Under the influence of consumer demand, technology, raw material prices, and geopolitics, the industrial chemical industry is under a constant cycle of change. Perhaps more than any other sector, petrochemicals are enduring a time of special transformation. The emergence of shale gas resources, the growing desire for a circular economy, the demonising of plastic, fluctuating oil prices, and increased use of bio-plastics and renewable chemical feedstocks are all threatening to impact the petrochemical industry.
A petrochemical plant in the UAE
Yet all of these potential challenges have come after a period of healthy growth. As a recent report by industry consultants at McKinsey & Company states, “The global petrochemical industry has experienced more than 15 years of strong volume growth: annual ethylene production has risen from around 100 million metric tons in 2000 to almost 150 million metric tons in 2016. In conjunction with this volume growth, value creation has also risen at a 4 percent compound annual growth rate since 2005.”
Called ‘Petrochemicals 2030: Reinventing the Way to Win in a Changing Industry’, the study continues to explain how much of this growth (and profit) came from. It notes that, “Most of the history of the petrochemical industry in the new millennium has been one of regional asymmetry—where the key to success has simply come down to being in the right place. Emerging-market-based companies have risen as leaders in the industry, and companies in locations with access to cheap gas have earned the majority of profits.”
But what now for the future? Can we expect to see further decades of growth? Will value creation and low gas prices keep the dollars rolling in?
This article outlines three key trends that will influence the petrochemical industry over the next 15 years, and what can chemical companies do to ensure a smooth transition?
1. Reduced Demand.
Chemical producers should expect a period of contraction for demand. As efficiencies are made across the chemical industry, stricter regulations on plastic disposal (particularly packaging), lower consumer demand for single use plastic items, and a maturing of Asian markets, the petrochemical industry should expect a 10% drop in production by 2050.
A Californian plastic recycling plant
As the McKinsey analysis observes, “The GDP growth rate of the important Chinese market has slowed and may slow further. In parallel, per capita chemical consumption in China appears to be at the point where it may start to grow more slowly than the country’s GDP growth rate. This development is associated with macroeconomic trends in China, which is moving from the investment stage of development with spending on infrastructure, along with expanded purchases of new houses, consumer durables, and autos, to an economy more focused on services and upgrade-type purchases. The latter generate much less additional demand for chemicals.”
The report also adds that, “We estimate that the last decade’s 3.6 percent growth rate for global petrochemicals demand may slow to 2.0 percent to 3.0 percent through 2030. Growth may accelerate again as a new group of economies—for example, India, Indonesia, Pakistan, and countries in Africa—contribute more significantly to expanding demand, but this may take another five to ten years.”
2. Increased Recycling
Improvements in waste collection, technological breakthroughs, and industry scaling will all play a part in increasing the amount of material that is recycled. Increased public awareness and the resulting political impetus will also put downward pressure on demand for petrochemicals.
In the UK, for example, the government is discussing an overhaul of recycling schemes, including; increasing plastic bag taxes (one was already introduced last year ), adding a ‘single use plastic’ tax, and a compulsory deposit program on plastic, glass, and aluminium bottles and cans. All of which has received widespread support, even from the plastics industry.
A recycling collection point in the UK
As petrochemicals consultant Jasper van de Staaij, explained to the industry journal Petrochemicals Europe, “As plastic waste becomes an environmental and public health focus and carbon abatement is required to achieve climate targets, governments are more likely to intervene.”
Although Van de Staaij acknowledges the expenses involved in reducing waste, stating that, “Any new regulatory obligations have the potential to create additional compliance costs for industry.”
He also believes that this development will have a positive impact on the chemicals industry. Noting how, “A regulatory framework that takes account of these [low carbon and circular economy] developments can only be beneficial for the chemical industry as it prepares for them. This holds especially if the regulation helps in the commercialization of new technologies and developing new cooperation standards and supply chains. For example: low-carbon production routes in the presence of carbon prices; development of biodegradable plastics; design-for-recycling in plastics production and industry wide quality standards that help the commercialization of plastic recycling technologies.”
3. Renewables and Feedstock Changes
It is predicted that most chemical suppliers will increasingly diversify their feedstock mixes. This is due to modifications in upstream production, consumer demand, and price.
