Unraveling the Future of the Chemicals Industry in an Uncertain World
A New Period for the Chemicals Industry
Over the past 20 years, the chemicals sector has outperformed the broader market for several reasons. Demand growth in Asia, productivity improvements, access to new feedstocks like shale gas, and a favorable position in the value chain have all contributed. The strongest performance was seen in 2008–11 and 2015–17, as well as during the COVID-19 pandemic. From 2003 to 2021, total shareholder returns reached 11 percent per annum, ROIC increased from 8 percent to 14 percent, and there was 5 percent top-line revenue growth annually. However, for many chemicals executives, the years since 2022 have been the most challenging. The chemicals sector has underperformed the broader stock market, with steep share price declines among Chinese-listed companies and global indexes being propped up by tech companies.Even after adjusting for these factors, the gap remains. This indicates that the industry is facing significant challenges and may need to adapt to new circumstances.
The Forces Contributing to the Industry Slowdown
There are several potential reasons for the chemicals industry's lagging performance, both in the short and long term. In the short term, energy prices in Europe remain high, depleting chemical stockpiles and triggering a destocking and restocking cycle that magnifies market fluctuations. Interest rates and inflation have also slowed chemical growth, affecting demand centers such as construction, automotive, and consumer-packaged-goods industries.Looking ahead, several structural factors suggest lower-than-historical returns for the chemicals industry. The industry is reaching the limits of linear demand growth, as economies mature and the correlation between GDP and chemical consumption weakens. Capacity additions in Asia, often led by state-owned enterprises, exceed demand growth, leading to depressed global capacity utilization rates and industry margins. Additionally, fundamental innovation has stalled, and many products are commoditizing faster. A changing regulatory environment, especially in Europe and the United States, adds another layer of complexity, affecting compliance costs and operational strategies.
How Chemical Companies Can Create Value in an Uncertain World
Despite increased competition and moderating demand, chemical companies can still capture significant value by taking the right steps. Firstly, they need to prepare for growth while controlling costs and inventory. Inventory levels have been volatile, and companies should be cautious about overextending. Secondly, continuous investment in innovation is crucial. Leading companies have developed distinctive solutions that drive megatrends, and they should continue to explore new areas such as recycled materials, the microbiome, and carbon removal.Chemical companies should also be prepared for structural shifts in select chains and consider M&A opportunities. Digital innovations and technology are transforming business models and value pools, and companies should leverage gen AI for R&D, commercial growth, and operations excellence. Finally, they need to rethink their engagement across geographies and address questions about growth markets, supply chain resilience, and IP protection.
Preparing for Growth and Innovation
Inventory control is essential in a volatile market. While demand may increase in the coming quarters, companies should maintain tight cost and inventory controls. This requires a careful balance between growth and discipline to ensure long-term success.In terms of innovation, companies should focus on transformative solutions that address unmet needs. They should also assess their starting point and abilities before diving into new areas to avoid destroying shareholder value. Bold capital reallocation towards unique value-creation areas can strengthen a company's position.
Leveraging Technology for Business Transformation
Gen AI is beginning to make an impact in the chemicals industry. It is enabling R&D breakthroughs in materials discovery, process optimization, and formulation. Additionally, it is opening new avenues for commercial growth through lead generation and cross-sell opportunities.Technology-enabled operations excellence can also lead to significant efficiency gains. Advanced analytics, sensor technologies, and predictive maintenance improvements can help improve productivity by 5 to 10 percent.
Rethinking Geographical Engagement
Chemical companies need to reassess their global expansion strategies. Investors are looking for the next wave of value creation in a geopolitical landscape. Companies should consider how to identify and capture new growth markets, ensure supply chain resilience, and manage IP challenges.Changes in European manufacturing, such as tightening regulations and increasing energy costs, also require a reevaluation of strategies. R&D and engineering hubs should be placed strategically to balance talent supply, cost, and IP protection.
Although uncertainty persists, addressing these questions is critical for management teams to make informed footprint decisions that will shape the future of the industry.
Chemical companies face a challenging and uncertain landscape, but those with bold and innovative strategies can still capture value. By preparing for growth, investing in innovation, leveraging technology, and rethinking geographical engagement, companies can navigate these uncertain times and position themselves for success.