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Chemicals

Chemical companies must navigate a volatile landscape: raw material shortages, rising energy costs and logistics challenges. PwC can help with industry-specific advisory and strategy services.

Sustainability is a key driver of change

Several big trends are driving change in the chemicals sector, especially the rising importance of environmental, social and governance (ESG) considerations. Delivering sustained outcomes and maintaining trust will require smarter, more efficient ways of working.

Such a transformation will help the sector shift to lower-carbon processes and operations. It will also make it easier to manage the ongoing convergence that will see chemicals businesses work increasingly closely with the energy and utilities industry.

Other factors reshaping the sector include digitisation, new mergers and acquisitions, changing consumer demands and black swan events. All this will require companies to re-examine their business models, find new ways to create value for customers and upskill their workforces for the future.

Chemical companies that are paying attention to current trends are reinventing themselves as champions of the circular economy. That’s increasingly important as the world moves towards sustainability and tackles efforts such as reducing plastic waste.

This requires fundamental changes in the way that chemical companies operate, the products they develop for customers and the organisations they collaborate with across supply chains and the broader economy.

To move in the right direction, the sector must understand the value that it can create and deliver, not just for itself but for users downstream. This includes financial value, as well as value through improved sustainability or lower carbon emissions. Chemical companies will need better data to do this, which requires digital transformation. They will also need to explore new partnerships, even with competitors, to develop new methods for extracting and recycling chemicals from existing materials.

Succeeding in the future economy will require chemical companies to proactively manage ESG expectations. The sector is in a unique position, finding itself sandwiched between increasingly strict industry regulations on one hand and rising customer demands for sustainability on the other. Technology – digitisation in particular – will be critical for this.

The chemical industry is energy intensive and relies heavily on fossil fuel inputs. It will need to innovate rapidly to reduce its carbon emissions. Companies that adopt sustainable processes and technologies will enjoy an advantage in a global economy that’s shifting rapidly to net zero.

Transforming its use of energy will require the chemicals sector to reduce consumption, increase efficiency, replace carbon-based energy sources with renewables and find ways to recover energy from end-of-life products.

Chemical companies also have an opportunity to improve ESG performance across value chains. They can do this by changing inputs and processes to create lower-carbon products, or by making it possible to recover and recycle critical materials from their products after use.

As they pursue transformation, companies in the chemicals sector need to become much more customer- and application-centric. This means developing and delivering innovative products and solutions that address customer and consumer needs.

Producing more sustainable materials and processes is costly – and it’s part of the reason that many chemicals companies have struggled to get a return out of both digital and sustainability initiatives. Overcoming such challenges will require the industry to redefine value across its broader value chain, and to innovate in collaboration with other parties. This will help put the sector on the path to adding value sustainably and will provide a competitive edge to companies that currently worry about losing business to rivals.

Compared to other industries, the chemicals sector has not kept pace with digitisation. Its future sustainability depends on technological transformation that can support new business models.

While many chemicals companies have digitised some aspects of their business, these efforts have often been aimed at specific areas, such as supply chain and production, with the goal of improving the bottom line. A more holistic approach is needed to innovate and mitigate risk for the future.

Improving digital channels and the workforce’s digital skills will help companies retain customers who increasingly expect 24/7 service – including self-service – as well as shorter order lead times and immediate access to the information they need. Analytics and artificial intelligence will provide insights to make better decisions, optimise operations and reduce customer churn. 

Multiple trends are reshaping the industry

Data-driven innovation

With more data insights into supply chains, customers and end consumers, chemical companies have the opportunity to better understand the sustainability of their operations and decarbonise their business models by innovation. They can also use analytics to improve decision making around the value – both financial and non-financial – that they create for stakeholders and partners downstream.

Data analysis of customers and supply chains will also help companies identify sustainability trends and preferences across industries. This opens the door to opportunities to respond to market needs by innovating new, more sustainable processes and materials.

Green hydrogen

Green hydrogen could help significantly reduce global carbon emissions. And developing a hydrogen-based economy will bring many new opportunities for the chemicals sector. However, sustainable hydrogen and hydrogen-based resources are not yet readily available in the near term.

Almost all of today’s hydrogen is ‘grey’ hydrogen produced using fossil fuels – natural gas, in particular. While green hydrogen production is possible, it often costs many times more than grey hydrogen.

By innovating green hydrogen production processes, the chemicals industry has an opportunity to reduce both its own carbon footprint and that of other hydrogen-using sectors across the supply chain. Chemical companies also have an opportunity to expand their capabilities in this area through cross-sector collaboration and acquisitions of innovative startups.

Cross-industry collaboration

While chemical companies today continually pursue innovation through internal research initiatives, they have an opportunity to accelerate such efforts through industry and cross-industry collaboration.

Many governments around the world are providing financial support and other incentives to encourage these efforts, and companies should seek these out.

As they pursue net-zero goals, companies also need to be ready to work with competitors and customers to improve innovation across the industry and the global supply chain. Sustainability isn’t something that can be achieved by individual effort alone – it requires a wide range of resources and skills across industries and stakeholder groups.

ESG-driven innovation

Because its products are used by so many other industries, the chemicals sector is in a unique position to drive sustainability across the global supply chain. Significant opportunity lies in innovating new ways to reduce industry waste, replace traditional materials and processes with lower-carbon ones and enable greater product recovery and recycling.

Such innovations would not only help move many businesses and end consumers closer to net zero, but could deliver a range of other knock-on benefits: increased product durability, reduced need for repurchases and greater opportunities for reuse and repair. They could also make it easier for industries to comply with evolving regulations on carbon and waste, integrate sustainability performance into their reporting and lead the way on new trends and standards.

Sustainability-focused deals

As global net zero efforts gain momentum, the chemicals sector has an opportunity to reshape its product portfolio accordingly through mergers, acquisitions and corporate venturing activity. So it needs to be looking at ways to rethink its approach to deals and partnerships.

New strategies will help chemical companies access new technologies and capabilities, expand into new business models and capture new opportunities for growth. Such approaches are needed to overcome current challenges such as stagnating growth and a lack of agility.

At the same time, the industry is also likely to see growing divestment of carbon-intensive assets. Companies that shed unsustainable lines of business can not only shrink their carbon emissions but can also reduce their exposure to climate and regulatory risks.

Growth in Asia

The Asia-Pacific region will play a dual role in the future of the chemicals industry. For multinationals, it’s a market with a large potential for growth. The region’s expanding number of market consolidators and low-cost players will also mean increasing competition for established companies.

As a leader in the industry’s growth over the past couple of decades, the Asia-Pacific region is expected to continue gaining increased influence on global trade. And the region’s growing demand for chemical products creates new opportunities for companies that can establish a foothold in local markets – whether through developing new products for those markets, partnering with Asian industry players or tailoring sales activities to local needs.

Doing business in Asia-Pacific – China in particular – also raises the potential for new industry opportunities and challenges. It will be important to stay abreast of potential risks that could arise from market volatility, local environmental hazards, regulatory updates and intellectual property rights considerations.

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Volker Fitzner

Volker Fitzner

Global Leader, Chemicals, Partner, PwC Germany

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