By John Richardson
THERE IS A FEELING out there that the chemicals and polymers industry is undergoing a typical downcycle that will last a few years, followed by yet another spectacular fly-up in margins.
But I believe a great deal more is happening beyond the usual cycles of over-building followed by under-building.
We don’t know if China will make a success of a new economic growth model designed to replace the old model built on heavy investment – especially in real estate – that has become overinvestment.
In the short-to-medium term, China’s zero-COVID policy will add further downward momentum to the country’s economy.
China is becoming much more self-sufficient in another wave of chemicals and polymers.
Self-sufficiency was earlier achieved in polyester fibres, polyethylene terephthalate (PET) bottle and film grade, purified terephthalic acid (PTA) and phenol.
China has switched from being the world’s biggest importer of these products to being an exporter, and in the case of polyester fibres and PET resins, the world’s biggest exporter.
The latest products affected by the self-sufficiency push include polypropylene (PP) and styrene monomer (SM).
The benign period of geopolitics following the collapse of the Berlin Wall is over.
This is leading to localisation of supply chains to fit national political agendas. Chemicals and polymers may, as a result, no longer flow as freely across borders.
Supporting this shift away from outsourcing could well be global carbon and plastic waste taxes and credits that make moving chemicals and polymers long distances less viable.
Austerity, resulting from a prolonged period of stagflation and problems specific to the developing world, may support the climate agenda.
Because people are likely to have less money to spend, this could encourage a return to “build to last” – for example a smartphone where the battery isn’t deliberately designed to only last two years.
In the developing world, food shortages will increase because of the cost and supply of fertilisers and disruptions to planting season caused by the Ukraine-Russia crisis.
Over the longer term, developing world economies may not grow by much as is commonly expected because of the impact of climate change.
I used to be sceptical over the sustainability transition. But now I am convinced that a new chemicals business model will emerge because of the factors above, and from what I am hearing in discussions with ICIS clients.
Chemicals companies need to brainstorm what the new business model will mean in detailed practical terms for each value chain.
But even in the same value chains, there will not be a “one size fits all” approach for because of differing customer needs.
Minimising the need for new tyres
In order to support your discussions, see below more details on the theoretical example of a service-based model that I suggested last week:
A styrene butadiene rubber (SBR) producer works with a tyre manufacturer to ensure that SBR pellets are adapted to prolong the life of tyres, with the tyre manufacturer also redesigning its processes.
The car-hire company innovates to reduce the volume of new tyres it requires by using big data.
Customers’ driver behaviour is tracked to determine the extent of unnecessary acceleration and braking and how this affects the life of tyres. Customers are financially incentivised to drive in ways that extend the life of tyres.
None of this can work unless all parties share the same objectives. So, at the outset of a 20-year service deal, the SBR producer, the tyre manufacturer and the car-hire company agree on a set of shared targets for minimising consumption of new tyres. The targets are agreed with investors and monitored by regulators.
The economics of this service-based deal are underpinned by carbon, plastic waste and other taxes and/or credits. In other words, all three parties have strong financial incentives to minimise their use of non-sustainable resources.
Conclusion: New ways of measuring success
New ways of measuring success are needed along with new business models. This is where ICIS comes in as a data provider. I am still thinking through the full extent of what this means for us.
As we provide new data sets and new ways of interpreting old data, our role is also to support companies through facilitating internal workshops. For more information on this service, contact me at email@example.com.