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TEXT 3. CHEMICALS INDUSTRY TRENDS IN 201656
The chemicals industry faced significant headwinds in 2015: a strong
dollar, slowing emerging economies, malaise in Brazil, stagnation in Europe
and Japan, and a cyclical downturn in the agricultural sector. In addition to
having to operate in an unfavorable economic environment, many chemicals
companies also found themselves the target of activist investor campaigns last
year. Among the companies feeling pressure were Air Products, American
Pacific, Calgon Carbon, Ferro Corporation, LSB Industries (Engine Capital),
and OMNOVA Solutions. Activist investors also fostered the largest chemicals
industry transaction of 2015, the merger of DuPont and Dow Chemical.
A recurring theme for most of the activist investors was the lack of a
compelling rationale or coherence in the existing portfolio of target
businesses. As a result, many chemicals companies began to reconsider
their product lines, sometimes as part of a merger or acquisition. The large
and growing firepower accumulated by activist funds – which had
US$169 billion under management in mid-2015, according to FTI
Consulting, up from $93 billion in January, 2014 – suggests that shareholder
activism will continue to be a factor in the industry in 2016. As a result, if
you are a chemicals executive, don’t expect the coming year to be any less
challenging than the last few. You can expect that three particular issues –
business portfolio coherence, next-generation productivity, and digital
transformation – will be at the top of your agenda in the next 12 months.
(1) BUSINESS PORTFOLIO COHERENCE. In general, investment
interest in the chemicals industry is surging because of an ongoing
dynamic: consolidation around more coherent business portfolios. Activists
perceive a lack of clarity and logic in company asset portfolios, which grew
disjointed as firms pursued two strategic approaches for too long: chasing
existing molecules into new stages of the value chain; entering new product
lines, a move that was often justified by the company’s presence in an
adjacent or similar customer segment.
These strategies seemed to make sense for a time. But as the maturity
cycle in segments of the chemicals industry sped up and the value chain became
increasingly commoditized, this approach began to backfire. For example, in the
early stages of PVC development, it might have been possible for a PVC resin
producer to expand its profit potential by owning its own fabrication businesses.
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However, over time a more transparent and heavily populated PVC producer
market developed, and the benefits of vertical integration became less apparent
as viable stand-alone fabrication competitors emerged.
Similarly, when specialty products were “special,” bundling different
product lines was advantageous, particularly for chemicals companies whose
specialty items were in strong demand. They could use the strength of bestselling products to squeeze increased sales and profits out of their other lines.
For example, a plastics additive provider with a popular (and unique) heat
stabilizer compound might assemble a related but disparate portfolio that also
included UV stabilizers and antioxidants. But as many specialty chemicals lost
their one-of-a-kind privileges as low-cost suppliers entered these product lines,
the new competitive realities emboldened customer procurement departments
to demand ever-greater control over their orders – the viability of unrelated
product bundles disappeared.
Given these conditions, your responses should be targeted, systematic,
and dispassionate:
- Conduct an objective assessment of your portfolio by revisiting its
underlying rationale. Examine closely whether you are benefiting from
product integration, production scale, and portfolio breadth. Eliminate
products that are found to depress company performance.
- Identify missing elements that would logically improve your portfolio
without detracting from scale and productivity. A supplier of ingredients
for base lubricants might consider acquiring additional products or
technologies that would allow it to expand into new additive areas that
are produced with the same manufacturing processes as the original
product and distributed via the same channel.
- Develop an M&A playbook that outlines multiple potential outcomes for
your company in terms of markets, products, customer base, and financial
performance and the associated pathways to reach them. This includes a
logical and efficient manufacturing plan for your product lines, target
acquisitions, desirable sequence of acquisitions, contingencies, and
options. This playbook will allow you to act quickly when M&A
opportunities arise that are suitable for your company’s goals and portfolio
and also let you be proactive in taking other approaches to market that are
not linked to mergers and acquisitions.
