IntroductionThe two-year marathon of chemicals price increases is coming to an end. While that’s good news, price relief is likely to be both fragile and varied across materials. Since 2020, the combination of supply chain disruption, rapidly rising oil prices, and robust demand has driven chemicals prices to historic highs. Now, favorable trends have emerged to put downward pressure on prices, but opposing forces will ensure that the situation remains fragile. The favorable trends pushing prices downward include both slowing demand and easing of supply chain and logistics disruptions. In contrast, elevated energy and feedstock costs and plant operating rates near peak levels continue to put upward pressure on prices.These opposing market forces pose a unique set of challenges and opportunities. Petrochemical consumers can stand to benefit from a softening in prices but must prepare to act quickly while the window of opportunity is open. More broadly, companies across the chemicals value chain should take a fresh look at and reevaluate their strategic plans in this new context.Key driversThere are four drivers at play now influencing chemicals prices.Slowing demand is expected to put downward pressure on prices. GDP growth is expected to moderate, industrial production has slowed, and major chemicals producers have reported that they expect volume declines for the second half of 2022.Supply chain disruptions are easing with ocean container and trucking freight rates expected to continue falling. Port congestion is also easing with shipping times down from all-time highs, allowing for cheaper and more reliable shipping in the near term. However, ongoing COVID-19 lockdowns in China, a narrowly averted rail strike in the US, and the arrival of hurricane season in North America demonstrate how easily the situation could shift with an event-driven disruption.Energy costs have receded from historic highs, providing near-term price relief, but prices are expected to remain elevated due to ongoing geopolitical events including OPEC production cuts and the conflict in Ukraine. Furthermore, ongoing sanctions against Russia could further reduce its production capacity, leading to upward price pressure in the long term.Plant utilization across the petrochemical value chain remains elevated with limited capacity additions forecasted. As a result, producers may not be incentivized to lower prices despite slowing demand.The fragile state of each driver combined with them acting in opposing directions tempers expectations of a significant price decline. Instead, there should be limited price relief with a potentially short-lived window of opportunity (see figure 1).Modeling the outlookTo better understand the impact of the key drivers on chemicals prices going forward, we developed a multivariable stochastic model using key indices as proxies for each driver. We excluded the impact of plant utilization due to limited representative data.Demand: US GDPSupply chain: Shanghai–US East Coast Container Rate ($/FEU)Oil prices: WTIWe first applied stepwise backward regression to identify the statistically significant drivers, eliminating other potential drivers such as US Industrial Production Index as a variable that were not significant. The remaining variables were then fit using multivariate regression using data from January 2017 through June 2022. As seen in figure 2, these three variables can sufficiently model chemicals prices. We then established a baseline case using published projections for each of the input variables. A range of scenarios was also developed by applying distributions for each input variable and running Monte Carlo simulations. Our model suggests that there is a more than 90 percent probability that prices will fall in the upcoming months. However, there was no scenario, in the range examined, where prices returned to pre-COVID levels during 2023.ImplicationsThese dynamic market conditions require fast, tailored, and bold thinking to successfully navigate. As the tides are turning in many chemicals markets, chemicals consumers no longer need to be price takers and should widen their focus beyond supply security.We recommend several actions that organizations should undertake to rethink their supply strategies:Expand supplier conversations beyond supply security to reset the relationshipsReintroduce cost reduction as an expectation even if now may not be the time to sign a new contract.Broaden the time horizon of discussions from near-term supply to potentially longer-term agreements in exchange for more favorable economics. Material suppliers and associated logistics suppliers would likely value the certainty of demand and utilization as the economy enters a period of softening and continued uncertainty.Elevate the discussion by elevating the level of attendees. Sales teams have been focused on addressing tactical supply issues and finding incremental volume for customers for the past two years and may not be the right audience to discuss a broader set of topics.Rethink supplier partnerships both in terms of which suppliers are a priority and how you want to collaborate with them going forward.Internally, adapt existing strategies or develop new ones to deliver both supply resilience and cost reduction. Supply chain disruptions remain a looming threat, so organizations cannot lose sight of supply resilience when pursuing cost reduction.Relook at your procurement organization’s fundamental capabilities. Given the potential fatigue from continuous supply chain disruption fire drills over the past two years, now is a good time to take stock of your team’s capabilities to operate with a strategic mindset that is future oriented.Sources: CME, EIA, US FED, IHS Markit