State of the Chemical Industry: 2024

[lauren_mccallum]

The big picture

To understand the state of the chemical industry in 2024, you need to understand what drives demand for the products chemical companies make. The simple answer is that you and I do. If you are going to buy a car, buy or renovate a house/apartment, upgrade your cell phone or home entertainment system, update your wardrobe, visit a nail or hair salon, buy food (especially carry out) or cleaning products, plant a farm field, or unfortunately check in to a hospital, you create demand for chemicals.

What will this demand be in 2024? Given concerns about a global economic slowdown, chemical demand is forecast to be initially weak with slow improvement throughout the year. The degree of improvement will vary by region and industry segment.

Let’s explore in more detail.

End Use Markets

Two of the biggest end use markets for chemicals are the automotive/mobility industry and the building/construction industry. There is over $4,000 worth of chemical products in your average automobile. More than that in an EV. As for building materials, the paint, insulation, siding, flooring, roofing, and various sealants and coatings used to construct a house, apartment or any building all require chemical products.

It is then significant for the chemical industry that projections for these two markets are not great for 2024. We’ve all heard about the slowdown in EV sales. Automotive industry growth is expected to be flat in 2024. Housing construction is expected to decline slightly due to high borrowing costs both for buyers and builders. While these end use markets will still consume chemical products, they won’t do so at a greater rate than in 2023. Chemical companies serving these markets will not see much opportunity for growth.

That said, there are bright spots where end use markets are growing, providing opportunity for some segments of the chemical industry. Take the US as an example, where several government stimulus programs have increased demand for chemical products in specific areas.

Thanks to the CHIPS act spurring growth of the semiconductor industry in the US, companies that serve this industry such as Merck, Entegris, DuPont, and Air Liquide are looking at seriously increased demand. The construction of new fabs planned by Micron (New York), TSMC (Arizona), and Samsung (Texas) will drive demand for specialized building materials and equipment.

The Infrastructure Investment and Jobs act is also a stimulus to manufacturing expansion, especially in the areas of EV infrastructure, electronic equipment, and battery manufacturing – with both plant construction and operation requiring chemical raw materials. It is likely that in the US market, plant construction in these industries will in a small way offset the decline in demand for residential building materials.

In other regions, we are seeing the energy transition driving plant construction and modifications as well. Companies like BASF, INEOS, and Versalis have built or are building plants that turn plastic waste into raw materials for chemical production. In fact, as a Deloitte study points out, across all regions, “The chemical industry supports more than 75% of all emissions reduction technologies needed to meet net-zero goals by 2050”. This means that as manufacturing companies of all sorts move to use of recycled raw materials, renewable energy from solar and wind, and embark on other “green” initiatives, this will drive increased chemical production in 2024.

Regional differences

In the coming year, regional differences in the industry will be particularly pronounced. If we look at regional industry associations, the American Chemistry Council, for example, expects “a modest recovery in all segments with overall chemistry output growing by 1.5%” The German chemical industry association (VCI), on the other hand, “ does not anticipate chemical production to be back on the increase in 2024. Sales are expected to fall by 3 percent.” Gulf Petrochemical Association (GPCA) members, whose production generally focuses on, as the name implies, petrochemicals, forecast that “Dull demand and oversupply are expected to persist for much of next year”. Companies counting on the buying power of the Chinese economy are likely to be disappointed as that economy slows – this at the same time as China has invested hugely in polymer production, leading to an oversupply of the basic chemical building blocks for plastics: ethylene, propylene, polyethylene, polypropylene.

Factors other than demand

Demand may be a major factor in assessing industry health, but it is by far the only one. Some of the most significant regional differences are due to access, or lack thereof, to affordable feedstock and energy. The most dramatic example of this is the downturn in European chemical manufacturing due to lack of Russian natural gas. On the other hand, growth of chemical production in the US, particularly in the Gulf Coast, is due to easy access to US shale gas and affordable, if not cheap, energy, not to mention a (currently) more permissive regulatory environment.

Which brings us to the effect the regulatory environment has on chemical companies. Government regulations, including everything from trade tariffs, to “green” taxes, to outright product bans (think PFAS chemicals) make producing chemicals both more expensive and risky and thus affect industry growth. Examples of these regulations abound, from:

• The US Superfund Excise Tax, which imposes a tax of from $.40 to almost $24 a ton on the sale or use of 42 chemicals and 100 chemical substances
• The EU Plastics Tax, which imposes a tax of  EUR 0.80 per kilogram on non-recyclable plastic used in product packaging
• The EU Carbon Border Adjustment Mechanism, which requires importers to buy carbon credits to offset the CO2 emissions of specific carbon intensive products such as steel, fertilizer and cement

The cost of these taxes increases the cost of production and forces chemical companies to decide if and how to pass the cost of regulatory compliance on to their customers. If you factor in the cost of complying with carbon and other emissions caps, you can see that chemical company operating costs are likely to increase for the foreseeable future.

