The first and perhaps most significant implication would be that with growth rates only a little above annual capacity creep, there will be less need for new builds. Most new investments will either replace existing assets or need to displace others. For example, the new crackers in North America will target Asian markets and compete with exports from Middle East producers. The latter’s exports to Europe may increase as a result, increasing pressure on European petrochemical players in the medium term. While this scenario seems remote in today’s environment of record profitability for European petrochemical makers, good times rarely last forever, and the need for closures could resurge. More broadly across the industry, companies could be forced to restructure in almost all parts of the world, and we foresee players trying to attain greater economies of scale through new waves of M&A.
The only major exceptions might be India—where all indicators suggest that the local growth is going to continue, albeit from a low base—and China. But many areas of the Chinese chemical market these days are already oversupplied and overserved. We would argue that Chinese supply needs a broad and drastic consolidation.
Incumbent specialty-chemical players must prepare for further encroachment of commoditization and erosion of their historical advantages when attackers from developing markets gain more experience and become increasingly technologically savvy. The value-add potential of many Western specialty-chemical conglomerates will be challenged even more intensely than today, and so will their questionable claim that they can upgrade their portfolio in a way that generates value for shareholders.
At the same time, the long-heralded shift of the chemical industry’s center of gravity to Asia will actually take place. As much as Western players have tried to prepare themselves for this development, many still have only a limited grasp of what this will mean and the mind-set shifts required to face the fact that they will move from the center of the industry to its sidelines. The historical track record of multinational companies in China and other Asian countries has been mixed at best. At some point, they will need to consider much closer partnerships with Chinese players to grab hold of one of the last opportunities to become an insider in what will be the largest chemical market. There may be a fit here with the interests of local companies: as Chinese players grasp the opportunities for consolidation in their home market and expansion globally, they may value access not just to Western companies’ technology but also to their successful business approaches.
As a general statement, strategies for chemical companies may become simultaneously simpler and more challenging. They may become simpler because the imperatives of productivity improvement and functional excellence—in other words, executing a chemical-business model better than most competitors in the field—will be even more obvious than today. Without this executional excellence, companies will lack the financial strength and the credibility to lead in a game that will include a lot of M&A. Strategy development, however, will also become much more difficult: it will be much more challenging to identify the remaining opportunities for growth that exceeds GDP and to develop approaches to capture those opportunities in a value-generating way.
We are the first to acknowledge that any attempt to look into the future has limitations, and we present this perspective based on careful observation of the industry as a starting point for participants thinking about strategies for the next decade. As chemical companies head into this new and more challenging territory, they need to take stock of their strengths and weaknesses.
