Holding petchem CEOs to account: tackling societal needs the route to success

Business, China, Company Strategy, Economics, Environment, Europe, European economy, European petrochemicals, India, Indonesia, Sustainability, Technology, US

By John Richardson

IF WE all had a dollar for every time we’d heard the phrase, “the growth of the Asian middle classes”, as just about the only justification by CEOs for petrochemicals and polymers investments, then the Principality of Monaco would by a very crowded place. There wouldn’t be enough room in the harbour for all the luxury yachts.

In reality, as I have long argued, we need to use the phrase “middle income” when referring to Asia and not middle class as middle class creates the misleading impression that Asia, and the rest of the developing world, can in general be compared with the West.

Nearly all the average or median income data show that such a comparison is a fallacy. Yes, there are of obviously rich people in Asia and Africa etc., and as I write this blog I am in Singapore – the home to some seriously rich people.

But Singapore’s petrochemicals consumption is tiny. And despite the super-rich in countries such as India, Indonesia, Vietnam, Pakistan and Bangladesh, the reality for these countries is that they are light years behind the West in terms of average incomes – and it is the poor, that in volume terms, will drive future basic petrochemicals growth. This is of course a big volume business.

Focusing on basic needs is essential

Take Bangladesh where per capita income in 2016 was just $1,355, which is the latest data I could find available. In India, IMF data show 2017 per capita income at only $1,940. These levels would be way below the poverty level in the West.

Despite the Indian super rich, 60% of the population are still dependent on agriculture for employment with the agricultural sector generating just 15% of GDP.

This statistic, along with all the other data on levels of modern sanitation, the availability of potable water, electricity supply and universal basic education, point to how India remains poor and very much a developing country.

Even in China, IMF data show that average per capita income was just $$8,836 in 2017. 500m Chinese still live on less than $5.50 a day, according to the World Bank.

Those who often accuse me of staring at my glass and always seeing it half empty rather than half full usually miss the point.

The point here is that words count – and what counts here is holding petrochemical companies to account for their strategies in the developing world.

The winners in the developing world will be companies with cost bases low enough to provide products and services cheap enough for the economic realities of the developing world.

Companies must also prove that they are satisfying basic needs – as I said above, water and electricity. Affordable transportation is another issue, as are raising crop yields and reducing food waste.

The great news is that many of these basic needs can be met by the products and services of the petchems business.

Cynicism is not the route to profitability

Companies must also promote their societal value in the face of the big push-back against single-use plastics.

The problem with single-use plastics is that it makes the life of the poor worse, as the vast majority of the plastic rubbish in the environment is in Asia and Africa. It is the poor that mainly have to deal with rivers and coastlines choked with discarded plastic.

The petrochemicals companies that can answer all of the above challenges will therefore not just be the ones with the lowest cost base. They will also be the ones that “walk the talk” – that prove their societal value through their involvement in, say, NGOs that provide cheap PE or PVC drinking-water pipes.

Successful companies will also be the ones, such as Borealis, that take responsibility for final disposal of the plastic pellets they sell through investing in plastic collection and recycling schemes in the developing world.

There are plenty of visionary CEOs out there who are walking the talk. These are the real industry leaders, but not the ones that only talk in clichés and assume that all the industry has to do is to constantly build new cost-competitive capacity and the demand will inevitably come.

The world has always been more complex than this and its complexity has greatly increased. Greater complexity is the result of the consensus that humans are driving climate change, the plastics rubbish crisis, ever-widening income inequality and today’s heightened geopolitical instability.

It is so easy to be cynical about these issues. But I firmly believe that rising societal pressures will reshape how petrochemicals companies need to operate if they want to be profitable.

There will be much more on these themes in later posts.

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