Looking ahead, moderate growth is expected to continue in the chemical industry in . The American Chemistry Council (ACC) projects global chemical production to rise by 3.4% in and 3.5% in , after increasing just 0.3% in .5 However, even with chemical production improving and margins reverting to average levels, the industry still faces challenges and uncertainty. In the next year, chemical companies will navigate many of the same challenges as other industries: evolving macroeconomic conditions, shifts in policy and regulations across regions, changing customer preferences, and advances in technology. To help improve their positions in the face of these uncertainties, chemical companies could consider adopting strategies that help them weather uncertainty while positioning themselves competitively in the low-carbon, high-tech future.
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To plan for the future, companies should consider developing an understanding of where they stand in the current scenario. This can provide them with a foundation for examining the emerging trends that may shape the industry’s trajectory in the coming years. Our Chemical Industry Outlook explores some of these trends and highlights the signposts leaders should consider while developing strategies.
This year, Deloitte updated its chemical multiverse analysis with data through to take a closer look at how the track record of global chemical companies through recent turbulence may shape trends in and beyond (see “Methodology” below for more information on this tool). This longitudinal study tracks multiple financial variables across more than 300 global chemical companies over the past 25 years and, through a segmentation approach, assesses the current standing of each company. The chemical companies were measured on two dimensions—the financial resources at their disposal and their ability to generate returns using those financial resources—and plotted on a two-dimensional plane. Plotting the chemical companies on this plane can provide insight into their competitive positioning and could help them decide on a future course of action.
This analysis gave rise to four distinct strategic groups, which we termed: strategic leaders, strong options, middle ground, and limited options. Each group has its own unique characteristics, but overall, strategic leaders exhibit the highest financial strength, while strong options demonstrate relatively higher business performance compared to middle ground and limited options.
Due in part to the turbulence spurred by pandemic-related shutdowns, the number of companies in the middle ground group has declined, with more companies moving into stronger (“strong options”) or weaker (“limited options”) positions in terms of business performance (figure 2). Additionally, the following two notable observations also emerged from this analysis.
Many companies announced cost-reduction programs in and , after facing challenges with higher operating costs and lower operating rates stemming from lower demand, high inventories, and overcapacity of some chemicals.8 These programs included measures for increasing efficiency in plant and back-office operations, redesigning processes, aligning spending levels with the macroeconomy, and undertaking workforce reductions and plant closures.9 In fact, in an ACC survey of its members, more than 18% of respondents said that the motivation behind their capital investments in was geared toward operating efficiencies (figure 3).10 Another 26% of respondents cited replacing existing plant and equipment as a key motivation, likely indicating that some companies took advantage of the low operating rates to conduct maintenance and upgrades.11 While many of these programs began in , several announced that rollouts will continue through or .12
There is a regional component to how much pressure these assets are under. Plants in Europe have encountered challenges with inflation and high energy prices in and , reducing demand and putting pressure on chemical margins. In the European Union, inflation reached a high of 11.5% in October , compared to the US peak of 10.1% in June .13 And with most Europe-based chemical plants facing natural gas prices 70% higher than pre-crisis levels, the region continues to be cost-disadvantaged.14 Further, many of these companies also faced losses due to lower-than-expected demand from China.15 Asian companies were similarly affected by lower demand from China and volatile LNG prices.16 Moreover, while the industry fared better in the United States and Middle East where energy and feedstock prices are relatively lower, US-based companies still faced lower earnings, which they likely compensated with efforts toward efficiency.17
In the petrochemical sector, excess production capacity, in combination with lower-than-expected demand, has contributed to low operating rates. In Europe, ethylene operating rates were still averaging at 70% to 75% in early , lower than the industry expectation of 80% to 90%.18 This overcapacity has contributed to the industry’s return on capital falling from an average of 17.9% between and to just 13% between and (figure 4).19 Partly, as a result of this, chemical companies began asset rationalization in , which continued through , with several companies announcing plant closures or job cuts across the Netherlands, Germany, and France.20 The impact of these closures are expected to reverberate through trade flows, with exports from the United States or the Middle East likely serving increased European demand in the future.
Asset rationalization is expected to continue through as companies acknowledge that a large near-term rebound in demand is unlikely and take the opportunity to reconfigure toward more cost-competitive supply- and growth-oriented markets. For companies in the limited-options or middle-ground categories, these types of measures could support improved performance and a move into the strong options category. Additionally, following the last few years of limited transaction activity, more merger and acquisition deals are expected to be announced in as interest rates moderate and companies search for growth and continue to reexamine their portfolios.
Global chemical production is projected to grow 3.5% in .21 However, demand has remained soft in some markets, so far in . In the United States, overall industrial production rose just 0.2% in and is estimated to stay mostly flat in before it’s estimated to rise to 1.7% in .22 Amid this uneven growth landscape across chemical end markets, many companies are focusing on driving efficiencies in their core business while doubling down in high-growth areas. Companies are also focusing their efforts on increasing customer centricity, building customer loyalty, and tailoring solutions for customers.
Chemical companies are investing in high-tech, clean energy—and other high-growth areas. So far in , data from the Federal Reserve Board indicates that semiconductors and electronic components, oil and gas extraction, architectural and structural metals, and plastics and rubber industries have experienced the most growth.23 Moving into , ACC forecasts that semiconductors will continue driving demand, followed by computers, iron and steel, aircraft and parts, motor vehicles and parts, and construction supplies (figure 5).24
Despite the substantial growth of renewable energy in the global generation mix, some companies have cited limited access to renewable electricity as an impediment to meeting their emissions goals.43 To meet net-zero emissions targets, a significant increase in renewable electricity capacity is required, tripling global installed renewable energy capacity to 11,008 GW by .44 These requirements may rise further if the demand for electricity grows more quickly than expected. For instance, the expansion of data centers, driven by new AI applications, is leading to higher-than-expected demand in the United States. In fact, the Electric Power Research Institute estimates that, by , data centers could consume up to 9% of US electricity annually—up from 4% in .45 Some chemical companies have begun building onsite clean-energy electricity generation.46 However, this requires capital investment and sometimes has a lengthy permitting process.
