Dictating Chemicals Demand

 

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By John Richardson

SOME commodity chemicals companies still assume that, if they build new supply, demand will always eventually catch up with supply.

The risks of not building new capacities, at times of easy financing and feedstock availability, are also viewed as too great. These include deteriorating economies of scale and loss of market share.

Thus in the US, for instance, the American Chemistry Council estimates that around $25bn (€20bn) is being invested in about 30 expanded or new US production facilities.

Companies are often also at the mercy of events because of their failure to predict major shifts in supply and demand dynamics. For instance, the current global tightness in butadiene appears to have caught producers by surprise.

A lot of money can be made or lost through sheer luck, therefore. To again use butadiene as an example, $10bn in earnings before interest, taxes, depreciation and amortisation (EBITDA) were transferred from the world’s butadiene consumers to its suppliers during 2011, estimates Rafael Cayuela, butadiene commercial manager for Styron, the global plastics, latex and rubber producer.

Because the industry has always been run in this way and because, as the example above illustrates, this reactive approach can deliver outstanding profitability, the risk of inertia is substantial.

Speciality chemicals companies such as BASF and Bayer Material Science (BMS) are very different. For several years, they have been developing new processes and products to serve what they predict will be the major demand drivers over the next 30 years or more.

These new demand drivers are the megatrends: ensuring there is enough food and water to sustain global growth, the impact on economies and societies of changing demographics, such as ageing populations in the West and the impact of China’s one-child policy, and the need to reduce carbon footprints.

Commodity chemicals companies argue that this only applies to the likes of BASF and BMS because they are “innovation” companies and so must constantly develop new products for new markets.

BASF and BMS also benefit from the somewhat more patient and longer-term approach of European investors compared with those in the US.

Further, neither of these two European majors have access to low-cost feedstock. Basic commodities, therefore, make no strategic sense for them and for other speciality players in a similar position.

And unlike the constant innovation that is taking place in specialities, the last commodity polymer to be invented was linear low-density PE (LLDPE) in the late 1950s (LLDPE didn’t gain widespread commercial acceptance until the early 1980s). Old, well-established products encourage adherence to old and well-established ways of running businesses.

But the megatrends are reshaping the global economy and so have huge implications for chemicals companies in both the commodity and speciality sectors.

For example, 272m Westerners are now over 55 years (29 percent of the population), according to UN population data. Further GDP growth will be limited by reduced spending as people save for their retirements.

And the one-child policy in China will result in the ratio of workers to retirees (presuming workers continue to retire at 60) dropping from roughly 5:1 today to just 2:1 over the next 20 years, says Wang Feng, director of the Brookings-Tsinghua Center for Public Policy in Beijing. Between 15-25 percent of the country’s 1980-2010 GDP growth was the result of a favourable age structure, he adds.

Commodity chemicals companies need to accept that building capacity on the assumption that demand will always catch up with supply no longer works.

In our Monday blog post we will discuss these megatrends further and provide examples of how companies can proactively develop new markets using polymers that were invented many decades ago. New applications do not necessarily require new products.

Instead of being reactive to market fluctuations in demand beyond their control, companies will thus be able to create and virtually dictate levels of demand.

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