The global chemical industry is on a rollercoaster. From the whiplash of the COVID-19 pandemic to fluctuating markets and shifting consumer demands, it’s been a wild ride. But amidst the chaos, there’s a fascinating story unfolding – one of adaptation, innovation, and a bold new way of thinking about the future.
The Pandemic’s Punch:
The COVID-19 pandemic dealt a significant blow to the chemical industry, disrupting supply chains, impacting demand, and forcing companies to adapt quickly. Lockdowns, factory closures, and transportation bottlenecks created a perfect storm of uncertainty.
A Multiverse of Strategies:
Enter Deloitte’s insightful “Multiverse” framework. This innovative approach analyzes chemical companies based on their financial position and business models, creating a fascinating “map” of the industry. It reveals a diverse landscape of players, each navigating the challenges in unique ways. Some are focusing on cost-cutting and asset optimization, streamlining operations to weather the storm. Others are investing heavily in research and development, seeking to innovate their way to success. Still others are exploring mergers and acquisitions, seeking to consolidate market share and gain a competitive edge.
The Survival of the Fittest (and the Smartest):
The chemical industry is proving its resilience. Companies are implementing aggressive cost-reduction strategies, including closing underperforming plants and optimizing assets. This isn’t about simply cutting costs; it’s about strategic realignment, focusing resources on areas with the greatest potential for growth.
Looking Ahead: Moderate Growth and Strategic Moves:
Despite the challenges, the outlook for the chemical industry remains relatively positive. Deloitte predicts moderate growth in 2025, driven by increasing global chemical production. Mergers and acquisitions are expected to play a significant role, shaping the industry landscape and creating larger, more resilient players.
The Takeaway: Embrace the Uncertainty:
The chemical industry’s journey is a testament to the power of adaptation and strategic thinking. The “Multiverse” framework highlights the diversity of approaches, demonstrating that there’s no one-size-fits-all solution. Embracing uncertainty, adapting to change, and making bold strategic moves are key to navigating this dynamic landscape and emerging stronger than ever. The future of the chemical industry is being written now, and it’s a story worth watching!
In 2024, the chemical industry made moderate progress, with output increasing compared to 2023. Production levels are forecast to continue rising as the destocking cycle weakens and demand increases for most products. To further boost revenue growth, chemical companies have launched cost-cutting programs and begun improving margins, while continuing to invest in decarbonization technology and innovation. While these cost reduction plans are still being implemented, margins have begun to recover in the first half of 2024.
Looking back over the past few years, the chemical industry has experienced dramatic fluctuations in market conditions since the outbreak of the COVID-19 pandemic in 2020. In 2020, the epidemic led to shrinking demand, declining production and reduced revenue. Then, between 2021 and 2022, chemicals production and revenue rebounded strongly as demand picked up and concerns about supply chain issues triggered inventory build-ups.
However, towards the end of 2022, supply chain issues gradually eased, key end markets began to reduce inventories, and demand for chemicals also declined. By the end of 2023, the chemical industry’s revenue fell by 8% year-on-year, operating margins fell to their lowest point since the Great Recession (2007 to 2009), and return on capital returned to pre-pandemic levels.
Looking forward, the chemical industry is expected to continue to maintain moderate growth in 2025. According to forecasts from the American Chemistry Council (ACC), global chemical production will grow by 3.4% in 2024 and 3.5% in 2025, compared with a growth rate of only 0.3% in the second half of 2023. Still, even as chemical production recovers and profit margins return to average levels, the industry still faces many challenges and uncertainties.
In the upcoming 2025, chemical companies will encounter similar difficulties as other industries, including the changing macroeconomic environment, adjustments to policies and regulations in various regions, the evolution of customer preferences, and the rapid development of technology.
“Multiverse” analyzes the current situation of global chemical companies
Deloitte has updated its Chemical Multiverse analysis with the latest data for 2023, aiming to delve deeper into how the performance of global chemical industry companies in recent years will shape development trends in 2025 and beyond. The analysis is based on an exhaustive methodology). This 25-year longitudinal study covers more than 300 global chemical companies and takes a comprehensive look at each company’s current operating status through segmented assessments of multiple financial indicators.
In the study, chemical companies were considered on two core dimensions: one is the financial resources at their disposal, and the other is their ability to use these resources to create returns. These two dimensions form a two-dimensional plane that is used to draw the competitive positioning map of chemical companies, thereby providing guidance for the company’s future strategic decisions.
