Q1. Could you start by giving us a brief overview of your professional background, particularly focusing on your expertise in the industry?

Since 2021, I have been serving as a Board Advisor and Independent Consultant in the chemical industry and related segments, including marine fuels and plastics recycling. My primary focus is on developments in the petrochemical landscape, including steam cracking and downstream derivatives, as well as decarbonization strategies.

Prior to that, I worked for 30 years at BASF in various roles and locations (Malaysia, Portugal, USA, Germany, and the UK) across fine & intermediate chemicals, global procurement, including infrastructure and pipelines, Home & Personal Care, and General Management. My last role was Managing Director of BASF UK & Ireland.

 

Q2. How are global trade dynamics, including the rise of “Fortress China” and capacity expansions in Asia and the Middle East, influencing growth forecasts independent of GDP trends?

“Fortress China” refers to China's drive for self-sufficiency in various value chains, not just the chemical sector. It encompasses the substitution of imports by own production and the resultant displacement of trade inflows from previous trade partners such as Europe, North America, and the Middle East.

This strategy has led to a massive overbuild of capacity globally as other regions have expanded their capacities. In the same period, Chinese domestic demand from key sectors such as construction has dropped significantly, impacted by, e.g., the Evergrande collapse and structural topics such as demographic development.

This unprecedented build of overcapacities (still ongoing) in products / value chains as varied as olefins, polyolefins, polyurethanes (MDI/TDI), polyamide precursors (ADN, HMD, Adipic, Caprolactam…), intermediate chemicals such as 1,4 Butanediol (going into e.g. PBAT) and vitamins, to name but a few examples, will influence the global market and trade flows beyond 2030.

“Fortress” also implies that the penetration of the Chinese market by foreign companies has become more challenging. The Middle East is simultaneously continuing to expand its own capacities downstream of its oil and gas production and refining, and by definition, it has to move into the main petrochemical building blocks. The US has similarly expanded its ethylene production significantly off the back of shale gas and therefore has to export an increasing percentage of its production to maintain utilisation rates. Europe, with its structural disadvantages, appears therefore as the target export market for various regions, leading to the closure of a significant portion of European petrochemical capacity.

This is a high-level view of the supply side.

These global issues, in addition to specific European issues such as failed EU policies, uncompetitive feedstock and energy costs, sub-scale and aged assets, have contributed to the exit from Europe, or downsizing of global players´ European portfolios such as Dow, Lyondellbasell, ExxonMobil, Sabic, Westlake, Huntsman et al (all with multi-regional assets). European-based owners, such as Ineos, BASF, and Evonik, are similarly reshaping the scope of their activities.

These structural issues in the industry, the resulting new trade flows, and the massive increase in tariffs and frictions such as anti-dumping duties, take us back decades to the pre-globalisation era. Comparative advantage theories and globalisation are thus unravelling.

 

Q3. How does the decoupling phenomenon vary across developed, emerging, and frontier markets in the global chemical industry?

Having looked at the supply side, now to the demand side, and the decoupling of chemical industry growth from the traditional GDP correlation. Measuring global GDP is a highly complex topic due to different national and regional definitions and the fact that statistics can no longer be viewed as independent of political influence.

The shift to the service economy over the last few decades has fundamentally changed the composition of GDP, which has altered the relevance of chemical industry demand forecasts. Therefore, more sector-specific and granular demand-related indices and correlations are required, which reflect the key sectors downstream of the chemical industry.

Technology has changed and is contributing to new demand patterns. For example, in polymers, the development of a broad range of recycling technologies is denting the demand for virgin polymer, rendering extrapolation of past trends inappropriate and inaccurate.

Technology is the key element, but it requires policy frameworks to support and incentivize its adoption and implementation.

There is no stopping the speed of technological development, as seen in AI.

However, Europe presents an interesting case due to the misalignment between policies and technology. Plastics recyclers are struggling and collapsing as a result, and recycling rates have plateaued.

Technological advancements also mean that less plastic material is wasted in various production processes, and more importantly, less material is required in many applications due to improved processing and control technologies, as well as stronger materials.

Additionally, there is regulatory pressure in the form of regulations and laws to increase recycling quotas and ban plastic in various applications. Inter-material substitution (glass for plastic, cotton for polyester, etc) also comes into play (irrespective of the science) due to consumer perceptions and industry lobbying. The issue of plastic pollution and the collapse of the UN treaty continue to negatively influence the perception of the value of plastics, which we know are of indisputable value for our society, well-being, and in many cases cannot be substituted.

The above decoupling effects will play out differently across developed, emerging, and frontier markets; there is no stereotype for the impact based on the state of development. The speed of technology adoption depends on the development of regulatory frameworks that parallel it.

