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Global Health

Chemical firms see light at end of coronavirus tunnel

Facilities are reopening in China but spread of virus outside China is raising concerns

by Rick Mullin , Alexander H. Tullo , Hepeng Jia, special to C&EN
February 25, 2020

 

20200225lnp1-train.jpg
Credit: Tao Ming Xinhua News Agency/Newscom
Workers are beginning to head back to their jobs in China, sometimes via special trains such as this one in northwest China's Shaanzi Province.

Chemical makers in both China and Western countries report progress in their efforts to keep businesses running in the face of the new coronavirus disease, known as COVID-19. Firms with operations in China are getting their facilities going again, and those dependent on raw materials from China are crossing their fingers even as they reroute supply chains.

Demand will no doubt be affected. Kristalina Georgieva, managing director of the International Monetary Fund (IMF), told officials at the G20 Finance Ministers and Central Bank Governors Meeting in Saudi Arabia on Feb. 22 that the IMF’s current scenario calls for China’s economy to return to normal in the second quarter. The country’s economic growth this year will be 5.6%, down 0.4% from predictions made in January. Global growth will be 3.3%, the IMF forecasts, down 0.1% from the January prediction.

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“But we are also looking at more dire scenarios where the spread of the virus continues for longer and more globally, and the growth consequences are more protracted,” Georgieva said.

Executive are also watching as COVID-19 cases appear elsewhere in the world. An emerging hotspot in northern Italy is of particular concern to the drug industry, as the region is a major supplier of pharmaceutical chemicals.

What follows are reports from C&EN reporters and contributors about the struggle to keep businesses running amidst the spread of COVID-19.

China attempts to recover

With China’s new confirmed COVID-19 cases now fewer than 10 a day outside the hotspot of Hubei Province, the country’s chemical sector is pushing to production. But understaffing, spotty supplies of raw materials, and weakening demand are dampening efforts to get back to full speed.

Most major petrochemical plants in the southeast province of Zhejiang—a major chemical industry hub—had resumed production by Feb. 19, according to China Chemical Industry News, a trade newspaper. Impacted by a fragmented supply chain, factories are reaching operating rates of only 40–70%, the publication reports, though the number could surpass 70% by the end of February.

In general, observers say, bigger refineries and basic chemical producers, mostly affiliated with state-owned conglomerates like Sinopec or PetroChina, are getting back to work more easily, in part because many of their workers live nearby. In contrast, manufacturers of fine and specialty chemicals, which are mostly privately-owned, have much lower work resumption rates because they rely on migrant workers, many of whom who are still in their hometowns or were quarantined while traveling back to their factories after the lunar New Year holiday in January.

Recent field studies by two industry associations—China Petroleum and Chemical Industry Federation and the chemical branch of China Federation of Logistics and Purchasing—revealed that worker shortages, reduced demand, and transportation blockages are major problems affecting manufacturers and logistics firms throughout the country.

Although companies will overcome the logistical issues, Kelly Cui, a Beijing–based principal consultant at the consulting firm Wood Mackenzie, says demand shortfalls resulting from the virus will hit China’s petrochemical sector much more than they did during the SARS (severe acute respiratory syndrome) outbreak in 2003. And demand for materials used in disease prevention won’t be nearly enough to offset the losses. “Only 4 grams of high-melting-point polypropylene fiber is needed to produce a single surgical mask,” Cui points out.

The view in the West is getting clearer

Like their American counterparts a few weeks ago, European chemical executives have been taking questions from stock analysts about the impact of COVID-19 as they release their 2019 financial results. But whereas US executives were mostly in the dark, European managers are now able to offer more concrete answers.

Polyurethanes maker Covestro estimates that the coronavirus will have a negative impact on its first-quarter earnings of about $65 million. The company has been able to keep its plants in China running, but at reduced rates, Covestro CEO Markus Steilemann told analysts.

“The logistics situation remains a true challenge,” he said. Finding enough truck drivers to haul material has been difficult, he added. “So even if you’re able to produce, even if you’re able to package, then you need to have truck drivers, which are shipping the stuff to the customer.”