As Van de Staaij, explains, “We expect that by 2050, the supply mix for petrochemicals will comprise a portfolio of hydrocarbon sources. It will combine fossil which is the large majority today, with recycling – utilizing recycling options along the value chain i.e. mechanical, chemical and thermal recycling, as well as renewables. However, since using renewable feedstock for the production of chemicals is from a business-case perspective more expensive, its increase will mainly be driven by customer pull in specific applications or regulation.”
A bioethanol plant in the UK
He also notes that, “renewable feedstocks, such as bio-ethanol or bio-ethylene, are projected to increase from base rate of 0.5% globally (2015) to 4% by 2050.”
What does the future hold for petrochemicals?
The petrochemical industry is on the edge of a period of great change. Asian economic expansion and increasing demand for consumer goods is levelling off, to be replaced by a growth in service industries. Meanwhile, more mature economies in Europe and North America are heading towards renewable feedstocks, lower carbon emissions, and the goal of a circular economy. All of these events will lower the need for petrochemicals.
Furthermore, historic regional advantages, such as US shale gas and Middle East oil will begin to be removed through technological advances, or as other energy sources go on line. As McKinsey notes, “There are new possible sources of advantaged-price gas supply in the world, for example in Iraq and Kazakhstan, and there is also the prospect that shale-gas production could take off in countries such as Argentina.”
A shale gas plant in China
No single company can avoid the approaching challenges. Instead, petrochemical suppliers will need to adapt if they are to survive. They must find new raw material sources by embracing, not resisting the circular economy. They must make savings by investing in digitalisation and big data analytics. They must prepare themselves for a world of reduced demand, increased recycling, and alternative chemical feedstocks.
A few weeks ago, at the end of February, Bloomberg published an informative article about a commodities trading company called SourceSage. The story was insightful because it told of the unlikely team behind a Singapore raw materials trading company.
As the authors described, “Co-founder Jianmin (Jian) Sim, 29, has all the hallmarks of the young entrepreneur — a former machine-learning researcher with a Masters in engineering from Oxford University. His partner, though, is his father, 63-year-old John Sim, who has three decades of experience buying and selling commodities.”
It was also interesting because of their amazing growth in commodity trading markets. An expanding company with over 10,000 clients, including Cargill Inc. and Wilmar International Ltd., in 102 countries.
But while there have been plenty of family-run trading companies from Singapore, many of whom have found great success, what was truly inspiring was the founders’ vision. A father and son team with a plan to re-write the rules of trading for industrial raw materials. As Paul Santos, managing partner at Wavemaker Partners, which has invested in SourceSage, says, “They had a conviction that this industry was really messed up and needed a transformation.”
The industry journal, The Edge Markets, agrees, noting that, “Many physical commodities markets are ripe for disruption using technology. Unlike stocks, where prices are typically determined on highly regulated exchanges, most niche commodities have dodged intense regulatory scrutiny because of their relatively smaller value and the wide geographical spread between production, shipping, processing and end users.”
If you are interested in reading more about industrial raw material markets, chemical prices, and feedstock sourcing, then please take a look at the SPOTCHEMI blog page.
Seeing the advantages available for tech-savvy raw material traders, the team began to combine the commodities trading knowledge of father John, with son Jian’s understanding of the latest technology and communication techniques.
“Once he retires, his knowledge would be gone forever,’’ explains Jian. “I wanted to capture that, digitize it, and immortalize John Sim as a brand.’’
In doing so, the business has found a growing market for providing data and pricing information in a huge industry sector.
As the Nikkei Asian Review explains, “The Singapore start up gathers and verifies commodity prices from online and offline sources and distributes real-time data as well as weekly market analysis via its app, website and terminal. Chat-bot Amanda helps users navigate the app. They can search data on chemicals, oil & fats, oleochemicals, petrochemicals, freight & logistics and steel & iron ore, the app show.”
“It’s a robust technology platform that’s user-friendly and easy to navigate,” said Sathia Varqa, co-founder of news and data publisher Palm Oil Analytics, who uses the app daily to reach SourceSage’s palm-oil related community.
Neither father or son had originally planned to go into business together. When Jian was growing up, John’s work commitments prevented them from spending much time together, especially as Jian was often studying overseas. Then one day in 2013, John asked his son to set up a website for his trading company. The question came quite ‘out of the blue’, but was the beginning of a beautiful working relationship.
As Bloomberg explains, “John scribbled his workflow on a piece of cardboard and passed it to his son. They began talking about the pain points in the industry — how nice it would be to have cheap, reliable, real-time data, and a platform for buyers and sellers.”
