In 2000, few would have predicted a US shale oil and gas boom disrupting global energy markets and making the US one of the world’s most locales for petrochemicals production. Indeed, the next ten to 15 years could very well usher in further disruptions. While the global chemicals market looks to grow robustly over the next decade, we could certainly see a surprisingly different kind of growth for the industry looking ahead.
What if we were to challenge commonly held assumptions and truisms about how the industry will grow? In this report, we do just that. We examine two uncertainties surrounding the global chemicals industry: the influence of the customer; and level feedstock playing fields.
For decades, the chemicals industry has largely moved in the direction of large, centralized, economies-of-scale production. But in the future, chemicals producers could compete more on how closely they collaborate with customers’ (and customers’ customers) needs for products that meet new preferences and values. Think of it as the downstream “pressuring up” to the upstream.
Consider the growing societal preference and demand for smarter and greener products (affecting a wide swath of industries from retail and consumer, food and beverage, construction to automotive) which, in turn, places an onus upon chemicals companies to respond to—or, better, anticipate—demand for new materials, solutions, and applications.
And, just as the baby-boomer generation sparked a movement for greener products, the millennial generation holds even higher demands and expectations for eco-friendly products—with over half of millennials globally willing to pay a premium for sustainable products. Meanwhile, developing economies are moving to mitigate pollution and waste, making consumer-driven sustainability more of a global societal imperative.
Technology advancements, too, such as 3D printing, collaborative robots, and Industrie 4.0 are opening new possibilities for manufacturers to pursue small-batch, customized or “micro” manufacturing. These manufacturers are also looking to chemicals producers for new materials that lend themselves to these burgeoning technologies.
How many of us foresaw ten years ago that shale gas and oil activity in North America would hand local ethylene producers such a strong home-court cost advantage over their Asian and European counterparts? The US shale gale has resulted in massive cost savings for US manufacturers, with the chemicals industry a chief beneficiary.1 Now that natural gas costs in the US are less than half of those in Europe and about one-quarter of those in Japan, much is being planned around the current state of affairs. PwC’s Strategy& estimates US ethane feedstock and ethylene production could rise by 45% through 2025. 2, 3, 4
But, what if this natural gas boom were to go bust? If, for example, a balancing of global energy/feedstock costs unfolds in the wake of numerous events: successful coal-to- olefins development in China; a greater viability of bio-based feedstock such as sugarcane in Brazil; shale gas and oil being embraced in western Europe and exploited in Asia Pacific for lower-cost ethylene production in those regions; prolonged period of low oil prices? Such a scenario would erase or at least erode cost advantages for US-based chemicals companies, and possibly derail planned expansions in chemical production in the US and the Middle East.
Thus, an altogether different energy landscape takes shape. The US and the Middle East lose their energy/ feedstock cost advantage, with light and heavy feedstock prices balancing globally. This could come about through a combination of a few unfolding conditions: unconventional hydrocarbon drilling technologies could become successfully adopted in regions such as Europe, Asia, and Latin America; “petro-states,” notably Russia and Saudi Arabia, could alter global supply to depress oil prices, causing a pull-back from shale oil and gas drilling in North America as a result of it becoming less economically attractive.
Quite simply, the era of large geographical hubs and regional energy/feedstock cost advantages ends as the chemicals and energy industries become less inextricably linked. The result? Regions gain a greater degree of energy/feedstock independence and embark to build out domestic chemical manufacturing hubs unencumbered by cost disadvantages and supply constraints. A highly competitive global race ensues to gain footholds in high-growth regions of developing Asia-Pacific, Africa, and Latin America, while US-based companies and Middle East producers reset strategies to compete. Local players, with access to affordable energy/feedstocks, ramp up their domestic chemicals industries.
In an era of more frequent disruptions triggered by unprecedented societal and technological change, it is becoming more important for companies to imagine the unimaginable, to think through alternate futures. This thinking helps companies from being surprised by disruptive developments and helps them take advantage instead of being blindsided.
We have painted a plausible future where the world would look quite different for chemical industry from today. There are, naturally, myriad other additional futures to glimpse. Take, for example, the recent rise of shareholder activism in the chemicals industry: what kinds of futures is this portending? Could hedge funds, as with customers, “pressure up” to force change on chemicals companies? And, if so, what should companies do now if they believe that will lie in store in the future?
Considering plausible scenarios of the future may reveal what bets are the right ones to make today.
1-World Energy Outlook Factsheet 2013, EIA, http://www.worldenergyoutlook.org/media/weowebsite/factsheets/WEO2013_Factsheets.pdf
2-First Research Industry Profile, October 13, 2014.
3-Note: As of October 2014, Henry Hub Natural Gas Spot Price was $3.77 MBTU; Europe Natural Gas Import Price was $9.77 MBTU and Japan Liquefied Natural Gas Import Price was $17.77 MBTU. Source: World Bank, Commodity Market Report Index, October 2014.
4-Global Petrochemical feedstock developments: implications for GCC players, Strategy&/ PwC, 2011.
Global leader, Chemicals, PwC US
Principal, PwC US