Stop wasting time waiting for the end of the downcycle

THE CHEMICALS industry continues to wait for the end of the downcycle. But as I discussed in my 26 July blog post, what if we have entered a period of secular change? What if we are waiting in vain for the end of the downcycle and thus wasting valuable time?

If we are indeed waiting in vain, and I believe we are, this affects everything from how we view short-term markets to long-term corporate strategy.

Major secular changes occur very infrequently. The last big change was the start of the Chemicals Supercycle in 1992 as China liberalised its economy.

Many other favourable events followed, leading to a huge growth in chemicals demand. This was a tide which lifted all boats regardless of competitive strengths or weaknesses.

Because secular changes to markets occur infrequently, it is very easy to miss the connections between events that lead to these changes. I therefore think it’s important to summarise the connections I see between the events unfolding now to results in biggest shift in the chemicals landscape we’ve seen since 1992.

See my summary below of the ten interconnected forces shaping the new chemicals landscape.

1. Demographics are economic destiny. The fewer people you have, the less is demand (demand is per capita or person consumption multiplied by of course the number of people). Most of the G20 countries, which account for more than 70% of global polyethylene demand (chemicals and polymers are equivalent to economic activity) are seeing ageing and so declining working age populations (where peak earnings take place) and declining total populations.
2. Immigration is of course the answer to some extent, but this is politically very difficult in the West.
3. In the regions and countries where populations are youthful, not enough people – because of politics in the West – are likely to be able to move to the rich world for better economic opportunities, and to escape conflicts and the effects of climate change.
4. Climate change will more likely be successfully mitigated in the rich world. But the Developing World ex-China is at risk of not getting the financing and technologies it needs to also mitigate the impact. In India, for example 70% of the workforce work outdoors.
5. China is the immediate centre of the crisis for the global chemicals industry because global capacity was added on assumptions of 6-8% per annum China chemicals demand. Because of debts, demographics and the geopolitical split with the West, even minus chemicals growth in China now seems possible.
6. Geopolitics mean that we are likely to see a change in chemicals trade flows. A bipolar world – one centred on China and its allies and the other on the US and its allies – is one outcome. Another is an even more fragmented and de-globalised world with many national and regional markets.
7. The oil and gas majors could end up dominating chemicals to compensate for declining oil demand due to electric vehicles (EVs) and fuel efficiency, as China moves to chemicals self-sufficiency by itself and/or with imports only from its geopolitical partners in the Middle East. But will the growth in EVs continue when the full life-cycle implications of EVs become apparent? And how will the weight of the incumbents in the old transportation value chains shape outcomes?
8. What we do know is that we are in the early stages of a new industrial revolution driven by sustainability.  
9. But as was the case with the start of the original industrial revolution, which occurred in Britian, it is impossible to say what will be the winning and losing technologies. Nobody knows the futures of mechanical and chemicals recycling, biofuels, bio- naphtha/biofuels, bioplastics, biodegradable plastics and green and blue hydrogen etc. All we can therefore do is to test and learn in sustainability while remembering that a new industrial revolution is indeed taking place.  
10. For chemical companies without strong feedstock advantages, without the right geopolitical locations – and which have too much exposure to the diminishing China import markets – it is success in sustainability that is the route to new competitive advantage.  

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