TACKLING THE COVID-19 CRISIS June 3, 2020

A ROADMAP FOR THE ESSENTIAL OILS INDUSTRY

The essential oils market isn’t immune and is facing its set of challenges due to the COVID-19 pandemic. The business is looking at leaders in the highest echelons of organisations to come up with suggestions to bring the industry back on track. Ravi Sanganeria, Managing Director of Ultra International Group, sheds some light on the challenges and possible recovery scenarios for the natural oils industry. Ravi sits on the Executive Committee of the International Federation of Essential Oils and Aroma Trades (IFEAT) and is a member of several essential oils regulatory bodies across the globe. Here is a lockdown Q&A with Ravi with regard to the “essentials.”

What are the difficulties being faced by the industry in light of COVID-19?

Ravi: In a very short space of time within our industry the pandemic has led to major disruptions in the way that products and services are bought, sold, distributed and manufactured throughout the world. We are facing four major challenges – logistics, labour, finance and price fluctuations.

Logistics: This is the most important and severely affected factor. Currently, the movement of ships and cargo is restricted. This has resulted in increased freight costs and longer transportation times. This is a big obstacle for the supply chain.

Labour: Due to the lockdown in several countries, many farmers are not working. This has reduced the production capacity and increased the time required to fulfil supply requirements.

Finance: As a result of the lockdown, factories have been shut, which has made the rotation of capital tricky.

Financial difficulties have cropped up, making it a herculean task to even pay salaries and procure raw materials. All the major economies are in deep recession with high and growing unemployment. There is little doubt that some companies in the F&F sector will be unable to survive this on-going crisis. This will add to the severe disruptions in the supply chain as well as lead to more mergers and acquisitions and bankruptcies in the sector.

Price fluctuations: We are expecting massive price fluctuations, due to demand-supply imbalances. I expect increased price volatility to be a long-term problem.

In addition, it is impossible to forget that alongside these economic challenges the COVID-19 pandemic is having an enormous social and human impact throughout the world in terms deaths, illness and numerous disruptions and tragedies caused by the lockdown.

Essential oils involve farmers, be it for flavours or fragrances. Going forward, what are the immediate changes needed in the production and processing of these oils?

Ravi: Wherever possible we need to try and support farmers, who are the backbone of the naturals sector. This can take a variety of forms, some of which are more longer term. Alongside endeavouring to ensure that farmers receive adequate and prompt payment for their production, we need to try to assist them in raising their productivity. This can be achieved by raising yields, adopting more efficient and less labour-intensive production techniques, including improved harvesting, storage and processing techniques as well as encouraging them to adopt sustainable production and processing practices, all of which will be vital to their future survival.

In the context of supply chains, what are the challenges you are facing currently?

Ravi: Quality control (QC) testing has become a massive issue. The time taken for testing has also increased with limited staff working in labs. This is an integral part of our business, and we cannot compromise on quality.

Also, as I mentioned earlier, the high freight rates due to limited transport options are delaying deliveries and causing challenges.

The dissemination of accurate information is also turning out to be a challenge. The lack of reliable information is leading to much speculation in the market. And, due to high demand, both existing and new companies want to start or increase output as soon as possible.

How can one mitigate these problems?

Ravi: The advantage Ultra has over many others in this situation is that we have stocks in multiple locations alongside excellent reliable staff and contacts working in many regions. Also, greater flexibility, advance planning, and keeping more inventory than usual are some remedies. However, this is not sustainable for all since it requires additional finance. So, companies with greater financial appetite will be at an advantage. But even they will have to go through delays in QC testing, which are unavoidable. On the flip side, it is a risky proposition to hold large stocks at the moment, since price fluctuations are greater.

As an international organisation, you have varied involvements in different parts of the world. Could you shed light on challenges specific to varied regions?

Ravi: I’ll walk you through the situation. However, as you are no doubt aware, the complex situation is changing almost on a daily basis. Hopefully, the regions that I discuss will be able to achieve the remarkable turnaround from the pandemic that China appears to have managed – but this is by no means certain.

