The decade ahead
Preparing for an unpredictable future in the global chemical industry1As the global economy emerges from the Great Recession of 2007–2009, the chemicalindustry ﬁnds itself passing through a period of profound transformation. Proﬁt marginshave been shrinking; return on capital has been in steady decline. The recent recessionhas only exacerbated the problems. The commodity side of the business has beeninvesting in large-scale advantaged capacity in developing markets and is now strugglingwith overcapacity. Among the fragmented specialty producers in developed markets,competition is growing more ﬁerce, end markets are in chaos, and rationalizationcontinues. Integrated players, wary of declining proﬁts on the commodities side, aresearching for ways to shift their portfolios to include more specialized products.To gain deeper insights into the performance of the chemical industry, the Deloitte ToucheTohmatsu (DTT) Chemical Group analyzed the ﬁnancial and operational performanceof 231 global public chemical companies between 1998 and 2008, including specialty,commodity, and integrated players. This analysis shows that proﬁtability has suffered inboth the commodity and specialty sectors. Proﬁts will continue to decline unless stepsare taken to reverse the trend. In the coming decade, established strategies will bean inadequate foundation for success and may not ensure survival. New approachesare required as prerequisites for competitive viability. Naturally, the speciﬁcs of theseapproaches vary by sector.For commodity chemical companies, the priority remains to preserve cash and increasefree cash ﬂow but in many cases that is quite a challenge. Excess capacity will be a majortheme in the years ahead, prices will come under further pressure, margins will be furthersqueezed, and any cash that is wasted will be missed.The specialty chemicals sector faces several challenges independent of the competitive pressures inthe commodity sector. Companies in this sector will need to ﬁnd better ways to focus on customerbehavior and tailor their operations to offer only the most proﬁtable products and services.For integrated chemical companies, it is reasonable to assume that both commodity andspecialty challenges will apply. Additional acquisitions will be a prime objective in the yearsahead, particularly as a means of moving farther downstream into the specialty chemical sector.The industry is further delineated by geography. Commodity chemical companies areshifting to lower cost, higher future demand centers in the developing world and today,the Asia-Paciﬁc region holds the market share lead. The Middle East has a smaller butgrowing share but demand is quite unlikely to match supply. Meanwhile, the chemicalindustry continues to play a key role in the economies of the United States (U.S.) and theEuropean Union (EU). That said, even specialty producers are ﬁghting to keep market shareand are facing new competition, including from companies located elsewhere. For the suggested changes, there are common themes, including adopting a moredisciplined and focused approach that responds to new challenges. Underlining thesemeasures is the pursuit of strategies based on clear and distinctive value propositions thatare themselves based on an in-depth understanding of customer needs and preferences.
1 Executive summary