Production/operating cost leads inevitably to a discussion of pricing and price competition. Especially in the area of commodity chemicals, where products differ little from one producer to the other, cost competition has always been fierce. Between increasing costs of raw materials, energy, and regulatory compliance, we can expect that chemical companies will struggle to grow or even maintain profit margins in the coming years. To take Germany as an example, the VCI reports that 40% of German chemical companies report declines in profit and 15% are already operating in the red. As mentioned before, in Germany’s case this is largely a consequence of raw material and energy price/availability, but margin pressure is an issue in other regions as well, though perhaps not as dramatically.

It's no coincidence that we have seen chemical companies globally show increasing interest in customer segmentation and price optimization over the past few years as a way to manage margins.

Industry response

Given the current economic, geopolitical, and regulatory environment, there’s no question that it’s tough to be a chemical company these days. But that does not mean the outlook is entirely grim. The industry is clearly facing a need to reinvent itself to become more sustainable in response to public, stockholder, and governmental demands and more agile in response to unpredictable events like pandemics, climate change, and political conflicts. The pressure to change is leading some chemical companies, who increasing prefer to leave “chemical” out of their names, to dramatically change course, often moving outside traditional industry boundaries.

We’ve already mentioned chemical companies moving into the recycling business by both building and buying recycling operations, putting them in the same category as waste management companies. Along with BASF, INEOS and Versalis, ExxonMobil, Eastman, LyondellBasell, Dow, Shell, Total and Chevon Phillips are investing in recycling plants, to mention only a few. In the US alone, Politico reports that “more than 40 [chemical] companies are developing or managing chemical recycling projects”.

Other companies are extending even further outside their historical business models. Fertilizer companies are a good example here. Nitrogen companies like CF Industries and Yara have not only transitioned to the production of “green” ammonia (where the nitrogen in ammonia is produced from water rather than natural gas), they have moved into the energy business, selling ammonia as a carrier for hydrogen and even as a marine fuel. Yara has gone a step further, partnering with the North Sea Container Line to develop the Yara Eyde, the world's first container ship that will use clean ammonia as fuel to travel the route between Norway and Germany. Perhaps it is no coincidence that Yara’s logo has always been a wind and human powered Viking ship.

Carbon capture is another new venture for chemical companies who look to lower their carbon footprints by sequestering the CO2 emissions from their chemical plants. On the one hand, you have plant-by-plant initiatives such as Dow’s investment in a net-zero ethylene plant in Alberta, where CO2 emissions will be captured and stored. On the other hand, you have companies like ExxonMobil, historically both an energy and a chemical producer, making a business out of providing carbon capture services to other companies, including CF Industries, Linde, and Nucor. Exxon is growing this business in part by acquisition. Their purchase last year of Denbury for almost $5B gained them a huge CO2 pipeline network as well as ten CO2 sequestration sites in the Gulf Coast. This puts Exxon more in the company of oil field service providers than chemical or energy producers. And their recent announcement that they will be drilling lithium wells in Arkansas puts them in competition with lithium companies like SQM and Albemarle.

Conclusion

These companies provide only a few examples of the ways chemical companies are reinventing themselves in response to changing industry dynamics. Whether you work in the industry or serve it, as SAP does, supporting this kind of transition requires thinking outside the box of traditional chemical business models and considering that anything is possible.

SAP, with a history of serving many industries, is in a particularly good position to enable cross-industry transformation. Chemical companies who need to simplify pricing and operations by segmenting products can look to an SAP solution developed for retail companies, who have long needed this business capability. Providing a service rather than a product? Chemical companies can leverage SAP billing functionality originally developed for telecommunication companies. Managing bulk inventory movements impacted by events in the Red Sea? Maybe SAP stock projection capability developed for the oil and gas industry will help. Powering your plants with in house nuclear reactors that have the capacity to provide energy for communities outside the plant, look at SAP utility solutions.

If you think it far fetched that a “chemical” company could be your new utility provider, you simply aren’t thinking enough outside the box. But that’s OK, SAP is.

[PeerLaslo]

Thx for sharing. I welcome the increase in chemical recycling described here, which will help reduce the increase in entropy also  through a reduction in the entry of plastics into the environment