(2) NEXT-GENERATION PRODUCTIVITY. Over the past decade,
leading chemicals companies have derived significant economic benefits
from excellence initiatives segregated into individual corporate functions.
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Now, however, these initiatives have generally reached the point of
diminishing returns, and have even become counterproductive as companies
chase growth in a low-growth environment. The reason for this reversal is
that isolated optimization efforts often succeed at the individual functional
level but inadvertently hinder cross-functional corporate performance. The
result: Companies’ ability to tap into and make the most of growth
opportunities is impaired, as is their ability to allocate capital efficiently.
Here’s how this phenomenon played out at an engineering polymers
company. It began innocently enough when corporate executives mandated a
substantial increase in orders from emerging markets. The company’s sales
team fanned out to these new regions, not realizing that customers there were
different from the firm’s “traditional” accounts. In general, these new
customers wanted to place more products in a single order but purchase a small
amount of each item and also request some customization. To secure the
business, sales staff promised that the company could meet these requirements,
but they hadn’t checked first with manufacturing and supply chain operations.
That’s when things got dicey. The supply chain team, having gone
through an extensive optimization program, refused to carry higher levels of
inventory; the unit complained that small amounts of many different products
would only add to the complexity of managing the logistics channels. This
meant that manufacturing had to disrupt its carefully designed lean production
system to make this large group of products on a just-in-time schedule.
This battle between conflicting functional priorities at the company led to
seesawing performance – some orders went unfilled, others were filled but
unprofitable – and before long the customer had departed for a more nimble
competitor. Your company can address this misalignment between functional
improvement efforts and corporate strategic priorities through what we call nextgeneration productivity. The cornerstone of this approach is to adopt an end-toend perspective of the business, from customer needs through company
capabilities. To fully appreciate the possibilities in this approach, take these steps:
- Conduct an impartial assessment of the true growth potential in the
markets that you currently control or hope to gain a foothold in. This
should be an honest analysis, not the wishful, rosy forecast that you
would like to be able to make to investors.
- Ask the company’s functional units to describe how they can meet these
growth goals and to provide objective cost and complexity assessments
for every action that they recommend.
- Explore the trade-offs and conflicts in the recommendations from each
functional unit through the lens of organization-wide productivity gains
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and revenue and sales growth. Adopt the approach to this assessment: must
have for elements that are needed in order to stay ahead of the competition,
and discretionary for possibilities that are desirable, even intriguing, but
not totally necessary to meet the organization’s immediate goals.
- For must-have activities, strive for functional excellence across the
organization, smoothing out activities that would introduce inefficiency
or waste in interwoven or neighboring functional units. Simultaneously
determine how you can undertake promising discretionary programs and
product launches, differentiating the organization without too greatly
compromising its excellence benchmarks.
- Reinvest savings from organizational productivity improvements into
upgrading discretionary and differentiation activities in the marketplace.
Engineering plastics, crop chemicals, and specialty fibers companies that
have adopted next-generation productivity have enjoyed significant reductions
in expenses. These can range up to 20% in sales and administrative expenses,
15% in manufacturing and supply chain costs, and 25 to 30% in working
capital outlays.
(3) DIGITAL TRANSFORMATION. It has been a long time since the
blockbuster breakthroughs, particularly in plastics, that characterized the late 20th
century. Since then, chemicals companies have had to make do with incremental
technological advances. As a result, it is critical that you embrace digital
transformation wholeheartedly, because leveraging new technologies in ways
that bring your company closer to its customers is going to be a significant source
of value for the industry in the coming years. Offerings based on digital
innovation will finally allow you to achieve a goal many chemicals companies
have been desperately targeting for decades: becoming a true solutions provider
and partner to customers instead of a mere supplier or vendor.
Chemicals companies that are early adopters are already making
waves with digital strategies. For example:
A supplier of process chemicals has installed sensors in dispensing
equipment that allow its technical services people to optimize
consumption at the customer’s site. These sensors are also providing
access to a host of other process data for analysis, which is yielding
valuable ideas for optimizing the company’s customer’s operations.