A developed region such as Europe is seeing stagnation in e.g., recycling quotas due to EU's failed policies.

Conversely, developing regions are able to “leap frog” existing status quo technologies and systems and potentially have a higher propensity to innovate and gain advantages.

So, a more specific country or regional analysis is necessary.

 

Q4. What impact does the evolving energy transition and delayed Net Zero implementation in mature markets have on chemical industry profitability and investment priorities?

The evolving energy transition is proving to be a bumpy road and is heavily dependent on regional and national government policies worldwide. Sustainability and ESG considerations appear to have been relegated to a much lower priority due to political and economic pressures. The differences between the regions appear to be increasing. A regional perspective is required to understand the dynamics.

Probably the largest shift taking place is in the US, with the unraveling of the IRA, and in recent weeks, the announcement that well-progressed renewable energy projects are being halted (e.g., the Orsted offshore wind project). This heightened uncertainty surrounding project viability will have a far-reaching effect, therefore deterring investment.

Downward Pressure on Margins

Simultaneously, the a.m. overcapacity situation is exerting massive downward pressure on margins, leading to projects in the chemical industry being postponed or cancelled (e.g., the Dow Path2Zero project in Saskatchewan). There should be no expectation that margins will return to previous levels (ceterus paribus).

Lower margins and the fight for survival mode of operation among many players means that the willingness to pay a premium for lower-carbon offerings from the chemical industry, both at the B2B and B2C levels, has thus been eroded.

The unlevel playing field between regions in terms of feedstock, energy cost, and carbon cost is a fundamental issue.

The EU´s plan to extend the CBAM system beyond the existing in-scope industries and chemical product groups into further petrochemical commodities appears flawed. The levies associated with the (highly bureaucratic) CBAM carbon regime appear to be insufficient to compensate for the cost advantages of production in lower feedstock and energy regions. In situations of overcapacity, full cost pricing takes a back seat, and contribution margin pricing strategies come to the fore.

In summary, Net Zero 2050 appears to have been pushed out by a decade…or two if one is being realistic.

 

Q5. Where do significant growth opportunities lie for chemical firms adapting to new demand structures and evolving market realities?

There can be no standard answer to this question, as each company has a different starting point and status quo product portfolio. The much-touted generic strategy of shifting to so-called “specialties” is fundamentally flawed. This is due to the lower volumes in the target segments, legacy commodity assets that cannot simply be written off, and the inherent impact on pricing and margins in “specialties” if there are multiple new entrants. “Specialties” do not, by definition, have higher margins.

What appears to be happening already, however, is that companies are becoming more focused in their strategies and moving out of peripheral activities where they lack a competitive advantage.

One such consequence appears to be the shedding of infrastructure assets (e.g., in the US and Europe), with “Chem Parks” receiving a broader scope of assets with existing and new financial investors from outside the chemical industry.

However, in each region, there will be different growth opportunities based on that Region´s response to the new geopolitical situation.

For example, in Europe, new priorities have been set for national government funding for defence and armaments, a clear long-term growth industry. The EU alone is funding a 170 billion euro defence funding plan known as the Security Action for Europe (SAFE).

And in Germany, the government has established a 500 bill euro Infrastructure Fund. Probably a trillion euros are earmarked for investment in Europe in the next 8 – 10 years.

These initiatives represent significant demand for the chemical industry at a high level. The devil is in the details, as always.

 

Q6. Which product innovations and development strategies are enabling chemical companies to capitalize on demand shifts and maintain growth momentum?

Maintaining growth momentum is a goal that most players in the industry are not achieving based on the described supply-demand economics.

This is leading to a focus on cost reduction and process optimisation.

R&D goals are, by definition, long-term, and breakthrough innovations appear to have slowed as established company organisational structures reach their limits. The “outside in” approach and Open Innovation strategies are probably going to be the winning ones going forward. Developing joint initiatives with stakeholders in segments such as those receiving multi-billion-dollar subsidies / financing, as outlined above, appears to be a good starting point.

 

Q7. If you were an investor looking at companies within the space, what critical question would you pose to their senior management?

In my view, management´s forecasts have been overly optimistic over the last 8–12 quarters, based on their status quo business models, misplaced expectations of a cyclical rebound in a structural crisis, and, in specific situations, failed acquisitions.

Therefore, my questions would focus on identifying disruptive initiatives to profit from the changed status quo. “More of the same” would make me nervous in the new geopolitical reality.

I would also request a higher degree of transparency regarding a company's “right to win” and the required capabilities, given that commoditization is affecting an increasing number of segments.