INSIGHT: Developing strategies in uncertain times

LONDON (ICIS)–Chemicals companies’ environmental, social and governance (ESG) performance is more noticed as climate action climbs the corporate agenda.

Shareholders will benchmark ESG performance as closely as they have cost and productivity metrics, consultants McKinsey suggested in a recent sector study.

Investors are looking at chemicals more critically and they do not see – and they do not except – the growth companies in the sector once delivered.

But the McKinsey research shows that the relative share price performance of the industry has continued to deteriorate – and underperformed the general market from 2017 to 2019, the period before the Covid-19.

How companies perform as economies recover from the pandemic remains to be seen, but hopes are not high for outperformance for the general chemical company names.

What lies behind this overarching underperformance?

Quoted chemical companies are not growing.

Returns on invested capital has not grown since 2011, McKinsey shows, and recently has started to decline globally.

“Volume growth for chemicals has been trending downwards over the past 20 years, even before the onset of Covid-19. Projections have suggested this trend is continuing – driven largely by an ever-maturing Chinese market,” it says.

China is dominating the wider chemicals market in terms of size and, increasingly, in terms of competition.

Additional capacities are chasing slower growing markets creating downward pressure for all market participants.

Sustainability, demographics and (digital) technology trends are impacting the sector; chemical companies are particularly exposed on the sustainability front as the battle against man-made climate change is geared up by nation states.

“Any serious application of the circular economy will likely negatively affect overall demand growth for chemicals, depending on the exposure of each company’s product portfolio,” McKinsey says.

“In addition, global electrification may inflate the price of energy (at least in some geographies), making the production of physical objects more expensive— thus reducing demand.”

Chemical companies will need to reach out further as the world changes around them, engage on circularity, engage on the environment generally.

And they will need to be seen to react.

It is often said that chemistry and chemicals can be part of the solution to climate change control, but the producers and sellers of chemicals have to believe that. Action will speak louder than words.

Unfortunately, sector firms are moving into a period of some uncertainty, where growth and returns are by no means assured and where they are positive, can be undermined quite quickly.

For a capital-, research-, and asset-intensive business that is not an attractive place to be.

McKinsey analysts suggest that chemical companies will need to develop strategies under a level of uncertainty; the world is changing around them and not necessarily to their advantage.

Even so, the consultant firm suggests that companies may still be forced to make risky bets.

“For an industry that has been historically accustomed to a relatively predictable demand growth, this will be a new experience,” it adds.

Insight by Nigel Davis