A supplier of vibration monitoring and other measurement devices has
connected its equipment to the cloud and is offering advanced
diagnostic services to chemical plant operators.
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A leading polyolefin producer is developing tailored grades suitable for
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3D printing. This will permit it to serve a rapidly growing segment of
the fabrication industry.
The current zero-growth environment, complete with shifting market
dynamics, creates a challenging environment for chemicals companies, but
one with significant potential if it is managed well. Ironically, perhaps the
smartest course you could take is to adopt an activist mentality yourself,
rather than bristling against the ideas proposed by maverick shareholders. In
other words, by focusing on improving productivity, organizational
efficiency, and digital capabilities, your company may in fact make allies of
investors and survive intact while disarray claims the competition.
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TEXT 4. OIL AND GAS TRENDS IN 201657
“The Stone Age did not end for lack of stone, and the Oil Age will end
long before the world runs out of oil.” So said Sheikh Ahmed Zaki Yamani,
former Saudi Arabian oil minister, in an interview in 2000.
Sixteen years later, Yamani’s words neatly sum up the troubled state of
the oil and gas (O&G) industry. Although the demise of oil is still some time
away, it’s clear that the sector is going through one of the most transformative
periods in its history, which will ultimately redefine the energy business as we
know it. Navigating change of this scale will require smart, strategic judgment
on the part of O&G company leaders. They must tackle cost and investment
concerns in the short term while readying themselves to respond to the future
impact of inevitable external environmental pressures.
The sensational drop in oil prices – below US$40 per barrel at the end of
2015, down more than 60% from their high in the summer of 2014 – reflects
rampant supply and weak global demand amid concerns over slowing
economic growth around the world, especially in China. This imbalance is only
going to worsen this year. Saudi Arabia continues to pump at full tilt, less
concerned about propping up oil prices and more intent on securing market
share, hoping to drive out marginal producers, particularly in the United States.
As early as the second quarter of 2016, the flow of Iranian oil is likely to
increase, adding to the glut. Even Middle East instability, such as the tension
that erupted between Russia and Turkey in Syria toward the end of 2015, has
not budged crude prices. Consequently, we expect oil prices to remain low for
the near future, although it would not surprise us if volatility returns.
The impact of this situation on O&G producers has been rapid and dramatic.
In the third quarter of 2014, when oil prices were still above $100 per barrel, the
supermajors posted aggregate net income of $22.9 billion, according to Bloomberg.
Twelve months later, upstream profits had been wiped out. In response, companies
are slashing outlays. They are expected to cut capital expenditures by 30% in 2016.
Already, some $200 billion worth of projects have been canceled or postponed.
Both international and national oil companies are negotiating aggressively for 10 to
30 percent discounts from oil-field service providers. Head counts are affected as
well. More than 200,000 employees have been or will be let go in the O&G
industry, according to recent company announcements.
This reaction is not enough – or perhaps it is too much. Massive cost
cutting may offer some short-term breathing space, but it is a myopic,
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panicky response that could leave businesses unequipped for the next turn of
the business cycle.
What, then, will forward-thinking O&G executives do? If you are one
of those executives, you are probably already beginning to think and act
differently than you have in the past. It is time to reassess the purpose and
strategic direction of your company, and to find a profitable role to play in the
new O&G landscape. O&G executives must address a vital existential issue:
how to successfully do business in an increasingly carbon-constrained world.
Competition, slumping oil prices, and glutted energy demand are not
the only giant-scale factors affecting your business. The O&G landscape is
being significantly reshaped by a potent emerging trend: the fear of climate
change and a powerful, concerted effort to reduce CO2 emissions and
minimize fossil fuels. If you are a business leader in this industry, your most
important task this year is to address or at least face up to a vital existential
issue: how to successfully do business as an O&G company in an
increasingly carbon-constrained world.
