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In this article, we describe how the strategic context of the chemical industry is changing and discuss three additional trends significantly affecting the future of the chemical industry: sustainability, demographics, and technology.
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The situation of the chemical industry is becoming more and more complex Two years ago, we observed a change in investors' attitude towards the chemical industry and speculated on the possible reasons. Now let's review these observations to confirm potential assumptions and trends. As these challenges persist, the relative stock performance of the chemical industry continues to deteriorate. We now see that the growth rate of demand for chemical products is declining. Major trends such as accelerated Deglobalization and potential regulation to curb climate change will not make this easier. In this article, we describe how the strategic context of the chemical industry has changed and discuss how covid-19 may affect these considerations. Three trends that may change the future In this context, we see three other trends that significantly affect the future of the chemical industry: sustainability, population structure and technology. Sustainability The strong increase in the intensity of human economic activities has led to a series of worrying ecological development, such as climate change, water shortage, biodiversity reduction and other challenges. Let's pay attention to climate change: the earth is warming, and the choices left to mankind are limited. One of them is to significantly reduce consumption in industrialized countries in order to achieve the maximum acceptable carbon dioxide emissions within the framework of preventing a temperature rise of 2 ° C in 2050 (Table 2). If this approach is not successful, society will need to fully electrify its energy supply (and increase its dependence on renewable energy or nuclear energy) - which is likely to require huge investment. Unfortunately, if humans fail to successfully curb climate change, they will face consequences. The above three situations are all challenges faced by the chemical industry. As the promoter of the material world, it may need to deal with the relevant reduction of demand. The current debate about plastic recycling clearly shows that the best way to reuse materials is not to use them from the beginning. Any serious application of circular economy may have a negative impact on the overall demand growth of chemicals, which depends on the exposure of each company's product portfolio. In addition, global electrification may push up energy prices (at least in some regions), making physical production more expensive, thereby reducing demand. In order to plan for the future, chemical companies need to find answers to what these situations mean to their product value chain - from the availability and price of raw materials, to the price position of production routes, and then to changes in customer
demand. Regardless of the situation, as we see the earth continue to warm and the number of catastrophic events increases, regulation may play an increasingly important role. Parts of this provision may vary from jurisdiction to jurisdiction. Industry associations are likely to see their role as a channel for chemical enterprises to expand to the government. As the chemical industry is an important direct carbon dioxide emission industry, the main management team has begun to include carbon emissions and broader environmental goals in their agenda. This is only the initial stage, and the pressure from various stakeholder groups will deepen. In the context of the diversification and fragmentation of the chemical market, this development may bring opportunities to those who make the right strategic initiatives. Different portfolios will have different exposures to upcoming regulation and upcoming trends. For example, the body of autonomous vehicle may be made of plastic, because the number of accidents has been greatly reduced, and they are no longer required to be made of steel and aluminum. Other examples may include insulating materials (used for construction and protection of power infrastructure from the increasing risk of wildfires), materials for energy storage, building chemicals used to protect the coast, or bio based or recyclable materials. In order to take advantage of these opportunities, chemical companies need to consider strategies under a certain degree of uncertainty, and they may still be forced to make high-risk bets. For an industry accustomed to relatively predictable demand growth, this will be a new experience. Demographic and geopolitical tensions In many countries, life expectancy is increasing and birth rates are declining. However, another demographic development has a greater impact on our lives: the transfer of relative wealth from the west to the East. By about 1970, China and India accounted for less than 10% of the world GDP, while western countries and Japan accounted for more than 80%. This situation has changed. China alone has accounted for more than 30% of the global chemical demand and supply, and the target of 40% seems to be about to be achieved. In principle, this obviously positive development can help people get rid of poverty and provide greater equal opportunities for more people on earth. As the political turmoil intensifies, the chemical industry must face the differentiation of supply chain standards and other economic constraints. Many indicators show that different standards may continue to exist, or even form. Fortunately, most chemicals are essentially multi regional products rather than truly global products. However, for many enterprises, intercontinental trade is still very important, such as those that can obtain
advantages in raw materials or labor costs, and many chemical enterprises rely on customers to transport their products from one continent to another. A specific example is the capital allocation of Greenland assets or cross-border mergers and Acquisitions: according to different trade scenarios, the assets of some countries may be very valuable (entry trade is restricted) or contingent liabilities (raw materials or exports are restricted). All multinational companies will have to deal with the consequences of this new world and reposition themselves to make themselves more cross regional within the scope permitted by governments. This task is particularly challenging for Western players, who may find themselves partially excluded from the eastern growth market. On the contrary, the phenomenon of excluding Eastern players from the western market is also increasing. In addition, the technology leadership may gradually shift to the East, which makes the situation of Western companies more difficult. Technology Historically, the chemical industry has generally been slow to accept new digital or analytical technologies. In addition, the current wave of artificial intelligence (AI) has reached the coast of chemical companies quite slowly. This can be easily rationalized, because the chemical industry is the provider of physical goods. Usually, the number of suppliers of a specific product is relatively small, so the industrial utilization rate is relatively high. Nevertheless, new digital approaches can provide incremental and related benefits (mainly around assets and business productivity). However, we are very careful not to use these developments to predict the future, especially considering the acceleration of technological development and the possible impact on the chemical industry: AI is becoming increasingly common in all activities that process large amounts of data, such as production, marketing and sales, and research and development, which opens a new path for superior functionality and delayed capital expenditure. Leading chemical companies have begun to make the necessary investments in these capabilities, thereby benefiting from the resulting productivity improvements ("excellent functions of analysis support"), and can lay a solid foundation for the future technological progress of AI. The availability of real-time information has the potential to change decisions. Having more reliable information (such as sales, costs and inventory) earlier than other players may constitute a competitive advantage and eventually become a desktop bet - lagging behind will be a major disadvantage. The level of pattern recognition achieved by AI may improve the performance transparency of equipment and employees, chemical products (especially professional products), management teams, personal activities or business lines. This transparency
will inform shareholders and educate them on the company's business and strategic performance. Technology may lead to the automation of some processes (e.g., the negotiation between pricing machines and purchasing machines) and change the way chemical companies think about the complexity and scale of administrative activities, especially internal and outsourcing. Although the entire chemical industry is unlikely to experience a revolution, the changes it faces will continue to accelerate and eventually significantly change the way things are handled. Chemical companies will need to remain vigilant and keep up with these developments.