The Only Thing to be Certain of in the Chemical Industry is Uncertainty

31 May 2017

The chemical industry is facing uncertain times; the future price of oil is unclear, the major growth regions of the Far East are cooling, regional chemical legislation (such as REACH, TSCA, K-REACH, etc) is threatening to swamp the industry with red-tape, while the massive mergers of Dow/DuPont, ChemChina/Syngenta and others are creating research and production cuts across a range of sectors. And no one knows when all the changing will end.

At least that is the take-away package being offered by a recent PwC report on the future of the chemicals industry. A report that paints a gloomy picture for global economic growth, and warns that the chemical industry will face some difficult years ahead.

As the report states, “ The structural headwinds in the chemicals industry are blowing like a gale out of the global economy. In a funk since peaking in 2007, global economies have been unable to reach the 35-year GDP growth average of 3.5% in six of the past eight years. And the two years of ‘high’ growth were more of a bounce back from the sharp downturn of 2009 than precursors of a sustained turnaround.”

It continues to outline how this will impact the chemicals industry, stating, “Within a problematic macroeconomic environment, made worse for many multinationals by the strong dollar, demand for chemicals has fallen. Overall industry sales growth increased an anemic 2.1% in 2016 as the sector faced declining industrial production and broad inventory rightsizing by many of its customers. Chemicals companies that sell petroleum-based products often fell short of these industry averages because lower oil prices led to sharp top-line declines, sometimes in the range of 30% to 40%.”

Region by region, the report diagnoses challenging situations that no single chemical company can avoid or prevent. For example, it outlines economic fears in the US over the Trump administration’s protectionist stance. While the President has also proposed reducing the amount of red tape that businesses face, thus aiding domestic growth, any restrictions made on international trade will seriously impact the global chemical industry.

In Europe meanwhile, the UK is struggling to lessen the impact of Brexit, while at the same time trying to encourage growth. The rest of Europe has been experiencing economic stagnation for years, despite monetary easing, such that in general, the economic outlook for the European chemicals industry does not look too promising.

The same can be said of the Middle East, which is going through a period of massive change as Arab economies work out how to survive beyond oil. This has resulted in attempts to increase local production of non-oil manufacturing, as well as increase domestic demand. The chemical industry must find a new way to success in these changing economic times.

The Far East, and especially China, is the bright spot on the horizon for chemical traders, with a growth rate of 6%. However, even this economic boom is showing a downturn from the double digit growth of only a few years previously. Meanwhile, leaders there are hoping to change the economic model from a largely export based role, to one with increased domestic demand and consumption.

The chemical industry specifically, needs a process of adjustment, as PwC reports, “Margin pressures are increasing among domestic chemicals producers due to an overcapacity in basic commodities and in certain value chains (such as acrylonitrile-butadiene-styrene [ABS], a popular plastic used in manufacturing, and purified terephthalic acid [PTA], a polyester) as well as inefficient plants and processes.”

Outside of regional challenges, the chemical industry as a whole should prepare itself for the trend, from both consumers and producers, towards sustainable manufacturing. Increased levels of recycling and the further development of the circular economy will mean that many chemical manufacturers will need to develop more energy efficient processes or source chemical raw material sustainably if they are to grow.

As PwC notes, “With rare exceptions, chemicals companies can no longer depend on volume to drive growth. Structural weakness in most markets and recycling and reuse, which impact the sale of virgin materials, are combining to substantially reduce demand. Pockets of potential growth exist in new materials, such as biopolymers, which are renewable polymers produced by living organisms, but they are still some time away from reaching scale.”

The report also adds that, “In 2017, barring a recession in the U.S. and Europe or a slowdown in China, Moody’s Investor Service expects EBITDA (earnings before interest, taxes, depreciation, and amortization) in the chemicals industry to slip by 1 or 2 percent year-over-year.”

These are changing times, and while change is often something to be feared, it is better to see the challenges ahead than to step into the unknown. If the report is correct, then many chemical companies will need to make serious adjustments to their manufacturing methods, business models, and raw material sources. Maybe a downturn can be avoided, or maybe an adjustment in the market is needed. Unfortunately, the PwC report, like so many things in the chemical industry’s future, cannot be certain.

 

 

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