A happy festive season and all the best for the New Year to my readers. What should chemicals companies do to be successful in 2016 and beyond. What follows will help. I am taking a break from blogging, but will be back on 3 January.

The Chemicals Industry in the New Normal

By John Richardson

WHAT have we learnt from the last four years?

There are two dominant headline factors around which you need to shape your future strategies: Affordability and sustainability.

The retirement of the Babyboomers in the West is the driving force behind why manufacturers, and so of course chemicals and polymers companies, need to focus on affordability.

Meanwhile, in China the notion that it is rapidly becoming a middle class country by Western standards has been entirely discredited. So here too, affordability has to dominate product offerings.

It is equally silly to still believe that the vast majority of people in the rest of the emerging world are going to quickly become middle by Western standards. This process is going to take several more decades, if it CAN happen at all.

I have written the word CAN in capital letters, and in bold type, because this leads me on to my second point: Sustainability.

I have never understood people who see the debate about the environment only in terms of global warming. They don’t know or forget that when you burn too much carbon, you also create noxious air, water and soil and food.

China has to thus devise a new growth model built around sustainability which for the short and medium term at least, precludes the levels of car ownership, and energy consumption in general, that in the West defines being middle class.

And anyway, you only have to look at demographics in China to realise that along with the environment, a hug challenge is a declining working age population and a rising elderly population. Until or unless China effectively deals with the legacy of its One Child Policy, and in the process escapes ira “middle income trap”, it is simply impossible for China to become middle class by Western standards.

Back to the rest of the emerging world. I am jumping around a little here, but bear with me here because everything is connected: China’s economic lift-off was a historical one-off because the availability of its surplus rural workers combined with strong demand in the West for its manufactured goods.

This demand for Chinese goods only existed as a result of the Babyboomers being at the peak of their earnings power.  Nowhere close to a sufficient amount of new babies have been born in the West to allow any other emerging country to replicate China’s manufacturing lift-off.

In other words, even if say India became a mass manufacturer like China – assuming, of course, that this was environmentally sustainable and we know that it is not– India wouldn’t have big-enough markets in which to sell its goods.

And the last thing that the world needs is more mass manufacturing capacity. Everyone else, especially China, has already built more than enough to guarantee an extended period of global deflation.

The same applies to oil and other commodities including chemicals and polymers. Here, too, we have vast oversupply that has been added to supply all that unneeded manufacturing – hence, for instance, today’s collapse in oil prices.

There is no doubt that 2016 is going to be a very difficult year because of the failure of most people to see the turn of events over the last four years.

Too many people will be surprised by a further collapse in oil prices, potentially to below $25 a barrel, deeper global deflation and a worsening of the slowdown in China’s economy.

As 2016 develops, the strong temptation will therefore be to ferociously cut costs. That could well keep your internal cost control teams happy, whilst also maintaining dividends for your shareholders.

But this will not lay the foundations for a long-term future. Instead, what is needed is more spending in the right areas. This includes blue-sky research and development and development of existing product portfolios. The knowledge you will need to achieve this will come from further investment in the right quantity and quality of sales and marketing people on the ground in all the major markets.

How do you begin this process? By thinking about the chart at this start of this blog post. It shows that:

  1. The biggest-volume opportunity at the “bottom end” of the market will be centred on my two headline themes – affordability and sustainability. There are many millions of people in both the developed and developing world that will want very cheap, but also environmentally sound and good quality manufactured goods. It will be, for instance, the compact cleverly-designed car with great fuel efficiency that lasts for many years, thanks to 3D printing of spare parts.
  2. “Mass customisation” – a marketing and manufacturing technique that combines the flexibility and personalisation of “custom-made” with the low unit costs associated with mass production – has had its day. This is because a.) The middle classes in the West are being hollowed out by the retirement of the Babyboomers, b.) There will be no emerging market middle class boom anywhere close to the scale that was being talked about four years ago.
  3. The super-rich will stay super-rich, regardless of what happens with the global economy. That always happens. But they will care about their image, and so sustainability in manufacturing will be the key here too. But we are talking about small volume sales of chemicals and polymers into these finished goods, even if these sales are high margin. So, given the scale of overcapacity that is already on the ground in our industry, most chemicals companies will need to direct the majority of their focus to opportunity No1.
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