Chemical and Materials Industry Resilience
In response to the pandemic, companies have shifted production to meet the increased global demand for hand sanitizers and surface disinfectants. Certain active substances, such as alcohols, have been in short supply - and chemical multinationals around the globe have stepped in to provide finished products or active substances. The German chemical company BASF, for example, has reallocated tons of isopropanol production for hand sanitizers. Dow Chemical has meanwhile shifted production at several plants to manufacture an estimated 200 tons of sanitizer weekly.
The COVID-19 pandemic has created serious challenges, but also significant opportunity. As the coronavirus spreads, the chemical and materials industry has been identified as crucial for public health, economic development, and national security - classifying it as “essential critical infrastructure” in the US.
The industry has also provided essential chemicals and materials such as polymers to make protective gloves, masks, gowns, face shields, ventilator pumps, valves, bottles, 3D printed gadgets, syringes, and tubing. Regulators have facilitated this by easing guidelines for fast-track production. For example, the US Environmental Protection Agency announced they would temporarily allow manufacturers of disinfectants to source products that have not been checked first by the agency.
In the near term, the industry could be affected by COVID-19 in terms of lowered productivity, unpredictable demand, supply chain disruptions, feedstock price volatility, and workforce health. PwC expects that the chemical industry’s automotive, transportation, and consumer products sectors will be among the hardest hit, with demand for chemicals declining by as much as 30%. On the other hand, demand for pharmaceuticals, food additives, and disinfectants has been rising.
As chemical companies consider what the recovery may look like, they are planning for steps to build greater long-term resilience. Overall, the industry should focus not only on long-term objectives related to economic growth, but also those related to social and environmental responsibility. This is perhaps the perfect time to increase green investments via government stimulus packages, and move closer to achieving the UN Sustainable Development Goals.
The sector’s supply chain is historically dependent on China, which was initially hit hard by the outbreak, and many companies are starting to relocate the production of critical chemicals closer to customers. The industry’s workforce is particularly vulnerable, given that the bulk of its production cannot be done remotely.
The chemical and materials industry is increasingly tied to the energy sector. New business models that focus on solutions and services for chemical products have the potential to replace traditional sales of new items - with the added benefit that chemicals can be perennially managed and used by the same skilled technicians, with proper oversight of the “end-of-life” stage that is ideally geared towards circularity (re-using rather than disposing of) and responsible risk mitigation.
The products generated by the chemical and materials industry are deployed in just about every aspect of human activity, and often in places where the collective knowledge about the chemicals involved in making those products is limited.
However, developments in these fields generally face the challenge of how-to best deal with slow reaction rates, and with the necessity to operate in dilute conditions.
The industry’s interaction with the energy sector is becoming increasingly close, in the sense that the more significant the energy price reduction, the higher the profitability involved in the transformation of energy (using electricity) to make chemical products; this is a is a particularly relevant dynamic in a period of excess of electricity production from renewable sources. Meanwhile the diversification of energy storage possibilities can mean greater stability for electric grids, and for modular, rapid start-up and shut-down electrochemical plants.
In addition, the chemical industry can transform many forms of organic waste into biofuels and hydrogen. This can in turn be used together with electrochemical storage processes to realize a multi-vector system of energy storage, which can bring added displacement security to the “smart grid” management of solar and wind energy sources. Biotechnology and genetic engineering have both created opportunities to apply life science to chemical synthesis - and are already having an impact on multinational companies like the British-Swedish pharmaceutical giant AstraZeneca and Novo Nordisk, the world’s biggest insulin maker, where colonies of genetically-engineered bacteria are being programmed to prepare bulk chemicals, pharmaceutical ingredients, monomers (the basic elements in polymers, such as dodecanoic acid, butanediol, or caprolactam), and biofuels. Meanwhile advances in computing technology (including quantum computing), protein science, and genetic tools promise to enable the safer, more efficient, and increasingly sustainable production of chemicals and fuels.
CHEMICAL AND MATERIALS INDUSTRY
Projections indicate that, by 2030, China will account for more than half of all global chemical sales.