Patrick Jany, chief financial officer of the Swiss specialty chemical maker Clariant, said his firm’s facilities in China were shut down for several weeks. He expects sales for January and February to be off from a relatively strong end to 2019. “Obviously, it is unknown to us and, I guess to everybody, how long the situation will continue in China,” he noted.

Stephen Angel, CEO of the industrial gas supplier Linde, tried to put a positive spin on the situation by emphasizing his company’s ability to help aid workers in China. “We provided aid as a corporation to our Chinese team, and much of that is flowing to Wuhan,” where the outbreak originated, he said. “We prioritized the flow of products that are needed to fight this virus, like oxygen.”

Similarly, DuPont says it is working with authorities to provide the protective equipment it makes—such as Tyvek suits—“directly to the healthcare workers on the front line as quickly as possible.” DuPont says it has also expanded capacity for these products outside of China and is working with the Chinese government to boost production inside China.

Italy is new hotspot for pharmaceutical chemical makers

A new concern for the pharmaceutical chemical industry is the rise in cases of the coronavirus in Italy, a major active pharmaceutical ingredient (API) source. Flamma, an API manufacturer near Milan, in northern Italy, notified customers on Monday that operations at its plant have not been interrupted, despite the closing of schools and other public venues in northern Italy’s Lombardy region.

“There is no impact on production at our facilities, which are located outside the perimeter of the 11 cities presently under quarantine,” the company said. Among precautionary measures is an effort to replace face-to-face meetings with video and voice conferences. The company has suspended visits from suppliers and enacted “strict rules” for delivery vehicles and maintenance workers entering the plant.

FIS, located in Vicenza, Italy, 75 km from Venice, is also in full operation, according to Giuliano Perfetti, director of marketing and business development. He says only one worker was obliged by local authorities to stay at home. The company is taking measures similar to Flamma’s on face-to-face meetings.

Perfetti says COVID-19 is bringing to light the huge supply-chain vulnerability that results from Western firms’ reliance on raw materials from Asia, particularly China. Perfetti heads a committee of the European Fine Chemicals Group, an industry association, that is studying the supply-chain concerns that arose 2 years ago following an environmental crackdown in China. He calls the business impact of COVID-19 the tip of the iceberg.

Overall, manufacturers of APIs—most of which are heavily reliant on raw materials from China—report negligible impact on plants in Europe. Those with plants in China that the government ordered closed last month say that most have reopened.

Lonza, the large Swiss API producer, said on Tuesday Feb. 25 that its two API production sites in China, in Guangzhou and Suzhou, are operating, though it reports intermittent delays in receiving shipments of raw materials. “In some cases, we are looking for alternative sources of logistics routes to ensure supplies get through.”

Lonza reports that supplies of raw materials from China to its main manufacturing complex, in Visp, Switzerland, are not affected. The firm says it is “tracking the situation for each individual material and [has] alternate sourcing in place where possible.”

WuXi AppTec, a large Shanghai–based contract research and API provider, announced on Feb. 12 that it resumed operations at the end of the extended New Year holiday at all its sites in China other than one in Wuhan, the region where the virus originated. Sites that have resumed operations will support projects initiated in Wuhan, WuXi said, adding that it will also draw on its network of 7 laboratory and manufacturing sites in the US.

Some executives are concerned that transportation restrictions which are already interrupting raw material supply from China will impact access to materials from elsewhere, given the extent to which chemical manufacturers everywhere are dependent on starting materials from China.

Guy Villax, CEO of the Portuguese pharma service firm Hovione, says he is concerned about access to raw materials. The company is currently receiving shipments from Guangdong province, but he is on edge about shipments expected in March from elsewhere in China.

“Transportation is very problematic,” he says, “because drivers, when they cross provincial borders, need to go in quarantine when they come back.”

The problem extends to the supply of raw materials from companies in Europe, Villax says, given that manufacturers there report they are cut off from supply in China. “The knock-on effect of shortages through the supply chain will have a ripple effect over the next two or three months,” he says.

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