Two years ago, we observed a change in investor sentiment toward the chemical industry and speculated about the potential reasons. Now, we revisit those observations to confirm the underlying assumptions and trends. The relative share performance of the chemical industry has continued to deteriorate as these challenges continue to be in effect. We now see an ongoing decline in the growth rate of the demand for chemical products. Major trends such as the accelerating deglobalization and potential regulation to curb climate change will not make it any easier. In this article, we describe how the strategic context of the chemical industry is changing and discuss how COVID-19 might influence these considerations.
The sentiment of investors toward the chemical industry continues to change. The traditional overperformance of the chemical industry has not only slowed over recent years but also turned into a concerning underperformance from 2017 to 2019—and thus totally independent of the COVID-19 crisis (Exhibit 1).
The chemical industry succeeded in increasing its ROIC in the first half of the investigated period. However, industry ROIC has not grown further since around 2011 and has recently started to decline globally. The proliferation of new, predominantly Chinese competitors in many segments is leaving a trace.
All three scenarios are challenges for the chemical industry. As the enabler of the physical world, it may need to deal with a relevant reduction in demand. The current debate about plastics recycling makes this clear: the best way to reuse material is nonuse in the first place. Any serious application of the circular economy will likely negatively affect overall demand growth for chemicals, depending on the exposure of each company’s product portfolio. In addition, global electrification may inflate the price of energy (at least in some geographies), making the production of physical objects more expensive—thus reducing demand.
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To plan for the future, chemical companies will need to develop answers for what these scenarios mean for their products’ value chains—from the availability and prices of raw materials, to the price positions of production routes, to the changes in customer demand. Regardless of scenario, regulation will likely play an intensifying, crucial role as we see the planet continue to warm and the number of catastrophic events increase. Part of this regulation will likely vary by jurisdiction. Industry associations may very well see their role as the conduit for chemical companies to articulate themselves to governments expand. And as the chemical industry is a significant direct emitter of CO2, leading management teams have started to incorporate carbon and broader environmental targets into their agendas. This is only the start—pressure will deepen from various stakeholder groups.
