Mitigating the Tariff Impact on Chemicals
Navigating tariff impacts requires chemical companies to be both agile and strategic in their pricing decisions. This article outlines nine actionable strategies—from rapid cost pass-throughs to raw material substitution and contract management—that help protect margins and uncover new opportunities amid tariff volatility.
1️⃣ Pass on the Tariff Cost changes quickly: It is best to pass on the tariff related cost increases/ changes quickly to your customers to protect the margin. The good news is there will be no surprises with this – everyone knows cost increases are coming. Provide plenty of documentation on increases to customers so they can use this information with their customers to justify the increases they will be making on downstream products.
2️⃣ Create Price Transparency and Flexibility: It is best indicating the temporary nature of Tariff by showing this as a separate surcharge or fee. This also offers flexibility with the ever-evolving tariff situation, enabling adjustment to tariff percentage. This is to create transparency with the customers and protect the margin.
3️⃣ Change in Oil Price:
Oil prices reduced by 10 to 15% post tariff.
This impact may be required to be passed on to the index/ formula price customers but may be selectively passed on to the non-contracted and log tailed customers. This may also bring in a reduction in energy/ processing costs. These changes might allow for absorption of tariffs by the producing company to avert a price increase.
4️⃣ New Product/ Customer opportunities: Tariffs may render some imported products unviable/ more expensive. This could open up opportunities for new products and new customers.
5️⃣ Exchange rate impact: The tariffs initially caused the USD to strengthen and later they weakened the USD. This impact is to be calculated in the price and may be passed on to the customers selectively depending on its significance.
6️⃣ Inventory: As for as possible built in buffer for raw materials with no tariffs or low tariffs (10%). This will give cushion while post tariff prices are negotiated with customers.
7️⃣ Product Mix Rationalization: Since most chemical companies have some flexibility to adjust their finished product mix, they could produce more products which have minimal impact of tariffed raw materials.
8️⃣ Tariffed Raw Material Substitution: Some chemical processes may allow substitution of imported/ tariffed raw materials with non-tariffed local raw materials in manufacturing processes. It may be possible to substitute non tariffed raw materials to avoid cost increases.
9️⃣ Force Majeure Clause: Should existing long-term contracts include a Force Majeure clause, consider invoking it, as the tariffs were unforeseen and beyond the normal obligation of suppliers. It may be best to include this clause in all future contracts with the customers if it is not in place already.
The American Chemical Industry faces significant challenges navigating the complexities of tariffs.
However, by proactively implementing the nine pricing strategies outlined above—from transparent cost pass-throughs to strategic raw material substitutions and leveraging force majeure clauses—companies can effectively mitigate the negative impacts and even uncover new opportunities. Successfully navigating this landscape requires a nuanced understanding of market dynamics, pricing models, and contractual obligations.
Author : Upen Rane, Pricing Consultant at 7Sages Pricing