The chemical and materials industry contributes roughly $5.7 trillion to global GDP, according a report published in 2019, and supports an estimated 120 million jobs. Now, the industry is grappling with the challenges of COVID-19 as it attempts to shift to more sustainable practices - while at the same time generating products that both improve living standards and enable cleaner forms of mobility. Its center of gravity has been shifting to the East, as China captures an ever-larger share of sales and feeds massive infrastructure and manufacturing initiatives.
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Decarbonizing the Chemical and Materials Industry
The electrification of chemical plants via cheaper and more efficient electrochemical batteries, or through the use of electric furnaces and electrochemical processes, can help reduce the sectors’ carbon footprint. Electrochemical technologies will be particularly key, because of their high efficiency and selectivity - which will significantly reduce purification trains following reaction steps. In terms of process optimization, an electron can be used twice, by combining the oxidation and reduction reactions. In addition, the emergence of new and organic electrically-conductive solvents create the possibility of performing nearly any organic reaction.
New technologies and processes can help reduce the sector’s significant carbon footprint.
The chemical and materials industry accounts for a large portion of global greenhouse gas emissions - particularly the cement, iron and steel, and petrochemical sectors. According to the International Energy Agency’s Reference Technology Scenario, emissions from these sectors are expected to grow by 24% between 2014 and 2050. Each therefore faces intense pressure to improve process efficiencies, and to rethink production methods in ways that replace fossil fuels with low-to-zero emission electricity. This will involve retrofitting furnaces and other equipment, and using energy efficiency technologies like multistage cyclone heaters - which can be applied in both developed and developing countries.
Process emissions can be mitigated by coupling electrified processes with carbon capture technologies and “chemical looping” (a relatively new process that aids carbon capture). This will enable using CO2 as a feedstock to manufacture goods - including substitutes for cement and carbon fibres.
Ultimately, electrolytic hydrogen manufacturing faces stiff economic competition from legacy processes that involve reforming hydrocarbons to produce hydrogen and CO2 (CO2 emissions are still free, after all).
One way to correct this would be to place meaningful taxes on carbon emissions. In addition, biomass feedstocks could replace fossil fuel feedstocks as a means to reduce emissions - though it is essential to use low-emission technologies to process biomass into feedstocks. And, once recycling and circular economy approaches are in place, they will help capture and sequester the CO2 resulting from the destruction of biomass-based products. Overall, the industry can play an essential role in the broader, ongoing transition to low-carbon electricity and manufacturing.
Hydrogen-based industrial processes still require significant development, though the technology underpinning the electrolytic production of hydrogen is mostly available. These plants are scalable by adding modules, though there are limitations on this due to the size of polymeric membranes.
Large amounts of M&A are reshaping the sector, though global tension and COVID-19 have curbed activity. Consolidation, the expansion of product portfolios, and efforts to specialize are major M&A drivers, with the highest rates of activity observed among commodities, fertilizer, and agricultural chemicals businesses. M&A has been an optimization tool for the industry, enabling it to navigate in the context of declining margins, product commoditization, and growing competition in emerging markets. However, it has proven to be insufficient to drive organic growth that is enduring. In 2019, global chemical M&A volume declined by 3% compared with the prior year, amid growing geopolitical tensions and the trade dispute between the US and China, which led to the economic uncertainty.
In an era when resource consumption is coming under increasing public scrutiny, and COVID-19 is adding significant new constraints, companies in the chemical and materials sector have been pushed to find new ways to grow. The sustained pace of mergers and acquisitions activity between 2015 and 2018 was both an indication of structural changes afoot in the industry, and of the increased need for these transactions as sources of growth.
Even as M&A activity pulled back, however, it still remained relatively strong. Many segments within the industry remain fragmented, providing opportunities to continue to create value through M&A. In addition, the trend of traditional oil and gas companies moving downstream into petrochemicals has continued - Saudi Aramco’s acquisition of SABIC was the largest chemical deal of 2019.
In parallel, shifting public expectations and regulation, and new technologies, are affecting the business models at chemical and materials firms. The pandemic could affect deal-making in numerous ways, and any participants in ongoing or anticipated transactions should take whatever steps they can to mitigate any related disruption.
