After a decade or more of economic growth, the global chemical industry is bracing itself for a possible downturn in the global economy. Worries about a slowdown in the US, the security of future energy supplies, and the growing burden of regulations in many regions, are all contributing to the general impression that tough times may lie ahead.
In the past, such times of difficulty have often proved to be an opportunity for chemicals firms to capitalise on their strengths, maintaining profitability through their innovations. While many of these opportunities have been well aired, both in C&I and other publications, much less well explored are the potential threats. Several of these may seem fairly obvious. The current turmoil in global financial markets will have an impact, for example, the extent of which remains to be seen. There will be more and more regulations forced upon the industry as a consequence of climate change. And, of course, the industry will have to live with a high oil price for the foreseeable future.
Many other threats, however, are less well known, and will vary in their effects depending on geography. The activity, for example, of the Chinese government to secure raw materials from around the world may benefit Asia, but should be a worrying prospect for chemicals producers in the EU.
In the following boxes, and in no particular order, we present our own ideas on what are some of the most pressing threats our industry is currently facing, drawing wherever possible on experiences from the past. As starting points for further discussion, we believe that they should provide a useful guide to some of the potential hazards whatever the coming decade has in store.
1. The global economy
The profitability of the chemical industry has always been a hostage to fortune of the worldwide economy, dependent as it is upon demand for its products, plus the cost of its feedstocks, oil and gas. The golden age of the chemical industry in Europe and the US between the end of World War II and the first oil crisis of 1973 is unlikely ever to be repeated anywhere. The global recessions in the early years of each of the last three decades since the 1980s, allied with the major downturn throughout Asia in 1999, hit the demand for chemicals badly. The Asian crisis was largely unforeseen; prior to it, massive increases in demand for chemical products were being forecast for the region, accompanied by a big wave of foreign investment.
The frequency and amplitude of these swings is largely unpredictable - the middle of this decade, largely unexpectedly, showed a chemicals boom - but the industry in the past has done little to help itself, with over-investment in the boom periods and a marked reluctance to restructure or close unprofitable plants in the downturns.
However high the growth rates being forecast for regions like South East Asia, China, India, etc, they will be subject to exactly the same boom-and-bust cycles as the developed world. These regions are less understood than those of the US and Europe. There is no ‘track record’ to go by and events there will be largely outside the control and influence of western companies.
2. Political events
The effects of the Iraq conflict may have no major lasting impact on the chemical industry in the Middle East or globally. However, the effect of any major conflict involving the Middle East overall would have untold consequences for the chemical industry, destabilising trade, downstream industries and even governments in oil-producing countries.
What is almost certain is that an even higher oil price environment following such a conflict would last indefinitely, which would be bad news for chemicals. But at the same time many potential investors in Middle East complexes might be put off, which would be good news, at least in the short term, for those investing elsewhere. This happened in Iran, whose chemical industry was supposed to take off in the 1980s and mirror the growth in Saudi Arabia, but this never happened as the foreign investors held back because of fears of a war with Iraq.
Fears of terrorism are having a major impact on certain sectors of the industry, such as chemicals transportation. Security must now be considered as a major issue along with health, safety and the environment (HS&E).
Growth in Asia depends on no major ongoing conflict in Iraq – that threat seems to be passing – and no crash of the Japanese economy, which remains to be seen. There remains the fear that Japan could deliver the financial meltdown that has been dreaded for so long, and cause a world economic disaster akin to that in the 1930s.
3. Government intervention
In the 1980s, government intervention in the largely state-owned chemical sector in several European countries caused ongoing problems that are only now being left behind. The dangers of the state having a finger in the ‘chemical pie’ are clearly demonstrated by the cases of the French, Italian and Spanish chemical industries in the 1980s, where respective governments meddled ceaselessly with the makeup of companies, invariably to their detriment and, in the case of Italy, almost killing off their chemical industry completely. Although such things are unlikely to happen in Europe again, they are inevitable in developing regions of the world where the state retains a big stake in oil/petrochemicals, and any foreign companies in partnership with the state producers will be caught up in those changes that ensue, with little or no say in the restructurings carried out.
The other danger from government is the imposition of regulations which put an intolerable strain upon the competitiveness of the industry: the EU’s REACH initiative being a clear example.