The policy and regulatory environment can influence chemical companies’ investments in R&D and capex, including those necessary to lower emissions and innovate new, sustainable products and processes. In the United States, permitting processes and policies related to circular solutions and renewable feedstocks can impact these investments. Similarly, global regulations in Europe or other measures in Asia are expected to continue to impact investment decisions in those regions.
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Chemical companies upstream in the value chain continue to decarbonize their products and processes; however, they still face the problem of tracking carbon emissions across their product value chains. As a result, companies upstream that need to make significant capital investments to reduce emissions can struggle to capture a premium that customers may be willing to pay for environmentally sustainable solutions toward the end of the value chain or aggregate the downstream demand to rationalize upstream investments. This problem is exemplified by the fact that while scope 3 emissions account for about 75% of the average chemical company’s total emissions (with 50% coming from upstream activities), only around 30% of chemical companies currently report their scope 3 emissions because of the challenge of tracking emissions across their value chains.47
While many standards have been created to help companies across industries track their value chain emissions, there are still gaps that need to be clarified for the chemical industry. Consequently, companies are left to navigate this complex landscape by exploring innovative strategies to capture value, such as long-term contracts with buyers, product carbon-footprint assessments, and book-and-claim agreements. Some companies are using digital platforms that utilize blockchain, digital twins, and AI to monitor low-carbon products throughout the supply chain in a transparent and efficient manner.48 These technologies can facilitate real-time tracking, traceability, and compliance with environmental standards.
There has been some slowdown in decarbonization investment announcements in , likely in part due to high interest rates, uncertainty in global markets, and a hesitancy to increase investments before better understanding the return on investment from previous projects.49 However, chemical companies should work to continue to make progress as demand for more sustainable products grows. The innovative ways that companies find to navigate these three challenges could contribute to their future success.
In the dynamic landscape of global supply chains, chemical companies are encountering both significant challenges and new opportunities. Geopolitical disruptions, climate disruptions, and regional changes in policies and regulations, in addition to shifts in supply and demand, have made supply chain resilience, including visibility, agility, and flexibility, increasingly imperative for chemical companies. At the same time, the chemical trade has increased over the past six years.50 And this trend will likely continue over the next decade, with the International Energy Agency projecting continued growth in chemical production and trade through .51 Currently, China and the United States are leading the charge in this growth (figure 9), but other regions could emerge as major producers, such as India, Southeast Asia, or the Middle East.52 Similarly, other countries could begin to drive demand for chemicals. These shifts in consumption and production are expected to continue to be influenced by factors such as geopolitical and climate risks and regulatory differences.
Geopolitical and climate risks: Geopolitical and climate events impact chemical companies all around the world. For instance, the reduction of Russian natural gas supplies to Europe increased natural gas prices in the region, compelling firms to reassess their sourcing strategies.53 Conversely, disruptions in the Red Sea have rendered certain European chemicals economically viable once more, which also underscores the importance of agility in supply chains.54 Beyond geopolitics, drought conditions caused a reduction in traffic through the Panama Canal in and , impacting trade routes and shipping costs.55
Policy and regulatory differences: Regional policies and regulations are also impacting global competitiveness and trade flows. Whether it’s import tariffs, emissions regulations, or tax incentives, these policies continue to impact company decisions on investments and supply chains. For instance, companies are still understanding and preparing for the impacts of Europe’s Corporate Sustainability Reporting Directive and the Carbon Border Adjustment Mechanism on the chemical industry.56 Compliance with these regulations requires flexibility in supply chain management to adapt to changing policies.
Regional shifts in supply and demand: The sources of supply and demand will continue to shift. For instance, while China’s economic growth is projected to slow, other areas such as Southeast Asia and parts of Africa are experiencing an acceleration in growth.57 On the production side, plant closures in Europe58 could lead to increased imports from the United States or Middle East for certain products. Additionally, there has been some regionalization of the manufacturing of some products. For instance, although China has been leading battery manufacturing, policy incentives in the United States may increase production in the country over time.59
As approaches, the chemical industry will likely continue to grapple with challenges stemming from geopolitical tensions, climate risks, and regulatory and policy changes. While the chemical logistics sector has not fully rebounded to pre-pandemic levels, demand is expected to grow considerably over the next decade. To capitalize on this growth, companies likely need to enhance the flexibility and agility of their supply chains by leveraging digital technologies and strategic partnerships. The benefits of these measures would span all chemical company categories, strengthening their ability to weather future disruptions or shifts in geographical supply and demand fundamentals.
Digital transformation: Companies are increasingly adopting AI and analytics to enhance visibility and streamline operations. This digital shift can help enable better demand forecasting, real-time tracking, and more informed decision-making.60 For example, one company has implemented a digital supply chain platform that integrates data from various sources to provide real-time visibility and improve decision-making.61
Decentralization and diversification: The pandemic has highlighted the risks associated with centralized supply chains. Firms are now focusing on diversifying their supplier base and decentralizing operations to build resilience against future disruptions.62
Collaborative planning: Collaborative planning with suppliers and customers can help foster transparency and alignment, reduce uncertainty, and enhance overall supply chain performance.63
Monitoring supply chain resilience: Utilizing metrics that measure the adaptability of inter-firm relationships can provide insights into how firms can better navigate regional market dynamics.64 Research indicates that firms with a balanced approach to flexibility and stability are more likely to thrive in turbulent markets.65
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