Hydrocarbon Processing - April 2022 - 9

J. KRIMMEL, Pinnacle, Houston, Texas
Business Trends
The economics of reliability: Global chemicals
Chemical manufacturers worldwide are navigating an inflection
point. Following the pandemic-fueled demand crash
of 2020, a strong but stilted recovery unfolded in 2021. In the
latest World Economic Outlook (January), the International
Monetary Fund (IMF) announced global economic growth
increased by 5.9% in 2021 and is forecast to increase by 4.4%
this year. The chemicals industry is feeling this surge. After recent
revenue and profit declines, many chemical companies are
unprepared to fully capture today's market opportunities.
In the author's company's report, the performance of global
chemical companies as it relates to industrial reliability was analyzed.
The report defines reliability as a measure of how often
something performs when you want it to. In the context of the
industrial chemicals segment, the performance of the machinery
and equipment assets responsible for processing feedstock
into finished goods is of prime interest. These assets could be
pressure vessels, storage tanks, pumps, compressors, heat exchangers,
piping, mixers and countless other equipment types.
Specifically, interest lies in estimating how much global
chemical companies spend on reliability initiatives, and what
kind of results these companies see in return. Reliability initiatives
include inspections, repairs, planned and unplanned maintenance,
upgrades, expansions, overhauls and replacements,
along with all the necessary materials, supplies and labor.
Three major reliability trends have affected or will affect the
global chemicals sector. These include:
1. The chemicals sector experienced a decline in revenue
and profits in 2019 and 2020. In 2019, oil prices
fell by 10%, dragging down pricing for many
chemicals. In 2020, the COVID-19 pandemic
destroyed demand globally, causing chemical
companies to reduce their output.
2. In response to falling revenue and profits, chemical
companies reduced their capital expenditures.
Many of these companies saw their machinery
and equipment asset bases stagnate or shrink.
Even when accounting for the slightly smaller
asset base, the world's largest chemical companies
generated fewer dollar-for-dollar profits in 2019
and 2020 than they did in 2016, 2017 and 2018.
3. The market picture changed dramatically in 2021 and
is now abound with growth opportunities. However,
after years of reduced capital expenditures and
diminished asset productivity, chemical companies are
struggling to fully take advantage of market tailwinds.
Reliability is a common thread that runs through all three
of these elements. Reduced investment spending stresses the
reliability of existing assets. Suboptimal reliability impairs
asset productivity, which weighs against profits. In a market
environment where response times are critical, improved
equipment reliability can be a timely and cost-effective way to
capture opportunities while pursuing longer-term, new construction
in parallel.
Analysis methodology. The chemical reliability report relied
on the following three data sets:
1. The World Bank publishes data around the value added
by the chemicals industry on a country-by-country
basis. The report uses this data to estimate the total
reliability spend of this segment of the economy.
2. The report also studied the annual financial and
operational reports of 18 of the largest chemical
companies in the world. These reports provide
much more detail than what can be found through
the World Bank and provide more about the evolving
competitive landscape in the chemicals space.
3. The U.S. Bureau of Labor Statistics publishes
a producer price index for domestic chemical
manufacturers. This data set provides a sense of how
chemicals prices have changed over time, from which
important supply vs. demand details can be inferred.
The industrial chemicals sector has witnessed two consecutive
years of declining revenues and profits. The
author's company estimates that global chemical companies
spend approximately $236 B/yr on reliability. FIG. 1 shows the
revenue, operating income and operating margin for 18 of the
largest chemical companies from 2016-2020. There is a steady
Revenue
13%
426
487
13%
Operating Income
473
441
12%
413
Operating Margin
9%
8%
54
2016
65
2017
57
2018
40
2019
33
2020
FIG. 1. Revenue, operating income and operating margin for 18 of the
largest chemical companies, 2016-2020.
Hydrocarbon Processing | APRIL 2022 9
Hydrocarbon Processing - April 2022

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