is just now bottoming out. In many markets there is now an expectation for slower but more sustainable growth for the next three to five years, assuming no new drivers of another major market shift. The automotive sector in particular is a good example of how markets can shift.
EVs have seen shifts driven by multiple factors including regulatory changes, shifts in customer preference, and ongoing advancements in battery and other materials technologies. Tesla for example has recently seen a slowdown in deliveries after years of aggressive regional and global growth.
It is possible that the focus on EVs will dimmish in the short-term leading to a reallocation of resources within the supply chain. Conversely it is also possible that the shift will be more regional with Chinese competitors expanding from regional to global players and taking market share and growing the lower end of the market, resulting in a turnaround for suppliers in these markets.
In this example there are current and will be future impacts on demand resulting in reallocation. Both manufacturers and suppliers will need to adjust production processes and materials to align with the changing market dynamic.
Will demand plateau at current levels or even decrease? Will this shift market demand so that there is an increase in demand for traditional internal combustion engines (ICE) and related specialties? Will Chinese or another low-cost manufacturer create a rebound in demand and broaden the market demand for EVs?
Regulatory shifts are one more component to this story. At the time of writing, there are many unknowns about the future of tariffs and duties related to government policies and geopolitics. Even taxation policy driven by both federal and local governments, and interest rate policy changes by the US Federal Reserve can create shifts.
Environmental policies around the circular economy, green energy and related issues are generating regional shifts. Expensive electricity in Europe and related ‘deindustrialisation’ trends in Germany and elsewhere in Europe have created even one more factor capable to shifting markets based on cost structures and downstream market demand.
From a pricing perspective, winning companies will have systems and processes in place that allow for maximum speed. Speed is a significant factor in the ability to target and move price on a geography, end use application and segment, on a margin- or volume-optimised basis. One-size-fits-all approaches to cost allocation and margin goals or targets in the speciality chemicals space cost companies hundreds of basis points each time a change event occurs.
In personal care, cosmetics, pigments and a variety of consumer markets for speciality chemicals, the ability to properly segment and optimise with speed and accuracy makes all the difference in the ability to mitigate the impact of market shifts and even drive higher margins with speed driven by increased visibility into underperformance and opportunities as well as the systems in place to implement strategies quickly and optimised for specific market segments.
Strategic realignments
The response to the risks and change is for companies to reassess strategies and realign priorities. The need to retain competition, market positioning, and production and sales volumes drive the strategic realignment. Resilient companies are those that are able to evolve with the market.
There are a number of notable spin-offs or divestures and acquisitions occurring now which will likely continue at an increased pace in the coming year. The ability to capitalise on emerging market opportunities and drive cost, production, and marketing efficiencies and effectiveness is a strong story in the C-suite in the current market environment.
The downstream effect of this ongoing realignment on speciality chemicals markets will be significant. Shifts in production process and materials can lead to demand changes in market segments. Companies in these sectors need to continue to focus on innovation to drive new market niches, mitigate perceived product commoditisation and otherwise meet the ever-changing customer and market needs.
From a pricing perspective, winning companies are aligning themselves with increased visibility into all elements of the margin waterfall, from special price agreements and market spot pricing to optimised negotiated selling. The ability to manage pricing across the waterfall including on-invoice discounting and off-invoice discounting, rebates, and claims.
Strategic realignment is part of the broader tend of digital transformation sometimes aligned with large ERP projects (SAP S/4 HANA) and investments in sales efficiency (Salesforce CRM/SAP Sales Cloud) or digital sales portals (SAP Commerce Cloud). In any of these cases, dedicated price and marketing management is needed to unlock the value of these large strategic digital transformations that frequently go along with strategic realignment.
Long-term contract renewals
Finally, in some segments of the speciality landscape, long-term agreements have become a critical part of the strategy. Some of these will customer agreements on special pricing. In others cases it is possible to use complex formulae based on market indexes, services costing, value attributes or any number of other inputs.
Consumer speciality chemicals companies tend to fall into the former category with a variety of industry dependent factors that drive agreements. In latter example with formula pricing, these are more commonly seen in agrochemicals, where commodities like potash or other feedstocks for fertilisers are used for a formulaic approach to pricing. In any case, contracts with agreement pricing that were negotiated one year ago and certainly two to three years ago were based on strategies from a completely different market.
Terms and conditions have changed and additional service fees or other non-contract cost elements should be considered. Companies need to approach renewals with visibility and a clear understanding of new market conditions.
Strategic objectives have changed and the flexibility and adaptability to consider all the factor is a great advantage. Even elements related to delivery, cost to serve, payments terms, and other non-pricing elements should be considered with an eye on current and anticipated future market conditions.
From a pricing perspective, winning companies benefit from both cost-efficiency from agreements and automation processes, as well as more strategic pricing to drive margin expansion. Simulation of agreements allows for comparison of multiple formulaic or other pricing approaches to model the impact of price, margin and even volume looking back at the last year or when using a forecast data set to anticipate one or more market scenarios.
Positioning for the future
How companies approach and react to these challenges will define profitability and market position for years to come. Market outperformers who can master the aspects of pricing agility in the face of volatility, respond quickly to market shifts, and realign strategies on a shifting playing field are best positioned to take on a digital transformation including people, processes and tools to thrive in the post-pandemic economy and whatever comes next.
2024 was a challenging year for many speciality chemical companies. 2025 is expected to stabilise but will have challenges and are not yet resolved and others that are not yet known or fully understood. Navigating the uncertainties from global disruption, market shifts, and realignments is not for the weak of heart, but businesses that take on these challenges can emerge stronger, more competitive, and more profitable in the coming years.
Contact:
Garth Hoff
Director of Industry Strategy
Pricefx
+1 (312) 900-0110
www.pricefx.com