The convergence of the petrochemical and refining industries can be a successful strategic option for refiners who have grappled with globalisation, price volatility, and uncertain demand. But it’s not easy: To succeed, pure-play refining companies must confront the challenges of creating a stronger petrochemical-minded business model.
Growing electric vehicle sales, tightening fuel efficiency standards on passenger vehicles, and the introduction of commercial vehicle fuel efficiency standards in many economies were already softening the refined product demand. More recently, pure-play refiners were affected when the COVID-19 crisis brought the transportation sector to a near standstill. Companies that invested in plastics and resins found these businesses provided an effective hedge to collapsing transportation fuel demand. However, moving to petrochemicals requires complex changes for refiners. First, there is a fundamental difference between the refining and petrochemicals businesses: refiners sell into markets, but petrochemical companies sell to customers. Second, the petrochemicals business often comprises a large and complex product portfolio compared to refining.
To be competitive in the petrochemical business, pure-play refining companies must consider ways to differentiate themselves, such as building customer-centricity, honing business-to-business (B2B) and business-to-customer (B2C) strategies, de-commodifying their products to appeal to evolving customer preferences, and recognising the growing focus on sustainability. One of the consumer trends most accelerated by the events of 2020 has been a focus on sustainability, and some chemical companies have been quick to respond. Recyclable packaging and circular products have been a growing area of consumer focus with concern for reduced landfill waste and containment of plastic waste found in the oceans. B2C is becoming a key competitive point, as consumers demand more convenient and “contactless” ways to interact with suppliers.
Many new digital capabilities are already in place, which could help build more intimate relationships with customers and end-markets. These include using advanced analytics to gain deep insights; collaborations with academic institutes, emerging startups, and technology companies; and building AI-based real-time demand-sensing models to leverage market forecasts. In addition, there is growing focus on leveraging CO2 emissions to create brand-new business models by manufacturing CO2-based chemicals through carbon capture and utilisation (CCU) technologies. This, along with carbon capture and sequestration (CCS) technology will increasingly be used to lower the carbon footprint of facilities using fossil fuel-based feedstocks.
Companies that win in the future of the petrochemicals industry, both new entrants and established market participants, will need to focus on three areas to differentiate themselves: planning for volatile end-market demand, anticipating consumer preferences for seamless delivery and sustainable products, and capitalising on innovation. Consumer preference and technology innovation will be driven by the need to recognise sustainability in the product portfolio, including renewable energy; renewable fuels; and carbon capture, sequestration, and storage. The commercialisation of new technologies, ranging from crude to chemicals to carbon capture, can also lend a critical competitive advantage to companies that can leverage them. However, the smaller size of the petrochemical market compared to the current refined product market will likely make it even more highly competitive, so the ability to differentiate products and build customer relationships can separate the winners from losers.