Chemical companies have spent the past two years in “firefighting” mode as COVID-19 tested corporate resilience and the industry struggled with supply-chain disruptions, increased feedstock volatility, changing customer behavior, and higher costs of doing business. Overcoming pandemic-driven disruption preoccupied company agendas, particularly as distorted oil and gas prices complicated feedstock management.

Looking forward, the risks and disruption facing the industry will become increasingly transformative. And while COVID-19 may not be officially done with us yet, it’s time for the industry to switch its focus from short-term problem solving to the development of strategic agendas centered on sustainability and the needs of decarbonization. 

Time’s up to act

For the past 100 years, the industry’s business model has been to sell ever greater volumes of the energy-intensive, carbon-based products that essentially define it to this day. That business model cannot survive long-term in a world that is struggling to achieve net-zero carbon emissions in the next 30 years.

We’ve reached a tipping point, and failure to deal with the challenges of climate change and the dramatic overhaul of supply chains and value propositions that it portends may spell a company’s doom — maybe not this year or in five, but certainly at some point over the next 10 to 20 years. Proving a company’s sustainability will define the decade’s winners and losers. At present, few in the industry are fully prepared to embrace that journey toward the reimagined business models that will define the industry’s next 100 years.

For an industry that depends so heavily on oil, the pressure to decarbonize will become the overarching disrupter, whether in response to regulation or pressure from activist investors and consumers.

But it’s not only about taking out the carbon. There are also increasing calls for the industry to make less-toxic products that are safer for humans and the environment.

Relying on ESG priorities 

Companies must begin evaluating all issues through an environmental, social, and governance (ESG) lens moving forward. With anticipated population growth and the increasing demand for almost everything because of it, players will need to find sustainable ways to serve these customers through alternative technologies, new feedstocks, and portfolio realignments. The bar is being raised on both corporate transparency and responsibility, and companies that fall short are also likely to find it hard to find funding.

That’s the cloud that hangs over the industry. Even so, 2022 is likely to be a year of moderate to strong expansion, as the world emerges from COVID. If the industry is forward-thinking, it will use the financial momentum in 2022 to help finance the gradual shift away from fossil fuels and invest in new ways of manufacturing and increased recycling that will define chemicals moving forward. So far, much of the industry has chosen to sit on the sidelines — producing more promises than real progress on cutting carbon emissions and redefining sustainability.

While sustainability has been on the corporate radar for a long time, most companies remain overwhelmed by both the magnitude of the problem and the investment required to address it.

Strategic levers to consider

But demands from regulators, investors, and customers are only likely to get louder, and companies that are not seen making progress are apt to get punished in the marketplace. Increasingly, failure to meet sustainability targets represents the single greatest long-term risk to companies, putting even their license to operate in jeopardy. Companies that fail the sustainability test may find themselves locked out of financing, especially as banks and other institutional investors focus on greening portfolios and making ESG priorities core to investment strategies.

The chemical industry is in a unique position for value creation for itself and other industries through the development of alternative materials and fuels. But it is time to graduate from just talking about opportunities and move toward realizing them.

Here are four strategic levers that can help chemical companies accelerate that transformation:

1. Apply a customer-centric lens.

Key to identifying ESG-related transformation opportunities is a deep understanding of the changing customer buying behaviors and new priorities that will put various parts of the portfolio at risk.

While chemical manufacturers allowed an increasingly commoditized marketplace govern their agendas, value for next-generation chemicals will be defined as much by service as by delivery of a product.

2. Think circular economy.

Reliance on a circular economy will reshape many value chains—with plastics being the most obvious one. Embracing a circular mindset requires rethinking all activities, from product development to end-use. In other words, you need not only tell customers to recycle; you need to design products with that in mind and then track every phase of product life until they make it back into raw materials.

Recycling can no longer be regarded as good citizenship; instead, it must become good economics. Besides designing with products with recyclability in mind, the industry must invest in the development of efficient, large-scale technologies. All forms of plastic must be made to be recycled and recycled easily to allow municipalities and businesses of all sizes to participate economically. 

3. Participate in new ecosystems.

With the rise of new materials and technologies, alternative energy sources and fuels, and circular-economy business models, new business ecosystems should and will emerge. The waste management industry, for example, will become a full-fledged player in the chemical industry and will need to become part of every chemical producer’s value chain. Incumbent chemical players need to understand these emerging marketplace dynamics, so they can form the partnerships and alliances necessary to thrive.

 4. Leverage technology across value chains.

Digitization is an enabler of the coming change. In this new low-carbon environment, companies will have to achieve end-to-end transparency into supply chains, tracking molecules from origin to use. For instance, intelligent transport systems can guide logistics to routes with lower emissions, or data-driven insights can support optimizing energy and resource use in customer processes. But all this presumes much deeper customer integration and interaction than exists today.

As the decade progresses, it will become painfully evident that sustainability and viability will depend on strategic transformation of business models and supply chains. And that necessity is likely to materialize as early as 2022. The industry is embarking on an exciting time full of opportunity, innovation, and hard work, but also with plenty of potential pitfalls along the way — especially for those who think they can coast.

Niklas Steinbach also contributed to this article.

More Thoughts on the 2022 Outlook From the Chemicals Practice