Chemical industry needs new strategies in the next decade to regain profitable growth
Deloitte analysis shows industry faces different scenarios between now and 2020
New York, 16 December 2009 — By 2020, the global chemical industry could face a range of competitive dynamics that differ from today in nature and intensity, according to a new report by the Deloitte Touche Tohmatsu (DTT) Chemical Group and Deloitte Research (United States). In the report, The decade ahead: Preparing for an unpredictable future in the global chemical industry, Deloitte reviews the financial and operational performance of 231 global public chemical companies between 1998 and 2008, including specialty, commodity, and integrated players. The analysis shows that profitability has not improved in both the commodity and specialty chemicals sectors during that period. The commodity sector experienced the industry’s sharpest decline in falling margins — while the specialty chemicals sector also fell. The report suggests the decrease in margins can be attributed to overcapacity on the commodity side and, for specialty producers, competition, pricing pressure, uncertainty in end-markets, and portfolio challenges. Although the integrated players grew their revenue by double digits in most years between 1998 and 2008, they are impacted by the pressures of their commodities businesses and by the need for more high-value specialized products.
“Maintaining and improving value could be rather challenging unless chemical companies take meaningful actions to reverse the trend,” said Tim Hanley, Deloitte Touche Tohmatsu Global Chemical Group Leader. “The research found that a business-as-usual approach was not adequate in the last 10-year period for sustaining value. The decade ahead carries even more uncertainty and will require companies to focus more on new approaches and responses to tackle unprecedented challenges. By analyzing the interplay between three macro trends — economy, regulation, and technology — companies can use scenario thinking to strategically plan for unpredictable times ahead and test new innovative approaches to achieve sustainable and profitable growth.”
The report states that as the industry prepares for the future, the commodity sector will focus on preserving cash, managing excess capacity, and securing access to capital. The specialty chemicals sector will continue to seek competitive strategies that rely on understanding customer behavior and offering only the most profitable products and services, but at increasing levels of sophistication. For integrated chemical companies, in addition to the challenges of being in both commodities and specialties, new acquisitions will be a prime objective, particularly as a means of moving further downstream into differentiated businesses.
As chemical companies are broadening their geographic scope, Western commodity chemical companies are shifting to growing opportunities with a focus on the Asia-Pacific region and other areas within the developing world. With a small but growing share, the Middle East has significant potential advantages in low-cost hydrocarbon feed stocks and therefore continues to attract significant new capacity. It is forecasted that China and the Middle East will contribute 78 percent of new capacity by 2013. Meanwhile, the chemical industry continues to play a key role in the economies of the United States and the European Union.
A key differentiator for global chemical companies will be developing and implementing customized growth strategies that have the flexibility to be altered if unplanned obstacles or openings arise. “The success of the business model framework will depend upon more sophisticated methods for predicting market behavior and increasing the discipline of the business, product, and customer portfolio,” said Duane Dickson, principal, Deloitte United States (Deloitte Consulting LLP). “Given the uncertainty looking ahead, keeping in sight a range of alternative possibilities is crucial.”
The report defines three scenarios depicting how the global business environment could unfold between now and 2020, along with strategic implications for chemical companies:
“The US$3 trillion chemical industry is a significant contributor to our global economy and helps to solve some of humanity’s biggest challenges,” said Dickson. “The industry will continue to evolve and grow, but taking action now will be required to sustain its future. By committing to specific business models and creating strategic options through scenario planning, disciplined companies have the ability to galvanize their people, attract customers, and interest investors.”
For a copy of The decade ahead: Preparing for an unpredictable future in the global chemical industry, please visit www.deloitte.com/thedecadeahead.
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Deloitte Touche Tohmatsu Global Manufacturing Industry Group
The Deloitte Touche Tohmatsu Chemical Group comprises of Deloitte member firm chemical industry partners and is part of the Global Manufacturing Industry Group. The Global Manufacturing Industry Group of the member firms of Deloitte Touche Tohmatsu is comprised of more than 750 partners and 12,000 industry professionals in over 45 countries. The group’s deep industry knowledge, service line expertise, and thought leadership allows them to solve complex business issues with member firm clients in every corner of the globe. Deloitte member firms attract, develop, and retain the very best professionals and instill a set of shared values centered on integrity, value to clients, and commitment to each other and strength from diversity. Deloitte member firms provide professional services to Deloitte member firms to 80% of the manufacturing industry companies on the Fortune Global 500®. For more information about the Global Manufacturing Industry Group, please visit www.deloitte.com/manufacturing.