Reorganization of Supply Chains Cause for Concern

The reorganization of supply chains due to political changes and mounting evidence that supply lines into Europe have become too extended is a major issue at the moment in the European coatings sector.

Worries about supplies within Europe have been heightened by Brexit, the UK’s departure from the European Union.

The outbreak of the coronavirus (COVID-19) epidemic in China in January has also raised considerable concerns. In mid-February, these were mainly about its short term impact on supplies of key raw materials. But there were also anxieties about the long term viability of China as a leading – and in some cases the only – source of essential intermediates and chemicals for coatings ingredients like pigments, resins and some additives.

Within the next few years, there could be moves to make supply chains for some materials more regionalized or even localized so that their availability is less vulnerable to political or economic disruptions or other factors such as climate change and infectious diseases.

For producers of coatings or raw materials, such initiatives could present dilemmas because their benefits may be outweighed by the risks and complexities of possible upstream investments.

Brexit, which is due to come fully into effect at the beginning of next year, is forcing UK-based coatings and raw materials companies to rethink their supply chains because of the possibility of customs barriers between the country and the EU, even UK-imposed import controls.

These could eliminate EU-UK supply chains built up over several decades.

While UK companies would gradually switch as much as possible to supply networks within the country, EU-based coating producers and raw material suppliers may adjust their own supply chains to exclude UK suppliers altogether because of the extra cost of customs controls.

“There are a lot of different options for post-Brexit supply chains being considered at the moment in the coatings sector,’’ said Peter Newport, director of UK-based Chemical Business Association (CBA), whose members include small coatings products manufacturers and distributors, serving both the UK and EU markets.

“For the smaller companies their options are being dictated by costs,’’ he continued. “Some UK businesses may have to stop supplying some products to the EU because it is too expensive and some EU companies may have to do the same with the UK market. If niche but important materials are involved, this could cause problems for some customers in both the UK and the EU.’’

Over the past year, coatings companies have been enjoying a steady fall in raw materials costs from a peak in late 2018.

AkzoNobel, Europe’s market leader in coatings, reported in February that its raw material costs were €42 million ($45 million) lower in the fourth quarter of last year compared to the same period in 2018.

Analysts reckoned that this was equivalent to a cost reduction of around four percent.

As a result of the COVID-19 outbreak, coatings producers and their pigment, resin, solvents and other suppliers could face steep rises in some raw materials costs in the spring.

This could be mainly because of shortages of intermediates and some commodity pigments, solvents and other products.

Even incidents at single plants or sites in China can have a ripple effect across Europe. In March 2019, an explosion and fire at an industrial park in Jiangsu province caused scarcities of additives and pigments in Europe around 1-2 months later.

“There could be quite a long time lag before the full effects of the coronavirus epidemic on the European coatings and other industries become evident,’’ Newport said. “The outbreak coincided with Chinese Lunar New Year so distributors and customers will have done a lot of stockpiling. Also, depending on which chemicals have been affected there may be alternative sources outside China.’’

However, some analysts in Europe were warning in February that COVID will be a serious blow to not only the European but the global economy.

This was mostly because the outbreak has led to lockdown in the large city of Wuhan – the epicenter of the outbreak – and its Hubei province as well as other industrial centers.

In addition, critical parts of the country’s transport and logistics network had been shut down.

“European coatings companies will have problems with raw material supplies but they may find their biggest problem is a lack of demand for their products,” Paul Hodges, a London-based chemical supplies consultant, commented in mid-February. ‘’We might have to fasten our seat belts in preparation for a global recession.’’

The German-based supply-chain monitoring service Resilience360, part of the logistics DHL Group, reported in early February that there were three key concerns of manufacturers and suppliers about COVID.

They were the extent and duration of the lockdowns, the ability of workers to return to their workplaces after the New Year holidays and the continued willingness of local authorities to halt business operations because of infection worries.

The best-case scenarios being put forward by Chinese officials in February was that the outbreak would be fully under control within a few weeks with the disease has virtually disappeared by mid-April.

European experts were forecasting that COVID will still continue to be impacting the European and global economies well into the second half of the year.

Within China itself, AkzoNobel which has 15 sites in the country was expecting that 14 of them would be operating again by the second or third week of February. The exception would be a site in Wuhan.

“That’s not necessarily the end of the story,’’ AkzoNobel CEO Thierry Vanlancker told an annual results meeting of analysts in Amsterdam, Netherlands, in February. ‘’You have suppliers, customers, logistics companies. It’s still a little bit unclear how successfully these (are) going to start up or be able to supply (products).’’

BASF, a major coatings raw materials supplier and coatings manufacturer with a strong presence in China, reported in February individual raw material shortages in the country and supply interruptions.

But the “overall impact on our operation is limited at the moment,” a company spokesperson said.

The company’s coatings business has “a dedicated team (which) evaluates the likely consequences for our operations and the entire supply chain day by day,’’ according to the spokesperson.

However, it is the smaller coatings companies and suppliers which tend to suffer the most from major supply interruptions like those caused by COVID because they are far less flexible than the multinationals.

Hence in the weeks following the coronavirus outbreak the arguments in favor of reshoring key coatings products and raw materials from China to Europe have become stronger.

“COVID could accelerate a trend toward regionalization of supply chains because globalization has peaked and is being replaced by sustainability has the main driver in the world economy,’’ said Hodges.