Based on this analytical framework, chemical companies are divided into four different strategic groups: strategic leaders, strong choice group, middle ground group and limited choice group. While each group has its own characteristics, overall, strategic leaders stand out the most in terms of financial strength, while the strong choice group demonstrates higher business performance than the middle position and limited choice groups.
It is worth noting that due to turbulent factors such as shutdowns caused by the epidemic, the number of companies in the middle ground group has decreased, and more companies have moved toward stronger (i.e., “strong selection group”) or weaker ones due to differences in operating performance. (i.e., “limited selection group”) position transfer. Additionally, the analysis revealed two important observations:
First, between 2018 and 2023, while earnings before interest, taxes, depreciation, and amortization (EBITDA) fell across almost all groups, cash and securities holdings generally increased across groups. In particular, Multiverse’s cash and securities holdings grew by 27%, while EBITDA grew by just 2.6% during the same period. This shows that companies in various groups are actively hoarding liquidity to cope with economic uncertainty and increase the flexibility of future investments.Secondly, the investment growth of enterprises in the strong selection group in R&D and net fixed assets is particularly significant, far exceeding that of other groups.
In addition to segmentation based on financial positioning, Deloitte’s Chemical Multiverse uses an innovative classification approach that classifies chemical companies based on their business models rather than traditional product types. This approach is intended to more accurately reflect the responses of different businesses to long-term development strategies. Based on this classification, chemical companies are divided into three categories: natural owners, differentiated goods and solution providers.
The strategic priorities of these three types of enterprises are different: natural owners focus on reducing operating costs to consolidate their dominant raw material position; differentiated goods serve cyclical industries and focus on improving capital efficiency and technology leadership; and solution providers Business is primarily focused on selling comprehensive solutions involving system-level design and engineering.
Cost effective
From 2023 to 2024, many companies announced cost reduction plans to deal with rising operating costs and lower operating rates due to lower demand, inventory backlogs, and excess capacity in certain chemicals. The plans include measures to improve the efficiency of factory and back-office operations, redesign processes to align spending with macroeconomic conditions, layoffs and close some factories.
According to a survey of its members by the American Chemistry Council (ACC), more than 18% of respondents stated that capital investments in 2023 will mainly be used to improve operational efficiency; another 26% mentioned replacing existing facilities. and equipment were among the main drivers, suggesting some businesses are taking advantage of lower operating rates to carry out maintenance and upgrade work. It is worth noting that many cost control projects started in 2023 are expected to continue into 2025 or 2026.
Pressure on assets is also affected by regional factors. Between 2022 and 2023, European chemical plants are hit by the double whammy of rising inflation and soaring energy prices, reducing market demand and squeezing profit margins. The EU inflation rate reached 11.5% in October 2022, while the US inflation rate in June of the same year was 10.1%. In addition, as natural gas prices have increased by approximately 70% compared to pre-crisis levels, the production cost advantage in Europe has weakened.
At the same time, lower-than-expected demand in the Chinese market has also caused financial losses to many companies. Asian countries have also been affected by reduced demand from China and volatile LNG prices. Although the petrochemical industry is performing better in the United States and the Middle East, thanks to relatively low energy and raw material prices, U.S. companies are still profitable and may need to make up the difference by improving efficiency.
Overcapacity issues within the petrochemical industry coupled with lower-than-expected demand have contributed to low operating rates. At the beginning of 2024, the average operating rate of European ethylene plants was only 70%-75%, which is far lower than the 80%-90% range generally expected by the industry. The return on investment averaged 17.9% between 2004 and 2013, falling to around 13% between 2014 and 2023.
Therefore, starting from 2023, many companies in the Netherlands, Germany and France have begun to adopt asset optimization strategies, including closing some production bases or reducing the size of their employees. Such adjustments are expected to have an impact on global trade patterns, with increased demand in Europe likely to be filled by exports from the United States or the Middle East in the future.
This asset optimization trend is expected to continue into 2025, as companies recognize that market recovery is unlikely in the short term and look to take the opportunity to move to new markets that are more cost-effective and conducive to growth. For companies with limited or in-between options, these initiatives can help improve performance and help them move into more profitable areas.
In addition, after experiencing relatively sluggish transaction activity in previous years, 2025 is expected to see more mergers and acquisitions as interest rates gradually stabilize and more companies will seek to expand and achieve their goals by re-evaluating their business portfolios. The case was announced