Over the past 15 years, the chemical industry has significantly increased its performance and growth and chemical companies across the globe have been riding high despite the challenging global economy. Unlike other industries, which raised productivity but competed their gains away, the chemical industry has the ability to increase earnings based on slower growth, at a rate that resembles the global GDP growth.
But if you think about it, the industry as a whole is positioned to profit from a wide range of trends as its products enable the “world of things”. Everything we touch, from the houses we live in to the food we eat, exist because of chemicals.
Can this golden era come to an end? Despite the overall 15 years of good performance, the last 5 years chemicals lagged the total stock market since 2011 in TRS (total returns to shareholders) performance and ROIC (return of invested capital) performance has flattened. In some chemical subsector, it was decreased.
With China accounting for almost 50% of global sales by 2030, the level of competitiveness is increasing due to new entrants, but the global demand doesn’t follow the same rhythm of growth. According to McKinsey, “[…] looked at globally, we estimate that the last decade’s 3.6 percent growth rate for petrochemicals may go down by between 0.5 and 2.0 percentage points over the next ten years, depending on assumptions for regional GDP growth. For an industry with an estimated capacity creep somewhere between 1 and 2 percent annually, this could be a dramatic shift.”
On the other hand, “the United States remains an attractive destination for chemical industry investment,” the American Chemistry Council’s (ACC) Mid-Year 2019 Chemical Industry Situation and Outlook notes. “Since 2010, petrochemical producers have announced significant expansions of capacity in the U.S., reversing a decades-long decline.”
So, what’s the future hold for chemical companies in Asia, Europe, North America and Middle East? With growth rates just a little above annual capacity creep, is there a need for new builds? And how can most new investments either replace existing assets or displace others?
Chemical companies need to create simpler and more challenging strategies. Being able to execute a flawless business model for chemicals will drastically improve productivity and functionality but will also secure you the first place at the podium of competitors.
“The long-heralded shift of the chemical industry’s center of gravity to Asia will actually take place. As much as Western players have tried to prepare themselves for this development, many still have only a limited grasp of what this will mean and the mind-set shifts required to face the fact that they will move from the center of the industry to its sidelines”, McKensey claims. “The historical track record of multinational companies in China and other Asian countries has been mixed at best. At some point, they will need to consider much closer partnerships with Chinese players to grab hold of one of the last opportunities to become an insider in what will be the largest chemical market.”
Each company needs to carefully take into consideration their strengths and weaknesses and reflect on how to evolve. They must be willing to transform their business models in order to sell business outcomes and results. Top performers have already started bundling products with value-adding services that differentiate their offerings, using digital to ride the next wave of commercial, supply-chain, and operations performance improvement, and grab a larger share of the customer wallet and therefore the chemical industry.