Chemicals must respond to demographic destiny

Demographic changes are completely transforming chemicals demand patterns, as in other industries. And whilst all change is inevitably uncomfortable at first, it also offers major new opportunities for those companies prepared to rise to the challenge.
Two major shifts in demand patterns are taking place which raise questions about how companies will make money in the future. Demand is now starting to decline in many key end-user markets such as construction, autos and electronics. And there are important questions about the outlook for China’s economy. In both cases, the key issue is that after 15 years, central banks are finally winding down their stimulus programmes. In turn, the end of their “free money policies” is causing consumers to look for more sustainable and affordable solutions.
These changes highlight the need for companies and investors to revisit previously successful ‘business as usual’ product-based strategies. They suggest that a focus on becoming more service-led will provide critical competitive advantage for those businesses which want to become a future winner in today’s new normal.
Increasing life expectancy has created an entirely new generation

The key to success is to focus on the needs of today’s entirely new generation, the Perennials 55+. They are now the main source of population growth in the world, as a result of the major increase in life expectancy since 1950. This change is unprecedented. Back in 1950, most people died before or around pension age as this chart shows:
As the chart shows, this increase in life expectancy, alongside the collapse in fertility rates has transformed the world’s ‘Top 10’ economies, which account for around 75% of global GDP:
In summary, then, the demographic data confirms that the days of ‘business as usual’ strategies are over.
Perennials 55+ are the main source of population growth

We have all been used to the idea that population growth comes from babies being born - and this used to be true during the post-war Baby Boom:
Wealth creators were the largest and wealthiest generation in history and they created a golden age for the chemical industry in terms of growth and profit. The reason is that consumption is 60% - 70% of Western GDP and it is turbocharged as people enter the Wealth Creator cohort, as the chart shows for the US.
Perennials already own most of what they need

Younger people usually have to rely on their parents for much of their spending, whether they are in apprenticeships or going to college. But by the age of 25, they are mostly independent and earning their own income. Very often, they also start to think about settling down and having children of their own. And their incomes naturally tend to increase as they move on in their careers, helping them to afford the increased spending as shown in the chart.
The Boomers therefore powered major growth for the chemical industry (and others), as they essentially created a baby boomer super cycle in terms of demand. But now this tide is on the way out. By 2025, the entire Baby Boomer generation will have left the wealth creators and joined the Perennials 55+ cohort. Their consumption is very much lower as they already own most of what they need. And their incomes normally decline as they enter retirement. Unsurprisingly, therefore, average US consumer spend per annum falls by 41% between ages 55-75+, from $91k to $51k.
A further downside to the demographic picture relates to the major fall that has taken place in fertility rates. Since 1970, these have actually fallen below the replacement level of 2.1 babies per woman in the west. And the same pattern has been seen more recently in other major economies. Inevitably, therefore, we are also now seeing a sharp slowdown in the growth of the wealth creator population. China’s slowdown is even more acute due to the One Child Policy introduced in 1980. Births peaked at 27 million per year in 1970. Since then, they have fallen by 2/3rds to just 9 million last year. Unsurprisingly, China’s economy has moved into a major downturn.
Chemicals companies need new strategies for revenue and profit growth

Instead, we need to focus on developing new strategies for a more complex and uncertain world.
Today, however, much more judgement is required. Successful planning now requires the use of radically different scenarios. Effectively, future winners will be those who ‘think outside the box’ and come up with new strategies that don’t assume constant growth into the future.
The end of ‘business as usual’ strategies

As the scenario planning chart suggests, this means we have to be much more creative when we discuss future growth strategies. One key issue is that the stimulus programmes of the past 15 years led many companies to believe central bank claims that they could always create growth, despite the changes underway in demographics. Today we are facing the downside of these claims, in the shape of the massive overcapacity that now exists in all the core product areas.
ICIS data suggests that global chemicals capacity utilisation in July 2024 was just 69%, versus the long-term 1997-2023 average of 77% (which includes the major downturns of 2000-2002, 2008-2010 and 2020-2022). The US and Middle East, despite their feedstock advantages, are at just 67% and 61% respectively, whilst Europe is 66%. Even NE Asia is just 70%. In turn, of course, this has caused margins to collapse. Protectionism is also rising, as countries seek to protect their core industries from subsidised imports.
Faced with this situation, it is clear that the industry – particularly in Europe – is facing an existential crisis. And the scale of the crisis makes it hard to see how restructuring on its own can provide a quick and easy solution to the problem. Essentially, a volume equal to all of Europe’s capacity would need to close in order to bring capacity utilisation back to previous levels. And as we know from history, closures are normally very hard to achieve, due to the high levels of integration within the industry and with upstream refining businesses. Naphtha is normally only 5% - 10% of a refinery’s output, and it is normally better to subsidise unprofitable petrochemical sales than to stop producing gasoline, jet fuel, diesel and other core products.
Service orientation rather than product mindset will be key

This analysis suggests we need to look at a third option of reinvention if we want to return to a world of healthy operating rates and margins. And this, of course, is where today’s demographic changes provide vital clues about future opportunities. They suggest that a completely new market opportunity is opening up, given the rise of the perennials and their growing importance in terms of future market demand. The markets will be smaller, and growth opportunities will be very different from the past. But we shouldn’t despair. After all, the average American is still spending $51k per year at age 75+.
Prof Michael Porter’s famous ‘5 Forces’ model highlights the way forward. It suggests that we need to develop new value propositions and effectively change the nature of future competition. Instead of a product mindset, we need to think much more in terms of developing a service orientation. This should be easy to develop with the right management mindset, given the techno-commercial skill-base within most companies. Our strategies need to focus on the growth opportunities created by the perennials. Their numbers are continuing to grow, which is good news for those companies that focus on building out new offerings to attract them.
The profitable middle market of the Baby Boom years is disappearing

One key issue, as the chart suggests, is that the rise of the perennials is already upending consumer markets. The growth of the boomer super cycle created a new middle market segment focused on the concept of “affordable luxury”. But today, the major market opportunity is likely to be in the value sector, with low delivered cost the key competitive advantage. The rich will always be interested in luxury, but their numbers are tiny versus the opportunity with value-focused buyers. Importantly also, this suggests sustainability and durability will be key to success with the perennials in consumer goods, electronics and even autos.
A service orientation that focuses on being demand-led and understanding buying needs is therefore likely to be most successful as the examples of LyondellBasell and Arkema confirm. LyondellBasell is reinventing its portfolio via a focus on plastics recycling. Arkema is successfully developing a solution-orientated portfolio. Apple’s strategy is another example of the way forward. Since 2017, it has responded to the declining and increasingly cut-throat smartphone market by building out a new, highly profitable Services business, which aims to create an annuity income for the future.
Demographic changes are now transforming the nature of demand in the chemical industry. And in response, far-sighted companies such as LyondellBasell, Arkema and Apple are already adapting their strategies for success in this new normal.
Author:
Paul Hodges is chairman of New Normal Consulting and NiTech Solutions, and the Advisory Board for Infinity Recycling. He publishes The pH Report and writes the ICIS Chemicals & the Economy Blog.
Related content
Speak with ICIS
If you are interested in learning about how our specialist insight can help you make better business decisions, contact the ICIS team today. Simply complete the form and we will get in touch with you as soon as possible.
