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5 major risks chemical companies should address now

Steep price hikes for raw materials, many of which are in short supply, together with a heightened cyber threat environment is intensifying the risk landscape for chemical companies. At the same time, the industry is adapting to heightened scrutiny from both regulators and other stakeholders amidst increased focus on environmental, social, and governance (ESG) issues.

07/14/2022 · 5 minute read

Steep price hikes for raw materials, many of which are in short supply, together with a heightened cyber threat environment is intensifying the risk landscape for chemical companies. At the same time, the industry is adapting to heightened scrutiny from both regulators and other stakeholders amidst increased focus on environmental, social, and governance (ESG) issues. 

The elevated risk environment comes as chemical companies recover from the COVID-19 pandemic — a period that tested their resilience and ability to adapt and remain operational. And as geopolitical events continue to challenge competitiveness, chemical companies will benefit from focusing on the following five risks that could threaten their profitability.

1. Supply chain instability

Many chemical companies remained resilient through the early months of the COVID-19 pandemic, figuring out ways to remain operational despite a plethora of new risks. But the supply chain challenges that started in 2020 have been complicated by current economic and geopolitical events, often leading to higher costs for essential raw materials, critical machinery, and equipment. Further, significant delivery delays have led companies to shut down plants or miss delivery deadlines outlined in their contracts.

To manage their global supply chain challenges, chemical companies should consider alternate — and possibly localized or regional — sources for essential materials. Local supplies, when available, could offer stability, but may be more expensive, requiring companies to revisit their budgeting and future contracts to absorb the higher costs. 

As they seek more certainty related to their supplies, some chemical companies have sought acquisition targets that would allow them to integrate the production of raw materials within their own operations. Buyers should balance the benefits of vertical integration of operations against the risk of acquiring both known and unknown legacy issues, such as environmental pollution or complex product liability torts.

2. Cyber threats heighten hazard risks

Chemical companies are increasingly incorporating digital technologies to improve their processes and create an early warning mechanism for potential equipment failure. Some are creating digital twins of their plants, allowing them to carry out real-time analytics on specific pieces of equipment to help them identify potential challenges and improve their maintenance approach.

Increased touchpoints provide new access points for threat actors, raising the potential for crippling cyberattacks. Aside from the expense associated with possible ransomware and other attacks, business interruption, and recovery, threat actors could tamper with industrial control systems, potentially presenting hazards for personnel, communities, and the environment.

Considering the range of threats, chemical companies should take action to implement and test cyber controls to reduce the risk of cyber incidents. Advanced companies use a combination of systems and insurance to mitigate their cyber exposures. These companies also invest in physical improvements to systems and employ dedicated threat-hunting staff to reduce the risk of vulnerable processes being disrupted. 

3. Experience drain due to ageing workforce 

As many of their most skilled workers approach retirement, chemical companies face the possibility they will not be able to replace their process knowledge and experience. Filling the skills pipeline effectively is often hindered by competition from outside the industry, with younger people opting for similarly paying jobs that are less risky and less stressful. 

Larger organizations and those within concentrated chemical manufacturing areas of the country are investing in initiatives to attract new talent and fill anticipated knowledge and experience gaps. These companies often support local academic entities that provide extensive and relevant training programs to young people who, at course completion, will grow the local talent pool of candidates for these technically based jobs. 

Smaller companies in remote locations, on the other hand, are often more restricted and unable to increase salaries to attract new talent and retain experienced employees. These organizations should focus on building strong community ties and maintaining their reputations as safe, long-term employers within their regions. 

4. New technologies, products pose strategic risk

Enhanced focus on ESG issues has pushed companies to invest in new technologies to reduce carbon from the atmosphere. Aside from efforts to safely capture and store carbon dioxide, chemical companies are looking at ways to convert carbon dioxide into higher value chemical feedstock or at renewable stock, like corn or switchgrass, as sources to offset use of traditional hydrocarbon materials.

But as chemical companies seek to produce renewable materials, they face new risks: Will the new products work the way they are supposed to? Will they produce the same results? Will there be a market for them? And if investments fail, the companies may be at risk of shareholder suits alleging violations of fiduciary duties.

5. ESG objectives under increased scrutiny

Companies across all industries are investing in robust ESG initiatives as investors and regulators step up their scrutiny and communities become more interested in organizations’ climate-related risks. Chemical companies’ ESG-related initiatives are expected to be carefully analyzed, and failure to meet targets may lead to significant reputational challenges, inability to raise capital, and potential regulatory risk. 

Insurers, too, are assessing chemical companies’ ESG posture, and rewarding clients that can demonstrate they are achieving their objectives. A company’s ability to demonstrate alignment with internationally recognized ESG standards can assist in conversations with underwriters, and potentially lead to insurance benefits, such as increased limits of insurance or favorable pricing.

The way chemical companies respond to multiple challenges could significantly impact their reputation, underscoring the importance of a robust risk management strategy that considers both the response to individual risks and the potential reputational damage. It is important to work with a team of specialists with deep expertise in chemical industry risks, experience in helping companies overcome a range of challenges, and the ability to help you identify actions to mitigate key risks. 

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