Chemical companies have adjusted their strategies and priorities accordingly
High energy prices and the eastward shift of the global economy are changing the formula for success. The newcomer must build ability, while the incumbent must strengthen value proposition.
As new players from oil and gas producing countries, as well as fast-growing developing markets such as China and India, join the forefront of sales in the chemical industry, the competitive landscape of the global chemical industry is undergoing a major change. New players focus on resource profitability and economic development, while the traditional goal of shareholder value creation is the strategy of top players.
These newcomers not only abide by different rules, but also better benefit from two key factors that will drive the future development of the industry: control of advantageous raw materials in a high oil price world, and privilege in the most attractive consumer growth market.
While newcomers may be in a better position than existing chemical companies in Europe, North America and Japan, this shift presents challenges for both groups. If newcomers want to become industry leaders in the next few decades and give full play to the industry's potential to create wealth and support society, they must develop rapidly. They should go beyond simply monetizing their cost and market dominance and build capacity to make them more equal to existing enterprises in terms of management, innovation and marketing performance. At the same time, in order to ensure continued success in the new situation, chemical companies must reconsider their position in the industry and adjust their strategies and priorities accordingly. The newcomers and existing enterprises that can take these measures will be in a favorable position to take the track of sustainable profit growth of global chemical industry.
After nearly two years of financial crisis and economic slowdown, the global chemical industry is undergoing major changes. The first concerns the dynamics of energy prices. The chemical industry is facing unprecedented fluctuations in hydrocarbon prices. In addition, energy prices are significantly higher than those in the past 20 years and after previous recessions. Although little progress has been made in climate change regulation, which may increase the carbon tax related costs of chemical companies in some regions, the industry still finds that the price differences of natural gas and electricity between regions are becoming more and more obvious. In general, the degree of cost advantages and disadvantages among regions has increased.
Second, the economic downturn highlights the accelerated shift of global demand for chemicals from developed to developing countries. Although demand in Europe and the United States has not yet recovered to pre crisis levels, and it seems that it will not recover until 2012, China's chemical demand grew by more than 6.4% and 15% in 2009 and 2010, respectively. At the same time, new petrochemical production capacity in the Middle East continues to expand, and the news of plant closures announced in Europe, Japan and the United States has multiplied.
Closely related to this is the third major change, namely, the arrival of chemical industry leadership in oil producing countries and large developing markets with high growth such as China and India. To some extent, the simpler value proposition of new players conflicts with the value proposition of traditional players, and the destructive potential of this development is only gradually coming into people's view.
For the past 20 years, the industry's leaders have pursued a similar goal: to strive to increase shareholder value based on their technology portfolio and asset base, and to take advantage of emerging market growth by speculating in traditional home markets. Whether these companies are headquartered in Europe, North America, Japan or South Korea, this only adds nuances to this common practice.
In contrast, for governments and their production subsidiaries in oil-rich countries, the chemical manufacturing industry represents an opportunity to make money from superior raw material resources and provide employment opportunities for their rapidly growing population - even if it will have adverse effects on industrial structure and profitability.
For leading companies headquartered in fast-growing major emerging markets, chemical production is seen as a necessary condition to provide the products needed for sustained economic expansion. The lower labor costs in these countries bring competitive capital investment and operating costs to these companies, most of which are owned by state-owned enterprises or families closely related to the government. These companies can build production to gain growth in the local market, and they don't worry about the global imbalance between supply and demand caused by these chemicals.