Actions taken by industrialized nations to lessen global warming by
curtailing the use of fossil fuels gained momentum in June 2015. The leaders of
the G7 industrialized nations issued a communiqué calling for the phasing out of
petroleum-based energy by the end of the century. Six months later, nearly 200
nations at the COP21 summit in Paris agreed to a goal of limiting global
temperature increases to less than two degrees Celsius above preindustrial levels
and to reach net-zero greenhouse gas emissions in the second half of the
century. This deal appears to represent a collective commitment by nations large
and small to move away from fossil fuel production and consumption. This
anticipated outcome of the meeting did not deter the CEOs of 10 of the world’s
largest O&G companies (BG Group, BP, Eni, Pemex, Reliance Industries,
Repsol, Saudi Aramco, Shell, Statoil, and Total) from declaring their support for
what became the COP21 targets a month before the Paris meeting.
Given the reality of diminished fossil fuel use in the future – and the
gradual acceptance of that reality in the energy industry – a slew of questions
immediately arise.
– Will upstream oil companies end up with stockpiles of “unburnable”
petroleum reserves? If so, should they abandon all exploration activity?
– Will downstream refiners need to rejigger their configurations to
accommodate more biofuels and emission-abatement technologies?
– Will natural gas–focused companies be better positioned to manage the
transition to a low-carbon economy?
– Should large integrated O&G companies double down on low-carbon
technologies in their portfolio?
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These queries demonstrate the turbulence and complexity that energy
company executives face – and they are only the beginning. As with any other
transformation, managing the uncertainties requires a plan that takes advantage
of current conditions and simultaneously prepares the organization to bet on
options for a potential “new normal”: a stable business within the maelstrom of
change. For O&G companies, the right plan can be undertaken with three steps.
First, review the business strategy to refocus your organization on
what you do best and where you can best outpace competitors. As the
emphasis on fossil fuels wanes, it is critical to avoid becoming overextended
in legacy areas. Look for growth areas where you already have massive
strength that you can draw on, but where you are agile enough to adapt to
changing market conditions. For example, exploration and production
demand two very different business models. Production has significant
funding requirements, whereas exploration involves substantially higher
risks. All too many exploration firms have delved into production, only to
discover that the complexities of these operations, and the capital and skills
needed to support them, drain the business of resources and make it hard to
do either activity well. Downstream-focused companies have had similarly
unsatisfactory experiences when dabbling in upstream activities during the
past decade. Those types of missteps and overreaching are potentially
disastrous in today’s handicapped O&G market.
Instead of broadening your business to pursue every opportunity you
see, develop a more targeted approach to strategy. For example, Occidental
Petroleum spun off its Californian asset into a separately listed company.
Now Occidental is focusing on enhanced oil recovery, a sophisticated drilling
method that can extend the life of producing fields. Similarly, Apache is
emphasizing developing an expertise in managing late-life assets abandoned
by the majors; for example, it has acquired the 50-year-old Forties drilling
site in the North Sea and intends to extend its productive life by 20 years.
Second, no matter how difficult things get, avoid arbitrary cost cutting,
which can leave your organization ill prepared for an uncertain future. Instead,
channel funding into the areas of growth that best promote your differentiating
capabilities. In addition, O&G companies must link their investment programs to
options that are suitable for a more carbon-constrained operating environment.
This is not to suggest that you radically change your portfolio and begin
deploying wind farms on decommissioned oil platforms. Nor do we forecast that
pure exploration and production oil companies will be out of business in
20 years. But in the much shorter term, we think every O&G company will have to
figure out how to produce oil competitively while reducing its carbon footprint as
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much as possible. Part of the solution is demonstrating a greater focus on energy
efficiency. Statoil has taken steps in that direction by launching an ambitious
internal project to review every turbine and compressor it operates on the
Norwegian continental shelf. It intends to upgrade or replace equipment as
needed to reduce its carbon footprint.
