INSIGHT: Signs of sustainable chemicals resilience despite bear market

LONDON (ICIS)–There are signs of a resilient undercurrent of demand for sustainable chemicals that could accelerate over the coming years in spite of tough economic conditions for businesses and consumers, according to Accenture’s chemicals lead.

Spending on capital goods has diminished since the consumer purchasing spree during the COVID-19 lockdown years, with manufacturing in Europe on a contraction footing for most of the last three years.

Hopes for a slow build back to a stronger market cycle this year have been diminished in the face of the economic hit from trade tensions, but sustainable products demand has been a more resilient sub-set of chemicals products.

The sector is defined by Accenture as chemicals for the manufacture of more environmentally-friendly products and conventional products that feed into the wider sustainability trend, such as materials for the solar photovoltaic or electric vehicle sectors.

“What is becoming clearer and clearer is the end user still is asking for environmentally friendly, sustainable products. All the brand owners, OEMs, made their commitments and that is pulling through the value chain,” said Bernd Elser, global head of Accenture’s chemicals and natural resources practice.

The professional services firm projects that the market for “sustainability-related” chemicals will grow from $340 billion in 2023 to $570 billion by 2028, driven by downstream moves such as L’Oreal’s commitment to 95% bio-based ingredient and H&M targeting 100% sustainable packaging by 2030.

51% of respondents of a consumer survey carried out by the firm in 2023 reported being motivated to purchase and consume more eco-friendly products. The number of consumers willing to pay a premium for green products is accelerating in the US, according to a series of surveys by PDI Technologies.

The percentage of respondents claiming to be willing to pay more for sustainable products increased from 66% to 68% between 2022 and 2023, up to 80% in 2024.

“There is a price premium for certain segments if you look at the announcements of brand owners and OEMs, which I think is amazing, because if you’ve followed that sector, we didn’t see these announcements a few years back. So no one would admit there’s a decent market segment which is willing to pay,” Elser said.

“But if you look at what the consumer is asking for and what the brand owners are publicly stating, I think something is changing in the market,” he added.

SECTOR HESITANCE
Other analyst firms have produced data over the last few years showing that, in terms of upstream chemicals investment and publicly-announced end user demand, the sector lags many other industries such as steel.

The grim market conditions for European manufacturing, slower than expected growth in the electric vehicle market and the worst downsizing in decades for sectors like German automotive may be a driver of industry hesitance.

With bottom cycle market conditions persisting for years and spending, it is understandably difficult to commit to large-scale new capital expenditure in the face of deep widespread cost-cutting.

Several large consumer names have also begun to soft pedal their sustainability targets, with Coca Cola shifting its 2030 goals to 2035, and reducing the target for recycled content in its packaging from 50% to 35-40%.

Despite some softening in company targets, the direction of travel remains for demand to continue to firm over the next few years, pointing to a likely period of supply imbalance as end user companies draw closer to their stated deadlines.

“We’re still left with a big gap if you look at company announcements, especially of brand owners; they communicated targets which require significant supplies, and they set targets with very aggressive timelines,” Elser said.

“I still think that there is a significant supply demand imbalance, where the communicated demand is a lot bigger than what you find in real capacity out there,” he added.

SLOW RAMP-UP
Despite the likelihood of an uptick in sustainability-related demand as 2030 and the various decarbonization and sustainability targets tied to it draws closer, the odds of a sharp shift in chemicals production trends is unlikely, according to Elser.

“I think there will not be a big jump all at once, the market is not changing from one day over the next,” he said.

“This is an asset-intensive industry, it takes six, seven years to build a large-scale asset. So I wouldn’t expect that kind of disruption, which you may see in other sectors,” he added.

A potentially more bullish factor on supply is the case of small and medium size producers, where specific developments could be harder to track than multinationals, but could be an under-represented source of product.

“We don’t have the full view on the market, especially if you talk about mid and smaller companies, it might be harder to get the full transparency on demand,” Elser said.

Given the timeline to greenlight, construct and bring onstream substantial new capacity, the window for new facilities to be announced in time for 2030 is narrowing.

Despite still limited large-scale greenfield investment, options like mass balance, sustainable drop-in feedstock alternatives for existing plants, and retrofitting existing infrastructure could mean the supply gap may not be as cavernous as it may look on paper.

“Let’s not forget, you still have that whole angle of mass balancing, which gives you a bit of room, where you use an existing asset, you feed in a certain share of recycled, renewable feedstock,” Elser said.

“If you look at announcements, product launches, new solutions which are sustainability related, there are thousands out there. And if you look at large-scale capacity announcements, not a lot.”

These more incremental shifts present a means of taking the temperature of market demand without having to commit hundreds of millions of euros to a large-scale new unit.

“There must be a huge area where you do mass balancing, or basically find ways to do that with existing assets, which, I think it’s logical if you want to test the market and try to grow into that market,” he added.

Insight by Tom Brown