4. Parent company activities
The petrochemicals landscape changed almost beyond recognition in the 1990s, thanks mainly to the mergers among oil majors – Exxon and Mobil, BP and Amoco, Total Fina and Elf etc − that often took little account of the effect on their chemicals operations but which, inevitably, had a major impact upon them, for better or worse. Future mergers such as these may continue to influence chemical companies in the developed world, and could certainly become common in future in developing regions, as oil producers merge to achieve world scale.
Likewise, the future of chemical producers who fall prey to takeovers by private equity companies will be subject to the whim of their owners; some will prosper, many will disappear.
5 Energy and feedstocks
The cost of electricity for the chemical industry has been an ongoing bone of contention for decades, and at times of high oil prices, the cost of feedstocks can put the industry in Europe at a huge disadvantage. At present, there are no realistic alternatives to fossil sources for petrochemicals, and petrochemicals are the basis of the entire chemical industry, from pharmaceuticals to fertilisers, from dyestuffs to paints, from synthetic textiles to plastic products. The main threat is that if the demand for fuels falls, the availability of petrochemical feedstocks from gas and refinery streams could fall also, although this problem could be solved by developing ways of converting streams other than naphtha and gas oil into chemical feedstocks. Equally, in developing nations demand for fuels for cars and other vehicles could dramatically increase, and also reduce the amount of feed available for chemicals.
However, the future is not all bleak. As time goes on, environmental pressures will make it less and less acceptable to burn fossil fuels, and new initiatives such as solar energy and electric cars will slowly become the norm rather than the exception. Petrochemicals will become a more attractive outlet for petroleum than gasoline and other fuel streams. This is undoubtedly why ExxonMobil has forecast that chemicals could be its growth business of the future.
6. Demographic shifts
There is a marked shift in the developed world towards an ageing population, which is sure to herald a change in demand for different sectors of the chemical industry. At a basic level, it will boost those chemicals that go into pharmaceuticals, and decrease those going into sports equipment. In the developing world things will be very different, with chemicals consumption among the regions’ burgeoning middle classes expected to increase dramatically over the next two decades.
The picture is complicated by how much relative wealth different groupings will have. For example, if the dire prospects for pensions which are being forecast come about, the elderly may not have as much disposable wealth available to buy material goods, or they will already have what they need, either of which could impact the future of plastics. What the elderly will not do is to be easily persuaded to adopt the culture of disposable products, where items such as cell phones are replaced every few months as a fashion statement. Conversely, if the ordering and delivery of groceries via the Internet takes off in a big way in the West, food packaging could increase substantially, but legislation could mean that this is of paper and cardboard rather than plastics.
Likewise, the move to an increasingly consumer society in countries like China might indeed happen at the speed now being forecast, or it might not – for ideological reasons as much as any other. Another Asian crash could happen – and the chemical industry there could grow much more slowly than the 10% plus rates being suggested.
7. Resurgence of nationalism
The globalisation of chemical companies over the last two decades has been a product of the disappearance of national boundaries, such as in the EU, NAFTA, ASEAN and other groupings. However, this trend could and probably will reverse, as we have seen in artificially created states such as Yugoslavia, Czechoslovakia, and even in the UK, where calls for devolution goes contrary to the perceived aim of unification in Europe. The entry of a large number of economically unstable East European countries could eventually destabilise the entire European project. Even in the US, there could easily be a move towards more autonomy in individual states. All of this could have very difficult implications for companies spread around the world. It will just be a matter of timing – how long will it take to happen?
8 Mineral resources
It is well known that China, especially, has been travelling the world buying up mineral resources, and prices are constantly increasing. This is partly behind the increasing number of thefts of metal – manhole covers, copper pipe, lead from roofs etc – we have been seeing in the UK. It is also known that there is not enough mineral wealth on earth for China and India to achieve the same high standard of living as the West.
The threat is that material prices will rise so much that maintaining an acceptable level of profitability will be challenging. Chemical companies are moving to the Far East to reduce costs and address the need to remain profitable. If there were, say, a fall out in relationship with China we could see a large amount of the Western investment not accessible.
It would leave the West strategically weak. The industry, with support from government, really needs to plan for a long term manufacturing strategy in its own territory.