Even integrated O&G companies should seriously consider incremental
diversification, moving gradually into low-carbon technologies to manage the
evolution of products as fossil fuels are phased out. For example, figure out
whether you have the capabilities to invest in natural gas as a transition fuel. In
November 2015, Royal Dutch Shell’s purchase of BG Group made it the
world’s largest liquefied natural gas trader. This deal and others reflect the fact
that natural gas is a preferred fuel for power generation in the U.S. and many
other parts of the world, especially as its price has dropped and made it more
desirable than coal for cost and environmental reasons. If your company’s
strengths are not suited to natural gas, consider acquiring and managing
renewable energy sources such as wind, solar, and biofuels.
Third, O&G companies need to exploit new technology to innovate,
minimize costs, and help contribute to achieving a lower-emissions
environment. For example, as oil prices plunge, demand for digital oil-field
applications will grow. Opportunities to link multiple platforms operated
remotely from a single onshore center or to deploy remote monitoring for
onshore and offshore operations can obviate the need for physical on-site
inspections. One supermajor, BP, is already adopting drone technology to
inspect pipelines at its remote Prudhoe Bay field in Alaska.
Look into technology that can retrofit existing equipment for refining
and producing renewable energy. Some large O&G companies, including
ConocoPhillips, Eni, and Neste, are investing in refining processes to replace
diesel with fuel from soybean, palm, and canola oils as well as fats and animal
tallow in airplanes and commercial transportation. In short, as we enter the
second year of low prices, every company in the O&G industry will be
challenged in a different way. You will have to rise to the occasion,
repositioning yourself based on what you do well today as well as on the
opportunities you see going forward. Your skill at managing new business is
part of this; the industry will hardly disappear, but it will certainly look very
different 10 years from now. Some strategies for success are evident; others
will be surprising – even to the companies that make them work, for the
innovations that make them possible are not yet even on the drawing board.
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TEXT 5. CHEMICAL INDUSTRY VISION 2030:
A EUROPEAN PERSPECTIVE58
Vision 2030 outlines emerging challenges, analyzes the current
positioning, and highlights imperatives for the European chemical industry
in positioning itself to stay ahead in the game.
The European chemical industry is facing major challenges as value
chains increasingly move eastward, drawn by economic growth and market
opportunities in Asia. A new, more competitive environment is taking shape,
giving rise to state-controlled players and emerging chemical giants. Fragile
economic conditions require managing volatility on a playing field where trade
flows gradually change direction. Understanding what these challenges mean,
and more importantly, identifying the right strategic options to thrive in this new
competitive environment are at the top of every chemical executive’s agenda.
Since the mid-1980s, the global chemical industry has grown by 7%
annually, reaching €2.4 trillion in 2010. Most of the growth in the past
25 years has been driven by Asia, which now owns almost half of global
chemical sales. If current trends continue, global chemical markets are
expected to grow an average 3% in the next 20 years, mostly pushed by the
major players in Asia and the Middle East. Enjoying a home-field advantage,
Asian players are positioned to own two-thirds of the market by 2030.
Meanwhile, growth in Europe is expected to be moderate at just 1%. In
fact, we expect more than 30 % of jobs to be lost in the European chemical
industry by 2030 as a result of slow growth and productivity gains.
Considering the stable, slow, and somewhat linear evolution of the
European chemical industry, the “ruler strategy” is likely to apply in the next two
decades. This strategy disputes the emergence of disruptive market events,
arguing that the chemical industry will largely continue to follow the trend of
recent years. This is because of the dominance of robust shifts in the global
economy, asset longevity, absence of major chemical revolutions and continuing
innovation in established areas such as biotech and fuel cells. If the ruler strategy
is accurate, Asia will dwarf North American Free Trade Agreement (NAFTA)
countries and Europe in terms of chemical production by 2030.
Customer industries will continue their move to Asia, ending the
dominance of Western demand patterns and giving rise to a multipolar
playing field with diverging requirements. The changing direction of trade
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https://www.atkearney.com/documents/10192/536196/Chemical+Industry+Vision+2030+A+Euro-
pean+Perspective.pdf.
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