Some plastics materials suppliers are exploring new models that incorporate recycling facilities into their operations, for example; the chemical company LyondellBasell and the utility SUEZ created a joint venture to recycle used plastic into a high-quality polypropylene (a polymer), and Eastman Chemical established a partnership with Circular Polymers to convert used carpeting into feedstocks for polymer products. The outbreak of COVID-19 may cause potential buyers and sellers in the industry to suspend and rethink M&A.
Chemical and Materials Sustainability
Chemical and Materials Talent
Every year, million tons of plastics are disposed of, and only a small fraction is recycled - and related pollution may grow as plastic production expands. Addressing this will require public-private cooperation, and for the industry to work hand-in-hand with policy-makers to replace hard-to-reuse materials with novel ingredients manufactured using renewable feedstocks such as food waste or biomass.
In general, the concept of polymer recycling - mainly through chemical processes - is becoming more prominent in terms of biodegradability and compostability. Particularly in developed countries, waste will increasingly become source of raw materials through the process of urban mining. The industry in these countries must also develop new techniques to clean landfills.
The industry has made efforts to lessen its impact on the environment.
By the end of 2020, the global market for “sustainable chemistry” is expected to reach $86 billion - and to then increase by 10% annually. Companies are reducing their use of noxious substances, creating safer products, and lowering the impact of chemical processes on human health and the environment. The terms “sustainable” and “industry” have not been associated together in the past, damaging public perception.
However, the industry, especially in the European Union, has generally stayed ahead of its sustainability targets. Environmental standards in China are becoming more stringent, as thousands of operating sites are shut down every year. Economic incentives have meanwhile been implemented to push research and development aimed at decreasing carbon dioxide emissions. The industry must also develop technologies that help utilize resources more efficiently.
Artificial photosynthesis is one of these promising technologies - solar energy is captured in chemical bonds, and used to split molecules such as water into hydrogen and oxygen atoms. Hydrogen can then react with atmospheric CO2 to create energy-rich chemicals and biofuels. Continuous manufacturing is meanwhile expected to remain a critical technology for reducing the handling of highly-energetic or hazardous intermediates.
Technologies that enable a reduction of the manufacturing footprint and localized, on-demand production may be critical in the age of COVID-19 - which has demonstrated how risky it is to rely uniquely on international trade from countries in Asia.
The circular economy concept, where materials are reused and recycled rather than disposed of, is also gaining momentum. The industry is positioned to contribute to this through innovation that helps address plastic pollution, for example.
A redefinition of work is required across the industry, and proactive collaboration between knowledge centers such as universities and think tanks, governments, and companies is necessary to best take advantage of related opportunities and minimize risks. That is because industry leaders regularly cite a shortage of appropriate skills as one of their most severe challenges when it comes to keeping up with innovation. Addressing the industry’s public perception issue could help it attract new graduates.
The chemical and materials industry is faced with at least two serious challenges when it comes to its workforce. The first is a need to redefine, reeducate and adapt in the context of the Fourth Industrial Revolution and its associated, constantly-evolving technologies. The second is related to attracting and retaining the best talent. The technological transformation of work is changing reality for millions of workers and companies, and the chemical and materials industry is no exception.
Technologies like robotics, artificial intelligence, and 3D printing are creating exciting opportunities for businesses in terms of productivity, and in the ways that they can potentially replace unhealthy, dangerous, and repetitive tasks for workers.
According to the results of a survey published by the American Chemistry Council and Accenture Talent Management in 2016, recruiting and retaining top talent was a significant concern for management, and 87% of respondents highlighted the fact that the industry is suffering from a poor public image that can make it unattractive to new graduates.
Companies in the sector have to recognize the need to proactively address this issue, as they remake workforce models to better attract talent.
Most of these leaders recognize a need to foster new skills in order to make their organizations more agile, and to become better equipped to embrace new technology developments as they arise. For incumbent players to fully exploit Fourth Industrial Revolution technologies to maximum benefit, there is an urgent need to invest in employees. In response, many organizations are exploring new ways to develop and acquire the right skill sets, to enhance diversity, and to develop greater agility - even if these same organizations sometimes struggle to identify which key competencies they will need in the future.
