Our research indicates that the chemical industry is set for annual growth of 3 to 5 percent by 2030, accompanied by a 4 percent rise in capital expenditures. However, it also grapples with cost pressures, with a 26 percent increase in capital project expenses since 2020 and industry-wide margin compression due to oversupply. In this complex landscape, CFOs must find the delicate balance between capital allocation strategies, updated project return expectations, and continuous improvement of project outcomes.

Unlock the Secrets of Capital Management in Chemicals

Managing Capital in Chemicals

Chemical companies' capital deployment is closely tied to their overall value and financial well-being. When ROIC increases from 12.0 to 13.0 percent (an 8.3 percent improvement), EV surges by 22.0 percent. But as ROIC continues to rise, the impact on EV becomes less significant. CFOs face a complex landscape of challenges when trying to improve ROIC through better capital management, exacerbated by rising project costs, labor shortages, and macroeconomic headwinds. These challenges include highly technical projects with communication barriers, "gaming the system" due to trust deficits, information asymmetry within projects, deprioritized capital capabilities, and disruptions cascading through the portfolio. 2: The average project cost has increased by approximately 26 percent since 2020. This makes it crucial for companies to stay within budget to safeguard returns, especially in the face of margin declines. Optimizing capital deployment is now a pivotal task for CFOs as it directly affects a company's financial health and overall value.

Optimizing Capital Management in Chemicals: Five Questions for CFOs

What is the best way to determine what and where to spend?In a balanced portfolio, trade-offs are inevitable. Active discussions across the C-suite are needed to determine which projects best support business priorities. CFOs have four cash allocation avenues. Sustaining and compliance capital expenditures typically make up about 1.5 to 2.0 percent of the asset base for top performers. Growth capital expenditures are based on quantified risk-adjusted return targets and historical ROIC estimates. Strategic initiatives involve plotting investments to achieve commitments like net-zero goals or M&A strategies. And other uses of cash require balancing "should spend" with returns to shareholders. 2: How should my return expectations be different in a rising-interest-rate environment?From 2022 to 2023, capital project costs increased by about 10 percent. For a hypothetical $100 million project with a 15 percent internal rate of return (IRR) in early 2022, it required an investment of $110 million in late 2023 and yielded only a 12 percent IRR with 3 percent margin compression. To achieve similar returns to 2022 highs, companies need to either reduce capital expenditures by 15 percent or improve gross margins by 10 percent. The most effective approach often involves both actions.How can I improve project outcomes or control risk across my portfolio and on large projects?CFOs have a significant influence across five key stages of the project life cycle. In the concept development phase, they can set strict criteria and evaluation processes to ensure consistency and quality in project business cases. Engaging actively at this stage helps control portfolio quality and manage risk. During the design stage, CFOs can challenge existing scopes and push for standardization to reduce costs and improve returns. Examples include guiding design teams to the minimal technical solution and ensuring appropriate use of standard industry specifications. 2: Before financial investment decision (FID), CFOs can lead an independent review team similar to those in private equity. Major projects often have average cost overruns of 79 percent above the initial budget and schedule overruns of 52 percent. These overruns can often be prevented by performing due diligence similar to M&A transactions. Independent reviews before FID bring in external data and perspectives to validate and challenge estimates, plans, and budgets. In the procurement and contracting phase, CFOs are crucial in evaluating joint ventures and partnerships and avoiding complacency. In the execution phase, they maintain controlled communication and ensure a financial mindset.How can I focus the technical project teams on financial outcomes?CFOs can take four actions to encourage technical project teams to adopt a financial perspective. Role modeling by approaching major projects as independent businesses and appointing project directors with a CFO mindset. Developing financial expertise within the team and facilitating team development with coaching and tools. Communicating the financial impact alongside technical information in a compelling story. Reinforcing the use of financial terms through approval decisions and project updates. 2: These efforts help cultivate a financial mindset throughout the organization, aligning technical teams with broader financial objectives.How can I drive transparency on major projects to better predict what’s coming?CFOs have three interdependent levers to enhance capital project transparency. Integrating new technical solutions allows them to drill down into data at a granular project level and address productivity issues early. Improving performance management processes involves structured meetings with up-to-date data and clear escalation paths. Nurturing project leaders with the right mindsets, capabilities, and behaviors is essential for effective project management. 2: Tools, systems, and people should work together to create transparency and results. Today, chemical CFOs must balance shareholder returns with escalating costs and implement solutions to address critical questions.