Europe: Europe is in a tricky position right now. Every country has its set of rules to handle COVID-19, making the business environment confusing. There is no cohesive policy. Europe is also home to many regulatory bodies like REACH. It has raised concerns on how these bodies will function in the future and to what extent their current work will continue.

North America: The vast spread of the pandemic in North America has left many challenges. As in Europe, due to social distancing norms, we are unable to meet customers. New product launches have become an issue. While we are going the virtual route and engaging via video apps, this is an industry that runs on smell and taste. Even conferences like WPC had to be postponed. Trade concerns with China are affecting costing decisions. Plus, there is the distress and uncertainty caused by rising inflation and unemployment.

South East Asia: There is no concrete policy to fight COVID-19 in the region. Singapore has seen a re-emergence of cases. This has reduced the traffic to Singapore port, which is a very important hub for South East Asia. Since the region relies on labour intensive farming, production is slow at the moment.

Australia: Production in Australia hasn’t been hit like the rest of the world, in part because they have automated most of their processes. But, the location of Australia means long transit times to major markets. Also, the country was still recovering from one of the worst cases of forest fire and drought, when the coronavirus disaster hit.

Do you see a change in demand pattern for essential oils?

Ravi: Absolutely. For instance, certain oils used in the fine fragrance and niche product industry are witnessing a downturn. At the moment, the demand for luxury goods and fine fragrances is low. So, oils like sandalwood, rose, immortelle, vetiver will see a decrease in demand.

On the other hand, the demand for oils with anti-viral and anti-bacterial properties has gone up. Oils with cleansing properties, those used in the scent and care segment, antiseptic, aromatherapy oils, all are seeing a spurt in demand. This means the demand for tea tree, lime, cardamom, orange, lemon, eucalyptus, and nutmeg have all gone up.

What action, do you think the industry association can take to motivate the industry participants, farmers, and all employed in the essential oils space?

Ravi: We need to sincerely work on increasing the use of technology to improve communication and the transfer of knowledge to the wide range of stakeholders working throughout the F&F industry supply chains. Since most of our conferences stand postponed at the moment, physical interaction is out of the question. The social interface between industry colleagues was the main charm of these conferences, which unfortunately cannot be achieved online, though we can try webinars for the time being. Hopefully, once the situation improves, we can look at holding events on a smaller scale. Conferences based on geographical locations to connect stakeholders can be looked at, while communication systems can be developed to enable stakeholders to participate who are not physically attending the conference. New business models are being developed to facilitate a fundamental shift in how companies engage with their customers and reach out to new clients. As I mentioned, we are a business that depends on physical senses like smell and taste. I also feel the role of large organisations will be tempered due to the pandemic.

In this COVID-19 situation, even if you open the production in a staggered approach, do you think essential oil companies can provide previously maintained stringent quality standards?

Ravi: Maintaining high quality standards is an essential requirement of this industry. Companies have no choice but to adhere to quality requirements. In order to achieve that in the current scenario, longer lead times will be required. But it is imperative that we follow the set protocols.

Do you perceive any potential disruptions and innovations in the industry?

Ravi: We need to look at technology in a more aggressive way. Setting up of online trading platforms does feel like a logical step. Also, we have seen great research in artificial intelligence (AI) that can help solve some of the issues relating to smelling sessions, quality control and fluctuating prices. There are AI models being built at this very moment that focus on using current data to predict how a user will react to future similar products. Everything from toxicity and skin sensitisation will be evaluated through these models. This will be a massive push towards automation in the industry.

What we have learnt from this crisis is the need to adapt. I strongly feel that companies should look at procuring products from multiple locations. For instance, lemon oil can be sourced from Argentina, Italy and Spain. This will help mitigate the risk. It will require some changes in planning, but the stock will definitely increase, even if unit costs rise.

There are several factors impacting the overall dynamics of the essential oils market. The exhaustive research and work being done by Ultra provides a possible roadmap to re-establish supply chain links. But it is a longdrawn out process, which puts a massive onus on adopting and transferring technology, automation and the easing of lockdown guidelines across the globe.

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