By the year 2020, the global chemical industry could face a range of competitive dynamics that differ from today in nature and intensity, according to a new report by the Deloitte Touche Tohmatsu (DTT) Chemical Group and Deloitte Research. In the report, “The decade ahead: Preparing for an unpredictable future in the global chemical industry,” DTT reviews the financial and operational performance of 231 global public chemical companies between 1998 and 2008, including specialty, commodity and integrated players.
The analysis shows that profitability has not improved in both the commodity and specialty chemicals sectors during that period. The commodity sector experienced the industry’s sharpest decline in falling margins; the specialty chemicals sector also fell. The report suggests the decrease in margins can be attributed to overcapacity on the commodity side. The decrease in margins for specialty producers is attributed to competition, pricing pressure, uncertainty in end-markets and portfolio challenges. Although the integrated players grew their revenue by double digits in most years between 1998 and 2008, they are impacted by the pressures of their commodities businesses and by the need for more high-value specialized products.
“Maintaining and improving value could be rather challenging unless chemical companies take meaningful actions to reverse the trend,” says Tim Hanley, vice chairman and Process & Industrial Products Sector leader, Deloitte & Touche LLP. “The research found that a business-as-usual approach was not adequate in the last 10-year period for sustaining value. The decade ahead carries even more uncertainty and will require companies to focus more on new approaches and responses to tackle unprecedented challenges. By analyzing the interplay between three macro trends — economy, regulation and technology — companies can use scenario thinking to strategically plan for unpredictable times ahead and test new innovative approaches to achieve sustainable and profitable growth.”
The report states that as the industry prepares for the future, the commodity sector will focus on preserving cash, managing excess capacity and securing access to capital. The specialties sector will continue to seek competitive strategies that rely on understanding customer behavior and offering only the most profitable products and services, but at increasing levels of sophistication. For integrated players, in addition to the challenges of being in both commodities and specialties, new acquisitions will be a prime growth objective, particularly as a means of moving further downstream into differentiated businesses.
As chemical companies are broadening their geographic scope, Western commodity chemical companies are shifting to growing opportunities with a focus on the Asia-Pacific region and other areas within the developing world. With a small but growing share, the Middle East has significant potential advantages in low-cost hydrocarbon feed stocks and therefore continues to attract significant new capacity. It is forecasted that China and the Middle East will contribute 78 percent of new capacity by 2013. Meanwhile, the chemical industry continues to play a key role in the economies of the United States and the European Union.
A key differentiator for global chemical companies will be developing and implementing customized growth strategies that have the flexibility to be altered if unplanned obstacles or openings arise. “The success of the business model framework will depend upon more sophisticated methods for predicting market behavior and increasing the discipline of the business, product, and customer portfolio,” said Duane Dickson, principal, Deloitte Consulting LLP. “Given the uncertainty looking ahead, keeping a range of alternative possibilities in sight is crucial.”
The report defines three scenarios depicting how the global business environment could unfold between now and 2020, along with strategic implications for chemical companies:
1. Transition. Western economies suffer inflationary spells followed by hard landings, while the developing world focuses on domestic consumption and enjoys steadier growth. Economic and energy supply issues are higher priorities than emissions control.
2. Resilience. In both developed and developing nations, growth rebounds as governments play an active role in managing their economies, directing investment, and promoting national competitiveness. Renewable energy and nanotechnology are among the top areas targeted for support.
3. Dislocation. Difficult challenges and heavy-handed government policies keep growth subdued in the West. In Asia and the Middle East, the falloff in foreign export demand causes an economic slowdown that leads to social and political unrest.
“Becoming more disciplined and focused through scenario planning allows chemical companies to perform effectively in a global industry that is increasingly commoditized, cyclical and competitive,” said Dwight Allen, director, Deloitte Research. “By paying closer attention to future trends, executives can better anticipate and establish strategic options for what may lie over the horizon — and alter course as required.”
“The U.S. $3 trillion chemical industry is a significant contributor to our global economy and helps to solve some of humanity’s biggest challenges,” said Dickson. “The industry will continue to evolve and grow, but taking action now will be required to sustain its future. By committing to specific business models and creating strategic options through scenario planning, disciplined companies have the ability to improve their focus, rally their people, attract customers and interest investors.”
For more information, visit: www.deloitte.com/thedecadeahead.
