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Transformation and sustainability may be the new watchwords

Shrinking optimism over the longer term

Long-term optimism among chemical company CEOs may be shrinking after years of steady growth, fuelled by a global economic slowdown and trade tensions. While the one-year growth outlook is at its highest level in five years, the three-year growth outlook is conversely at its lowest in half a decade. Some of these concerns could be attributed to lingering uncertainties over China's economy, volatile oil prices, and economic uncertainties related to Brexit and the eurozone. But that would be just scratching the surface.

Concerns over long-term trends in sustainability now play a much more central role. Given the close ties between the chemical and existing fossil fuels industries, chemical companies are by extension seen as key players in the mitigation of climate change and pollution. How chemicals companies address these concerns should ultimately shape their licence to operate, marketplace status, relationships with customers, as well as their ability to grow sustainably over the coming years.

Fortunately, these challenges could present opportunities rather than obstacles to sustainable business growth. Companies stand to benefit, for instance, from the effective pioneering of materials that would contribute to energy efficiency and greenhouse gas reductions in sectors such as energy, transportation and even materials packaging. The latter is of particular interest, given the rising popularity of cradle-to-cradle manufacturing, in which every ingredient in the manufacturing process can ultimately be recyclable. Chemical companies that manage to pioneer improvements in the types of plastics used in packaging, their production processes and recycling programs will find themselves in a stronger position over the coming years.

An innovation path

To drive sustainability initiatives, chemical companies will need to collaborate with customers, who increasingly demand customised and innovative solutions. Open innovation remains a challenge, however. According to PwC's benchmarks, chemical CEOs can be relatively conservative, and seem less likely to collaborate with startups and entrepreneurs or pursue new strategic alliances and joint ventures.

Employing a disciplined portfolio approach is needed to maximise the potential for transformation, weighing the expansion into new areas against returns from current activities. Incorporating external forces, including sustainability trends, to inform investment, should also be a key consideration. Ultimately, companies must make the shift from simple manufacturing to providing innovative solutions and insights that better match customer needs.

Work to be done

While chemical companies can transform into key players in addressing sustainability for their customers, they also need to take the issue seriously enough to transform themselves. This goes well beyond the production of materials such as single-use plastics and recycling, and extends to their not-insignificant role in fossil fuel consumption.

By the middle of this century, petrochemicals are forecast to become the largest driver of global oil consumption, with agricultural chemical feedstocks acting as a primary driver. This is because the raw materials of feedstocks and other petrochemicals — including plastics — derive from the oil industry. Reducing carbon emissions through the decarbonisation of energy sources therefore presents the greatest opportunity to reduce overall CO2 impact. In reducing their carbon impact in supplementing fossil fuels, companies can derive maximum value by focusing on increasingly affordable renewable energy sources.

The strategic direction for the chemicals industry is clear but the roadmap to navigate it is uncertain. The coming decade is likely to see the sector come under increasing pressure on a range of sustainability measures. The good news for CEOs is that the window of opportunity will remain open for some time for companies to show they are part of the solution, rather than the problem. As many companies are beginning to demonstrate, there is considerable opportunity for innovation rather than regulation dictating the pace, and the future.

To read the full PwC Chemicals trends report, click here

To discuss what these trends mean for your business, please contact:

Iris Herrmann

Partner, PwC Strategy& Germany GmbH

Dr. Nils Naujok

Partner, Energy, Utilities & Resources

(EUR) Leader EMEA

PwC Strategy& Germany GmbH

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