The chemicals/energy industry market is ripe for continued growth even in uncertain times of geopolitical, environmental, and regulatory compliance unrest. As the industry moves toward even greater commoditization, the growth of new business models tied together with digital platforms is becoming an enabling reality.
The chemical industry enjoys a competitive advantage from robust supplies of shale gas and natural gas liquids (NGLs), leading to significant investment in new capacity and capital spending that will continue. In 2018, strong gains were seen in agricultural chemicals, consumer products, coatings and bulk petrochemicals, and specialty chemicals, and this will expand. U.S. exports will grow this year supporting the expanding trade surplus in chemicals due to expansion and strong demand from foreign and domestic downstream markets.
However, there are risks related to protectionist trade policies which reduce the competitiveness and growth performance of chemical manufacturers operating globally. A tariff war between the largest chemical consumers in the world, China and the U.S., could hurt global chemicals prices, and demand from key end markets such as autos and general industrial. Slowing growth in the early 2020s represents a threat to strong chemical market conditions.
Several trends that will reshape refining and chemicals industries during the year and beyond:
Rise of the Digital Supply Network
The chemicals industry is instrumental in every industry and is strongly asset-based. Nevertheless, the chemical industry will be impacted from within its own industry and greatly by its customers. A new industry digital supply network is on the rise.
In a digital supply network future, size will not be the key to success as in today’s world of economies of scale and synergies. Recent chemical industry trends, such as digital supply chain, vertical and horizontal integration with everybody and everything, big-scale M&As, and the move downstream toward special chemicals, are short-term thinking because they stay within the current scope of operations. Chemical companies are now converging toward digital supply networks and a network of network concept.
In a digital supply network environment, it is less about a service, solution or product. It’s about an overall solution combined from multiple building blocks and generated by joint co-innovation or collaboration for value to a customer. The industry will act more like a network of players than a value chain of competitors.
Specialty chemicals was about being special, resulting in serving a niche market. Now, having everybody heading downstream makes markets too small to operate economically and erodes the margins that initially attracted everybody. Global trade flows for digital supply network businesses will diminish, reshaping the supply chains of today.
The Tie That Binds
Bringing foundation and specialty organizations together results in the establishment of a third category: digital platform businesses. These digital supply network platform businesses are the glue holding all parts together. Their reason for being is that the glue requires a certain independence from the foundation and the specialty businesses to become a trusted partner.
Foundation companies will offer commodities to the specialty business, which then combines and intertwines them into the digital supply network offering. The interaction between the foundation and specialty businesses will be handled via the platform. The digital supply network is primarily used for basic end-to-end supply chain services, such as managing the products and services that are being sold, moved and bought.
With emerging blockchain and distributed ledger technologies, opportunities exist for a decentralized platform stack that operates autonomously based on defined rules (e.g., smart contracts). This will be a highly possible option for the platform between the foundation and the specialty business as the business contracts for these commodity goods are very well defined, which is prerequisite to establishing successful smart-contract-based platforms.
David Cahn is director of global marketing for Elemica.
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