Two years ago, we observed a change in investor sentiment towards the chemical industry and speculated on the possible reasons. Now let’s re-examine these observations to identify potential assumptions and trends. As these challenges continue to have an impact, the relative share price performance of the chemical industry continues to deteriorate. We are now seeing a decline in the growth rate of demand for chemical products. Major trends such as accelerated de globalization and potential regulation to curb climate change will not make climate change easier. In this article, we will describe how the strategic context of the chemical industry has changed and discuss how covid-19 may affect these considerations.
Shareholders are increasingly skeptical
Investor sentiment on the chemical industry continues to change. In recent years, the traditional performance of the chemical industry has not only slowed down, but also turned into a worrisome underperformance between 2017 and 2019, so it is completely independent of the covid-19 crisis (Table 1).
When we look at why shareholder sentiment has changed, we can look at two drivers of value in any industry: return on investment capital (ROIC) and growth.
ROIC: the chemical industry successfully improved ROIC in the first half of the survey period. However, since 2011, the industry ROIC has not grown further, and recently began to decline globally. In many areas, the proliferation of new competitors dominated by Chinese enterprises is leaving traces.
Growth: in the past 20 years, even before the advent of covid-19, the growth in the number of chemicals has been on a downward trend. The forecast shows that this trend is largely driven by the increasingly mature Chinese market.
These three trends are likely to change the future
In this context, we see three other trends that significantly affect the future of the chemical industry: sustainability, demography and technology.
Sustainability
The intense increase of human economic activity has led to a series of worrying ecological development, such as climate change, water shortage, biodiversity reduction and other challenges.
Let’s focus on climate change: the earth is warming, leaving us with limited options. A framework in which an industrialized country would significantly reduce consumption to meet the maximum acceptable carbon dioxide emissions, preventing a temperature rise of 2 ° C by 2050 (Table 2). If this approach is not successful, society will need to make full use of rechargeable energy supply (and increase renewable energy dependence or nuclear) – at all possibilities, requiring huge investment. Unfortunately, if humans fail to control climate change successfully, they will face consequences.
Demographic and geopolitical tensions
In many countries, life expectancy is increasing and birth rates are falling. However, another demographic development has had a more powerful 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’s GDP, while western countries and Japan accounted for more than 80%. That has changed. China alone has accounted for more than 30% of global chemical demand and supply, and the target of 40% seems within reach.
In principle, this obviously positive development can help people out of poverty and provide greater equal opportunities for more people on earth.
technology
Historically, the chemical industry has been slow to adopt new digital or analytical technologies. In addition, the impact of the current wave of artificial intelligence on chemical enterprises is quite slow. This can be easily rationalized because the chemical industry is the supplier of physical products, and there are usually relatively few suppliers for specific products, so the industrial utilization rate is relatively high. Nevertheless, the new digital approach can provide incremental and related benefits (mainly around assets and business productivity).
