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Industry growth rates, productivity threatened by global trends
Posted on April 6th, 2017 by Nigel Davis in Chemicals Industry News and Analysis
Consultancy McKinsey’s chemicals practice threw some interesting thinking into the pot last week. Its research indicates that chemical sector returns have been flattening over the past few years with performance being negatively impacted by overcapacity and slower demand growth.
Extrapolate from this position – and consider the threats to growth from China’s slowdown, greater protectionism and possibly the circular economy – and you have a not particularly pleasant mix. It could even be a witch’s brew which produces a much tougher operating environment for producers worldwide.
Productivity has been the key to superior performance for years but chemical makers are finding it harder to continue to make gains. It is one of the drivers of the current high rate of merger and acquisition (M&A) activity.
Demand growth has slowed; capacities globally, for some key intermediates as well as other products, are climbing fast. Companies do not so much have to run faster just to catch up but they do need to find different levers to pull.
Competition is increasing as aggressive producers in China particularly but also in other faster growing parts of the chemicals world are collectively affecting supply and demand. Some companies have been able to tap in to the gas-based feedstock advantage in the Middle East and, most recently, in North America but it is clear that those opportunities are limited in terms of volume and availability over time.
It may yet be proven that this gas phase for large parts of the sector was only relatively short-lived, the (chemicals) world shifting in a much bigger way back to naphtha. Any shift to liquids means that different models of competitiveness apply.
McKinsey talks about a sector that has consolidated but is losing the benefits of that consolidation as the supply base grows. Two decades of portfolio restructuring, which has put companies in a strong position relative to customers and suppliers, is in danger of being lost.
A Chinese economy characterised by “services and ‘upgrades'” will not need so many chemicals and volumes of imports will fall.
“Looked at globally, we estimate that the last decade’s 3.6% growth rate for petrochemicals may go down by between 0.5 and 2.0 percentage points over the next 10 years, depending on assumptions for regional GDP growth,” McKinsey says.
“For an industry with an estimated capacity creep somewhere between 1 and 2% annually, this could be a dramatic shift,” it adds.
There probably are pockets of stronger growth – in agrochemicals, for example – but McKinsey calls into question the specialties model on which so much current product and market research, and M&A activity, is based.
“Even in application development, the segments where consumers are willing to pay for leading-edge solutions are not getting bigger, since the fastest-growing markets (China and India) have only a limited appetite for premium grades. Expanding in application development will compensate for only part of the margin erosion in the upstream core business,” it says.
The commoditisation of specialty chemical companies’ products and offering could also gather pace with the development of digital technologies and platforms like Alibaba. While digitalisation on the one hand offers next-step improvements in production process productivity and SG&A (selling, general and administration) cutbacks there are threats buried deep in the market place where few chemical companies currently dare to tread.
The concept of the circular economy may apply almost entirely to plastics but plastics provide the backbone of demand for most upstream petrochemicals. McKinsey says it is not unlikely that plastics producers will face regulation and pressure from customers to recycle more and, in effect, reduce virgin polymer demand growth.
“If just a few of these shifts gain substantial momentum, the chemical industry will face a decade very different from, and much tougher than, the last on,” it says.
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