Burying Your Head In The Sand Is Not The Answer

Business, Economics, Environment, Polyolefins, Sustainability, Technology, US

head-in-the-sand-3

By John Richardson

YOU are a US polyethylene (PE) producer or any other chemicals producer in a country that remains on the wrong side of the new consensus about climate change. Sure, you can choose to bury your head in the sand and pretend that this shift in this consensus isn’t permanent.

But with your head buried in the sand, you are going to find it very difficult to make money in the future. The reason is that the type of people in this picture below will be vitally important customers for the big volumes of PE you will need to export as you aggressively expand your  capacity.

Bangladesh

These people are from the village of Katakhali in Bangladesh. Like millions of other people in Bangladesh, they will be increasingly exposed to changes in weather patterns. Bangladesh has long suffered from devastating floods because of the flat nature of its land and snow-melt from the Himalayas that breaches the banks of rivers. But now you have to add to these problems a growing number of cyclones, floods and droughts, which are being linked to man-made climate change.

What will make life even worse for Bangladesh over the coming decades is that it is heavily dependent on agriculture for its income, which will obviously be badly affected by more floods and droughts.  It is also a very poor country and so can ill afford to pay for climate-change mitigation.

How might the Bangladesh government react to this crisis? Maybe by erecting import-tariff barriers against countries that are seen to have done the least to tackle climate change. The US might be right in the firing line for these tariffs because of its heavy fossil-fuel subsidies.

So, what can chemicals companies do to win favour with the Bangladesh and other governments that will result in exemptions from new import tariffs?

Here is one suggestion, again using Bangladesh as an example:

  • The country’s government has set up a multi-donor trust fund, a ‘one-stop’ mechanism for large-scale climate change financing.
  • One of the two ways in which you can support this fund is through the the Community Climate Change Project (CCCP). This involves allocating funds on a competitive basis to NGOs so that they can implement community-driven interventions that build resilience to climate- change impacts.
  • How much money are we talking about? About $12.5 million in total.
  • The CCCP would use this money help communities hit hardest by current weather extremes. These are populations who live in coastal areas affected by saltwater intrusions, in flood-prone chars (silt islands in rivers) and river basins, or in areas afflicted by recurring droughts.

And/or here is another much-broader suggestion:

  • The UN’s Least Development Fund is backing initiatives that will help 50 poor nations deal with climate change.
  • Projects include keeping health facilities safe from storms and tidal surges in Pacific island nations.
  • But the fund is short of $215 million.

Contributing to projects such as thesewould not only enable chemicals producers avoid the impact of climate-driven import tariffs and carbon taxes etc. It would also be another part of “demand management”.

As the New Normal develops, this demand management will become more and more important. The reason is that the world has entered a period of much more uncertain, more volatile, and quite often weaker, demand growth. In the past, under the Old Normal, chemicals companies could afford to, in effect, outsource this demand management to politicians and to central bankers. This is no longer the case.

This demand management needs to be heavily focused on all of these people:

4bnpyramid

 

Effective demand management will not just be about funding initiatives to help compensate for the negative impact of climate change. Far from it. It will also be about funding sanitation, public health, education and infrastructure projects in general that help satisfy basic needs. Only when these basic needs are met can people climb out of poverty, and so buy lots more things made from chemicals.

Sure, as I said, you could bury your head in the sand and ignore all of these issues. But how would this fit in with the line that you have spun to your investors: That whilst demand growth might be pretty much flat in developed economies, the great opportunity is to export big volumes of chemicals to developing countries, where demand growth is booming.

In the past, your investors easily accepted the notion that you could sit back and watch demand in the emerging world grow by itself because of the irreversible rise of the region’s “middle classes”.

But investors will increasingly come to understand that this passive strategy no longer works – that’s if it ever, in fact, really worked at all.

How investors view oil, gas and chemicals companies will undergo many more changes than just this as the New Normal further develops. This is a subject I shall discuss in more detail in tomorrow’s blog post.

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