Chemical feedstock price volatility is lethal. It can kill a company in a matter of weeks and destroys business models overnight.

With feedstock taking on average 60% of a chemical company’s total costs, chemical manufacturers are wary of changes to supply costs, but unfortunately for them, many of the feedstock goods have no alternative, especially in the short to medium term. As the advice website Investopedia states, “Many of the materials used as feedstock for chemical products are irreplaceable. For example, as of 2015, Dow Chemical devotes about 40% of its operating expenses to petrochemicals needed to create its chemical products. A substantial part of these costs consists of commodities with costs that are prone to fluctuate greatly with the broader global economy as energy prices and consumer demand change.”

If a massive chemical industry player like Dow Chemical can fall victim to feedstock price volatility, then it must be expected that the rest of the industry is also liable to its influence.

Helpfully, industrial chemical manufacturers and traders can find a great deal of support on how to manage feedstock price volatility. But with experts from economics, retail, wholesale, psychology, chemical engineering and sales all offering suggestions, it can be difficult for a chemical producer to know how to react when suppliers prices go up overnight.

So in an attempt to condense some of this advice into a more manageable volume, and yet without wanting to over-simplify a highly complex subject, here are the top 6 tips for setting chemical prices.

1. React.

Prior to the 2014 collapse in petroleum prices, the cost of a barrel of oil had remained stable for four years, when the price collapsed many companies were slow to change strategy when cost-advantages had so clearly changed.

A recent report on the chemicals industry entitled ‘Preparing for a Volatile Environment’ by the renowned consultants McKinsey, underlines this point, stating that, “The 2014 shock has shown that many chemical companies are incapable of changing direction quickly enough to respond appropriately to oil-price shocks. The stable-oil-price environment from 2010 onward allowed many chemical-company leaders to focus their attention away from volatility management.”

2. Empower Management.

When prices are changing rapidly, speed is important when switching business strategy to limit damage. Doing this will require a series of decisions by top-management. As McKinsey consultant and analyst Chris Musso, recommends, “Assemble a senior, cross-functional decision-making team. In highly volatile environments, decisions must be made much more quickly and at higher levels than in business-as-usual periods.”

Deloitte’s report on ‘Pricing in the Chemicals Industry’ supports this approach, advising chemical companies to, “Engage your management – The commitment of top management to invest in powerful pricing programmes is crucial to the successful execution of a pricing strategy.”

3. Calculate Volatility Risk.

Before your feedstock price has gone through the roof, calculate the chance of this happening, and ask yourself, “Does the risk of this happening and its consequences outweigh the gains to be made if it doesn’t?”. Knowing the answer to this will prevent you from being exposed to feedstock price volatility unnecessarily.

As Sheng Hong, a McKinsey consultant and market strategist, stated, when he said that chemical producers, “…should take decisive action to understand what is the ‘right’ amount of risk for their business, and then eliminate undesirable risks by shifting them through contracting, financial hedging, and internal operational choices (for example, sourcing alternative feedstocks).”

4. Accept that Feedstock Volatility will Happen.

Given the increasingly rapid changes in a now global economy over the last 20 years, then future price slumps and peaks are a certainty. The wise chemical manufacturer must know that feedstock prices will change, and sometimes rapidly, and be prepared for it. As a recent report entitled ‘Responding to Oil Price Volatility in the Chemical Industry‘ by Piet de Paepe, Jason McLinn and Mark Porter for the business consultancy Bain & Company states, “Over the past decade, oil prices have gone through at least two complete cycles, and more big swings are likely in the future. Chemical producers will have to continue to make short- and mid-term plans during this time of volatile prices.”

5. Reconsider Pricing.

When feedstock prices fluctuate adversely, it may seem that the obvious reaction is to increase your sales price to counter the effect. This may not always be the right choice, but it is important that pricing policy is understood by the whole team, and that it is clear who is responsible for pricing policy.

This is a point made clear by Accenture’s analysis of chemical pricing policies, in their report ‘Chemical Pricing Strategies in a Global Market’, which states that, “There are organizational and operational challenges that must also be addressed when moving to a strategic pricing approach. It is sometimes unclear who is responsible for setting prices because there are no clear governance procedures. Even when the business unit is designated as being responsible, they may have no market information to properly assume this responsibility. In addition, there can be conflicts between the direct sales force and sales subsidiaries, or even among business units. In order to resolve these issues, the authority of each business unit and sales organization must be clearly defined, and consistent operating processes must be followed.”

6. Stay Focused on what is Important.

The last thing that any business needs is panic. So it is vital that the central goals of the business remain clear and that those goals are met first. As Chris Musso writes, “Identify value and develop action plans. Companies must rapidly translate priorities into concrete actions by identifying pockets of value at stake (for example, customers at risk of switching to other suppliers) and developing clear and specific action plans (for instance, by customer) for frontline teams to implement.”

Whatever sector of the chemical market a business operates in, it is perhaps most important to understand the inevitability of feedstock challenges.

As McKinsey advises, “Chemical companies need not necessarily fear feedstock-price volatility; in fact, the best ones will savour the opportunities it presents. With disciplined investment in organizational capabilities and agility, producers can effectively plan for, respond to, and benefit from price shocks.”

For whilst there is inherent risk in any changing business situation, there is also opportunity.