Transcript: Challenging changes facing the chemical industry

Welcome to another edition of Deloitte’s Insights. In today’s programme, we are going to discuss the chemical industry and the considerable changes it is going through. In the studio today we have Tim Hanley Global Chemical Affinity Leader and Eric Desomer our Belgian Manufacturing Industry leader. 

Welcome Tim and Eric.

So Tim, to begin with how do you think the recession has affected the global chemical industry?

• Diminishing demand is a root cause of the many troubles global chemical companies are facing
  • Sudden and significant drop-off in demand from end user markets
  • The chemical industry relys so heavily on the success and failures of the automotive and construction industry
• Companies are taking drastic measures to quickly reduce costs
  • Plant closures
  • Decrease in production units
  • Employee reductions to conserve cash
  • Divesting operations
  • Filing for bankruptcy
• The recession has been pervasive across the board in Asia with commodity producers affected more heavily.
  • Export-oriented companies, especially those in Japan, have also been hit harder than those serving domestic markets, such as China and India

Eric, can you see any parallels in the Belgian Chemical industry?

• As you know, Belgium is a world hub for the chemical industry
• Belgium may be a small country in Europe but it is one of the largest chemical producing countries.
  In the current economical crisis, one of his strength, being located in the center of the world biggest and most diversified cluster, the Antwerp / Rotterdam area and being fully integrated in the global economy makes it also one of his biggest weaknesses.
• Two examples:
  • Roughly 80 % of the Belgium production is being exported.
  • More than 75% of the total investment value in the chemical industry in Belgium originates from foreign based parent companies.
• One of the sector’s main characteristics is its high degree of internationalization which makes us very open to the trends that Tim has just explained.
  

Tim, In your view, what is the biggest challenge ahead for chemical companies in this unprecedented environment?

• Companies are struggling with how to effectively plan for the future given current marketplace uncertainty
• Some companies can only develop 45–60 day forecasts at best to balance supply and demand
• Some companies are using a flexible planning strategy to deal with demand uncertainty
  • It takes a more experienced company to execute this type of plan and effectively synchronize production with market forecasts
  • Companies that are struggling and have challenges forecasting future demand are experiencing substantial destocking
• Experimenting with new business models that look at new customers and suppliers may be required to position companies for successfully managing
  • This will help executives develop a new perspective on their companies and define what is needed for revival
• R&D is an important driver for any chemical company because it paves the way for future revenue growth opportunities, however, concerned about the short term and the need to conserve cash
  

Eric is the Belgian Chemical industry experiencing similar challenges or are their unique challenges specific to Belgium which you see evolving?

• Most of the challenges that Tim has just explained are also valid for Belgium.
• This being said, I would highlight two main challenges:
  • Shape of the recovery
  • Changing industry landscape
• Chemical companies in Belgium have in 2008 and for the first half of 2009 lived on a month to month basis. Today, they start to see the light at the end of the tunnel. Production utilization starts to go up again.
• But companies continue to watch carefully their supply chain
• Experts expect that the recession in the Chemical industry will take a U shape. It may be faster in the US and Asia but experts except that it will take three to four years before the uncertainty is gone.
• During those times, Belgium chemical companies will continue to face overcapacity, consolidation and restructuring.
• One of the other challenges is that China and the Middle East are building huge new production capacity. They take full advantage of the integration with oil industry. This is going to change the competitive landscape of the chemical industry.
• The European and the Belgium Chemical companies will need to continue investing especially in innovation and play on their strengths. Companies like IMEC and the numerous spin off that we have in Belgium will need to be supported.

Tim, Some are saying that this recession will force major restructuring in the global chemical industry, including drastic measures. Do you agree? What might this look like?

• The chemical industry is at a turning point
  • Weaker players are going to be acquired and it will be interesting to see by whom. Will it be by the big players or will the industry continue to be fragmented
• Many companies will faced with the real danger of bankruptcy, which has the potential to change the face of the industry
• Anticipating a no or low growth strategy. The location of demand will change, there will be a different mix of customers, and buying patterns will change significantly
• There will be fewer production facilities as they are going to be rationalized at an unprecedented pace
• The geographic footprint of the industry will no doubt broaden, providing more global balance
• Asia’s importance to the industry will continue to increase, both from a demand and supply standpoint
• Government stimulus money is a way to help regain momemtum. Executives are thinking of ways to tap into the money

Tim, What indicators do you think will signal a recovery? Are there end-use markets or regions we should be watching?

• Many executives do not believe that demand will return to pre-recession levels anytime soon
• Possibility of a no or low growth scenario that may trigger a situation where top line growth comes more from market share gains than a robust expanding market
• Some executives do not see the recovery bouncing back to the demand we saw a few years ago
  • There will be a different mix of customers, and buying patterns will change significantly
• We are starting to see signs of improvement from key indicators including the housing and automotive markets, durable goods, and even some of the recent labor statistics
• It may take some time to make its way to the chemical industry, but we can anticipate the industry may benefit from the stimulus money
• Because of the large injection of stimulus in China and its indirect impact on the chemical industry, companies are also asking themselves if they should be placing even bigger bets on China and the Asia Pacific region

Eric, In Belgium are there key indicators we should be looking for?

• Global signs of recovery in the automotive industry, the construction industry will signal the recovery for the Chemical industry in Belgium
• I would rather focus on what key elements the Belgium Chemical industry needs to focus on if it want to build a sustainable future:
  • Sustainable challenges needs to remain top on the agenda of Chemical companies
  • Top end innovation will require world class level R&D and production facilities
  • Industry consolidation should re-enforce a winning cluster like Belgium. This cluster needs to play on his strengths that are his logistic platform, his synergies with energy, services and utilities companies and his skilled workforce

Finally, Tim, As we look toward recovery, what do you think will separate the winners from the losers?

• Some companies are just too heavily leveraged or unable to refinance their debts
• The companies that have taken the tough steps now to prepare for the other side of the recession will be better equipped to grow again
  • Expect to see many chemical companies engaged in consolidation transactions over the next two years
• Not only will we see companies consolidating, but also moving quickly to open up new facilities in low-cost regions
• The real winners are going to be those who are truly adaptable
• The way companies manage during a downturn is not the way they would manage for growth
  • They cannot cost-cut their way to prosperity
  • Need to continue to innovate to create new products, develop new value propositions, and tap into new markets

Well thank you Tim and Eric for sharing your perspectives with us today.