Chemical companies need a bold new approach to value leverage

The chemical industry faces a series of strong structural challenges due to some (but not all) reasons for the popularity of covid-19. Although the industry has had to skillfully harness changes in product commercialization, consumer attitudes and regional preferences and regulatory changes over the past few decades, the dynamics today are unique and more disruptive than ever. On the whole, they affect the whole value chain and are promoting the long-term structural transformation of chemical industry.

Because these challenges and their impacts are closely linked, chemical companies must take measures to look at them in a comprehensive way, guide them and find ways to benefit from them. This will mean that, considering the new pressure points facing enterprises, we should thoroughly review how value is generated. They must determine that these repositioning value levers are operational and targeted, and that they are effective with clear indicators, while supporting future growth goals.

Uncertain demand and profit cliff

The main challenge for many chemical companies is the instability and frequent decline in demand, which will have different impacts on the chemical sector and applications. From 2015 to 2019, the median sales growth of chemical enterprises remained at 3.8% a year, almost equal to the global GDP growth. But many chemical companies, especially those targeting the European and North American markets, cannot expect that growth any more.

In fact, the value creation of chemical enterprises has shown disturbing signs. Over the past 20 years, the total return on shareholders in the chemical industry has not only lagged behind the average of all industries, but also behind the performance of its key customer industries, including construction and non durable consumer goods. According to this standard, the development speed of chemical enterprises is second to that of automobile industry.

Why focus on the chemical industry? One explanation is "chemical phobia," a particular concern for the Department that supplies chemicals for consumer goods, including disposable plastics. Worried about their health and environment, some consumers are looking for alternatives to products that contain a large amount of chemicals. Therefore, some chemical enterprises began to take measures to adopt circular economy method, including the continuous recovery of raw materials and materials throughout the production process, and reduce energy and resource consumption. However, while a large-scale recovery is necessary, it will limit the demand for raw materials and other flows to chemical enterprises.

The same threat to production and profit is the reduction in the number of chemicals required for specific customer applications, which is driven by the customer itself. With the help of digitization, customers, especially industrial and consumer goods manufacturers, are developing internal capabilities to better assess the value, quality and quantity of materials and products they buy from chemical companies. With more understanding of their specific needs, customers can easily convert chemical suppliers based on reliable cost and product comparison, thus affecting the price and composition of chemicals more definitely than before. Similarly, consumers can make more and more informed decisions and actively replace existing chemical ingredients with more sustainable ingredients.

Global problems are also weakening the profitability of chemicals. These include trade wars, local content regulations, the protection of minimum intellectual property rights for chemical companies in some countries, and the growing view that long-distance transportation of large / low value products is wasteful and environmentally friendly. All of these factors together shift the production and distribution of chemical products from global to regional.

Article source: https://article-realm.com/article/Finance/12322-Chemical-companies-need-a-bold-new-approach-to-value-leverage.html