The future of the chemical industry
The year ahead may offer financial uncertainty, but it also has abundant opportunities, says Andrew Hagan
2008 promises to be an important year for the chemical industry. Tremors in the financial markets, not to mention the geopolitical scene, are impacting the global business environment.
Yet the slowdown of the US economy may not spell doom for the industry. There is plenty of liquidity, with buoyant sovereign wealth funds likely to play a big role in all sectors. The combination of fund locations - particularly in the Middle East - with regional development strategies means that the chemical industry will probably figure prominently in their investment deals.
Another significant factor will be the new dynamics needed to address global challenges such as climate change, environmental sustainability and the rapid growth of developing economies.
Indeed, China has declared its intention to 'blaze a new trail to industrialisation' by focusing on a science and innovation-driven economy.
China has also recognised that while lower labour costs will not be permanent, the global trend towards siting production clusters near to supply or market must continue. This globalisation has already transformed the industry in recent years, leading to new players, the disappearance of some old names, fragmentation into smaller, more focused companies, and new technologies being harnessed.
The demise of some bigger companies need not be worrying for an industry that exists in a dynamic economy, based on innovation in products and processes.
However, analysts at consultancy firm McKinsey have highlighted the worrying point that, overall, the industry today appears to be performing poorly in creating value through innovation, with just 20 per cent of chemical companies earning a substantial return on their R&D spending.
Collaboration between China and Europe will increase significantly over the coming years. Their activities in climate security, for example, are inextricably linked by their common goals. Europe could be purchasing 77 per cent of the carbon credits generated in China by 2012. They face similar challenges in energy security, with both predicted to import 80 per cent of their oil supply by 2030. And they have similar proposals for transition to a low-carbon future, including a high-efficiency building research platform, and cooperation on energy efficient and low-carbon technologies.
This collaboration is a prerequisite for the innovations that will ultimately provide the solutions to global challenges. A recent study at the World Economic Forum's Chemical Industry Community showed that collaboration with the construction, automotive and energy communities will be essential if the industry is to help reduce greenhouse gas emissions. The global greenhouse gas abatement cost curve produced by McKinsey, in collaboration with Swedish power company Vattenfall, shows that some of the most cost effective solutions come from the chemical industry. New insulating materials, innovative coolants, and improved membranes for carbon capture and storage, could all have a huge impact on carbon emissions.
Regular dialogue with sister industry communities, government and other stakeholders can allow the chemical industry to maximise its potential as the great innovator and solutions provider to global challenges. That's a major reason why the future promises so much for the industry and its supporters.
Andrew Hagan is Global Leadership Fellow and Head of Chemical Industry for the World Economic Forum