Today, after just a small $50,000 start-up investment, SourceSage has grown to be a ‘go-to’ business for commodity traders, and a well-known supplier of information on Far East raw material prices.
Today, SourceSage is not alone in supplying an online hub for raw material buyers and sellers. SPOTCHEMI (who support this article) is an online community of chemical industry professionals. Through the company’s website, raw material manufacturers, suppliers, and traders keep up to date on news, price fluctuations, and market trends. The website also offers a product sourcing service, product promotion tool, and provides a general platform for networking among like-minded chemical professionals.
While the speedy expansion at SourceSage is to be commended, it is just one of several start-ups who have seen for reform in raw material markets. The need for ‘real-time’, international data on prices is modernising the sourcing and supplying of industrial raw materials. Given the advantages offered to those who use information hubs and online buying networks, those who ignore progress are sure to be left behind.
007 would be proud of the chemical industry. Although it doesn’t have car chases, glamourous locations, and seductive women, it does keep a lot of secrets. And in the highly secretive market of industrial chemicals the biggest secret of all is the price.
In most situations this leads chemical manufacturers and traders to ‘best guess’ their opening offer to prospective clients. Without additional information, a chemical sales team can only create offers based on past experience and hunches. It can never know what the true value of the chemical product is to the customer.
However, a more modern approach to pricing industrial chemicals has now been developed that suggests having a more open discussion about price. It even suggests that the value of a chemical should be based on a calculatable evaluation of the practical solution a chemical product provides.
The details of this theory by Dr Andrea Maessen (formerly at the Department of Trade and Marketing at the University of Hamburg) and Jan Haemer (formerly at the Department of Economics at the University of Toronto), have now been published in the industrial chemical journal, Business Chemistry. Their work at the industrial consultancy Simon-Kucher & Partners offers a great insight into the theory of pricing industrial chemicals.
Pricing theory that is also pleasingly practical.
For example, Maessen and Haemer have provided real-world examples of how their theory was applied in advice to the water specialists at Ecolab . Here they suggest not pricing chemical products by the kilo or tonne, but by the value it provides to the customer. On this topic they note, “The added value is the ability to identify ways to operate a specific water treatment plant more effectively and efficiently on a continuous basis, based on gathered information and benchmarks. The value is derived from the solution, the combination of water chemicals and services. A model based on kg or bags of water chemicals doesn’t align with this value.”
They suggest that chemical companies are not just supplying products, they are supplying problem solving solutions. A manufacturer of animal feed gains value by adding agrichemicals to his mix. These chemical raw materials give value to his product that can be measured in the additional growth and productivity of a farmer’s animals. The value of these chemical products is therefore measurable, providing a base point for price negotiations.
However, as any chemical product provider knows, the real profit for supplying industrial chemicals can often be found in the additional services that are purchased. Maessen and Haemer also believe that chemical suppliers need to show the value of these services. In doing so they not only allow a client to select the value that suits them and their needs, but they also help both parties find a mutually agreeable price.
For this reason, the researchers have also developed further pricing suggestions that give value to the services that chemical suppliers offer.
Here are some of the take-away points of their theory:
- Treat services as products. This includes issuing services with a material number.
- Be clear about what the standard service includes. This way clients understand why they must pay for additional services.
- Include all services on the invoice. Enter a value of zero for those that are included in the standard service.
- Automatically charge for services. It is easier to take a charge off the invoice than to add it later.
- Avoid petty charges. The Ryanair business model does not apply in B2B industrial chemical markets.
- Don’t display a price for all services. Some services are so special they are only ‘available on request’.
- Use services and charges to influence customer behaviour. Increase charges on services that you may want to phase out, decrease charges on services that you want to promote or expand.
In recent years there has been much talk of ‘innovation’ as a driving force for the chemical industry. It is the power that focuses investment, creates new products, and solves the problems facing the modern world. However, innovation in pricing policy is perhaps even more important. As research costs become ever higher, health and safety testing of new products stretches into decades, and competition becomes ever stiffer, it is innovation towards accurate pricing that will increase profits for chemical companies.
As Maessen and Haemer note, “Innovations which can demonstrate true added value are the only way forward for the chemical industry. This also means business model innovation and not merely product and service innovation.”
Is it time to rethink your company’s approach to chemical pricing?
If you would like to read more about industrial chemicals and chemical pricing, then you can read more articles like this one at the SPOTCHEMI blog page.
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