Environmental threats from the chemicals CEOs’ standpoint

In recent months, we have seen the growing awareness about adverse effects on the environment brought about by the use of plastics. Plastic pollution and climate change have been high on the agenda of governments and world organizations.

It is interesting to note that chemicals company CEOs’ concerns about a number of wider ‘sustainability trends’ surpass nervousness about economic conditions. This is an unusual back story behind their longer-term caution, as we’ve found out in PwC’s 22nd Annual Global CEO Survey. Out of 1,300 plus CEOs around the world, 48 survey respondents are from the chemicals sector.

CEOs’ optimism shrinks on longer-term growth outlook

Just a short time ago, there was a notable dose of optimism evident in the chemicals sector. Having confronted extraordinary pressures for more than a decade — chiefly from product commoditization, raw materials volatility, fluctuating markets and rapidly expanding competition — 2018 initially delivered some strong results. Profits were up, capacity was tight and global demand was on a positive trajectory. It isn’t surprising, then, that in the latest survey, more than 90 percent of chemicals companies’ CEOs said they were bullish about their organization’s 12-month revenue growth prospects, the highest level in five years.

But when CEOs were asked to consider their company’s position over a longer period of time, their enthusiasm markedly waned. 

According to the Financial Times, the Organisation for Economic Cooperation and Development has flagged the risk that the interaction of a sharp deceleration in China’s economy, volatility in oil prices, Brexit uncertainties, and the fragility of some eurozone banks could lead to “a harder than expected landing.” And already some chemicals companies are cutting earnings outlooks in the face of retreats in key markets, such as automotive.

Sustainability impacts outweigh macroeconomic concerns

Strikingly, these global headwinds are not the primary reason for the longer-term wariness of chemicals company CEOs –sustainability is.

Among these worries: the impact of resource and materials substitution, decarbonization, renewable energy and waste elimination. These are serious issues, particularly for the chemicals industry, which is at the tip of the spear of questions surrounding the role that fossil fuels and new forms of energy will play in the future, including in the mitigation of climate change and pollution. How chemicals companies address these concerns will ultimately affect their license to operate, their marketplace status, their relationships with customers and, as the CEOs seem to be keenly aware, their ability to grow over the coming years.

Sustainability trends present growth opportunities

The greater focus on sustainability trends presents new growth opportunities for chemicals companies that were not possible before. The industry can be a significant player in developing materials that contribute to energy efficiency and greenhouse gas reduction in other sectors, improving the sustainability of downstream energy chains.

In the energy sector, for example, chemical products are commonly used in solar generation, and in new lighter and longer thermoplastic blades that offer the promise of greater wind power stability and efficiency. In transportation, lightweight materials could be critical for improvements in vehicle fuel efficiency and in the development of electric cars and trucks. Reducing the average weight of passenger cars from 1,380kg currently to 1,000kg by 2050 could lower emissions by 40 percent, according to a 2017 study by the International Transport Forum.

And although strides are being made in industrial materials, packaging remains a conundrum for chemicals companies — and another potential revenue channel if addressed correctly. Pressure is growing in many of the world’s largest markets to replace plastic in packaging with alternative materials and move closer to so-called cradle-to-cradle manufacturing, in which every ingredient in the process is recyclable.

As products emerge to satisfy recycling requirements, chemicals companies engaged in traditional plastic packaging value chains could find that a big part of their cash flow is affected. In fact, nearly one in three chemicals company CEOs expects cradle-to-cradle developments to have a high or very high impact on their business within the next five years. To avoid hemorrhaging revenue in the plastic packaging side of their business, chemicals companies should begin to rethink the types of plastics that they are using and the production processes employed to manufacture packaging.

New additives, such as antioxidants, can produce higher yields of plastics from less material with less waste and fewer carbon emissions.

Although much research is still needed to develop and perfect these new additives, companies that can pioneer improvements in the financial and environmental costs of plastics manufacturing will find themselves in a strong position in the coming years.

Also leading the industry will be companies that take an active role in expanding the reach of recycling, in part by helping develop new methods for mechanical and chemical recycling programs that at their zenith reprocess plastic items back to raw material, or feedstock. More than 25 global companies, including four of the five largest chemicals makers, have pooled US$1bn in the Alliance to End Plastic Waste to reduce the amount of plastic that ends up as garbage in the environment.

An innovation path

Chemicals companies have long accepted the need to shift from being ‘product sellers’ to being ‘solution providers’ in the customer-facing aspect of their business. But this is easier said than done. To drive sustainability initiatives, chemicals companies will have to collaborate with their customers. Purchasers will increasingly demand bespoke and innovative answers that transform their products to meet specific weight, waste, and functionality metrics.

Our survey indicates that chemicals executives have not yet fully embraced the idea of open innovation. We found that although chemicals
CEOs are slightly more focused on new products than CEOs globally, they are less likely to be collaborating with startups and entrepreneurs.

And they are much less likely to be pursuing new strategic alliances and joint ventures. Indeed, only 27 percent of chemicals CEOs are planning such initiatives within the next 12 months as a route to growth, compared with 40 percent of CEOs globally.

Making the move from ‘solution providers’ to ‘transformation deliverers’ requires CEOs to be sure their company has a clear and realistic lens through which to assess which markets offer the greatest potential for transformation. A disciplined portfolio approach is needed by which expansion into new areas can be weighed against returns from current activities. In turn, this will help companies articulate coherent portfolio strategies that can be readily explained to investors and that can drive merger, acquisitions and divestments, research and development, and other growth strategies. Many companies already use portfolio management to inform investment, but they don’t necessarily incorporate all the external forces, including sustainability trends, that will drive future transformation of target markets. Such transformation may be key to determining priorities for investment and divestment.

Delivering transformation also entails that chemicals companies become materials-agnostic. This is particularly the case in the specialty segment of the market, where companies don’t necessarily have to own the plastics they put together and assemble into composites. Instead, the focus should be on having the capabilities, insight, and relationships to provide a best fit for the customer’s needs. In the agrochemicals arena, materials-agnostic partnerships are developing around the use of a mixture of fertilizers, herbicides, and pesticides from different chemicals providers to more precisely address each farmer’s unique growing needs.

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.