The China Effect
By the year 2030, it is expected that China will account for more than half of all global chemical sales (both domestic and international), while the EU and the US combined will account for just one quarter of all sales. The reason for this relatively smaller share of the pie is that both the EU and the US will continue to face mounting competition in the coming decades from manufacturers in other regions of the world where there are less-stringent rules and regulations, companies enjoy more favorable tax policies, and they have generally easier access to cheaper sources of energy and feedstocks.
The country is expected to account for more than half of all global chemical sales by 2030.
China has become both the largest market in the world for the chemical and materials industry, and the most important source of growth when it comes to chemical demand. As a result, the country’s local firms are primarily focused on sales in domestic markets. By way of contrast, Europe remains the location of the world’s largest chemical trade surplus, and the biggest overseas market for the US - though its relative market share has been falling in recent years.
However, the ability of Europe and the US to counter this mounting competitive threat the next few decades will largely depend on four factors: their capacity to take the lead on the current transformation of the chemical and materials industry, their ability to draw foreign investment, their ability to grow their markets, and their navigation of trade policies.
In general, the tightening of environmental regulation is profoundly influencing the industry’s strategic decisions. And, there is newer uncertainty related to the impact of COVID-19, with some data pointing to a significant downturn in production capacity - though the full effect of the pandemic on global value chains is not yet clear.
Germany and other EU countries have already established mechanisms to carefully review foreign investment; in 2018, Germany implemented guidelines that enable the government to intervene in the public interest if a non-European purchaser buys a stake in a domestic company equal to 10% or more. Meanwhile China’s chemical and materials industry is delving into more specialized markets, and is becoming more selective about growth (several Chinese companies are entering the specialty chemicals market).
Digitization and Chemicals
By 2025, it is estimated that 20% of global energy consumption will be attributable to the acquisition, communication, and processing of digital information.
The industry must try to embrace digital trends without contributing to increased energy consumption. Digitally-accelerated biotechnology that enables the direct-route production of chemicals is particularly relevant to the industry. Large multinationals like BASF and Solvay have launched online stores on Alibaba’s B2B platform, while startups such as ChemSquare, a B2B platform for buyers and sellers of raw materials and ingredients used in food and pharmaceuticals, threaten to disrupt traditional procurement and sales processes. On the research and development side, large chemical companies have announced partnerships with the likes of IBM, Google, and Hewlett-Packard related to data management, machine learning, and quantum computing.
One problem with the spread of digitalization is the increase in related energy consumption.
While chemical companies once embraced digital technologies for process optimization, digitalization has now expanded to every aspect of the value chain - from laboratory research, to marketing and sales, and customer interaction. In a sense, digital technologies are creating unprecedented transparency.
Artificial intelligence and data mining are aiding the invention of new materials and monomers (basic units of everything from Teflon to polystyrene) for increased circularity, while advanced analytics and the Internet of Things are boosting energy efficiency, emission reduction, and traceability. Blockchain is meanwhile increasingly used to independently verify transactions and contracts, and to facilitate the secure transmission of molecular information without the need for paper documents.
All III-V compound semiconductors from gallium arsenide to indium phosphide will continue to be used where they bring the advantage of the higher electronic mobility. In addition, the importance of fiber optic networks for increasing digitalization cannot be overlooked. In addition to the classic ceramic glasses that utilize rare earths, polymeric materials remain essential - particularly for local networks.
In terms of portability, emerging flexible materials will be key; the possibilities they present are remarkable, such as flexible screens for smartphones.
Advanced 5G mobile technology could quadruple the energy consumption of current technologies, for example. It is therefore essential to deploy smart systems able to shift among multiple sources of power generation and end-users, in order to enable more efficient, reliable, and low-cost digital operations. While most new sensors and devices will be based on silicon technologies, 5G devices will be made of silicon carbide - which has reached the maturity necessary for mass production.