Dr. Stan Higgins' Column : Change: Business As Usual For The Chemical Sector
Posted On : 26th February 2015

Has there ever been a more changeable outlook for the chemical industry? It seems to me that the process of change in the chemistry using industries hasin fact been continuous over the last 100 years. Looking back we have seen the progress of basic chemicals into commodity chemicals then petrochemicals and polymers. They were followed by the development of the speciality chemical companies who created the many new effects that consumers even today are prepared to pay more for. This was the chemical Industry'ssearch foradded value product development that has been described by economic gurus as so important in many other sectors. With hindsight we can show that the value that the consumer facing companies desired in their products and services has in fact often been provided by the underpinning effects supplied by the speciality chemical sector. It is unfortunate that in the minds of the general public the sector received no credit at all for thisunderpinning contribution.

In the last third of the 20th century, as the speciality chemical industry matured, the pharmaceutical and agrochemical industries began to focus their management energy and company resources more and more on new product research and product delivery mechanisms. They consequently often left the more complicated and hazardous job of chemical manufacture to others; hence creating business models to enable outsourcing and contract manufacture and the development of the fine chemicals sector. In the new millennium the chemical industry has contributed to wide ranging new opportunities to utilise biotechnology, renewable materials and is also being challenged to help society lower its carbon usage by the advocates of climate change. Most recently technologies developed in oil and gas exploration and production are being utilised that are threatening the global positioning of the industry's raw material suppliers.

FRAGMENTATION

Strategic Thinking in its many guises, brought to us by so called management gurus and consultants while driving consolidation in many sectors has its seems delivered significant fragmentation to the chemical industry. Throughout the last 40 years we have seen most chemical companies develop strategies with the central theme of customer focus and it is this that has driven many mergers and acquisitions, spin outs, MBOs, startups, closures. It seems to me that all this has resulted in an industry that is more fragmented than it has ever been. In terms of company numbers the sector landscape in western economies has seen the rise and fall of some large multinationals to leave the sectors landscape more and moreoccupied by many small and medium sized businesses. The are some essential learning's from this period of absorption and desorption of companies, which began when larger essentially commodity chemical/petrochemical companies began to covet the level of returns on investment they could see inburgeoning speciality chemical businesses.

Through acquisition, sometimes unfriendly takeover, they tried to secure this added value for their businesses. Interestingly many of these acquisitionsdid not workout as the giants were not wiseenough to grasp that gaining new business in speciality chemicals required them to be "fleet of foot" withmanagement styles that allow almost instant decision making. Speciality companies cannot compete when smothered in the procrastination that arises from conglomerate matrix management structures.There are now many examples where multinational management failure has resulted in huge losses in shareholder value, as well as many instances where the demerged businesses have gone on to become successful again as they have returned to a more entrepreneurial management culture.In my own region of North East England alone,we have seen thisdemonstrated by Aesica pharmaceuticals, ShasunPharma,Fine Organics and Chemoxy as they have re-emerged from the clutches of BASF, Rhodia, Evonic and Dow respectively.

GLOBAL CLUSTERING

The huge growth in the Chinese economy and also the strengthening economies in the other BRIC countries has also significantly impacted the chemical sector bringing significant change to the sector across the world. These high growth economies have helped to fuel the process of globalisation. As a consequence we have seenchemical manufacturing being reconfigured and moving away from units focused on a single region or state, towards clustered facilities serving a whole region or continent.Clusters of chemical manufacturing unitshavebeen created due to the recognition that material and energy symbiosis and economies of scale are absolutely essential for the chemical industry to remain competitive and also tackle the challenges of climate change. This is particularly true for commodity and petrochemicals, but it also is important for many fine and specialty manufactures who can take advantage of the infrastructure and utilities of their larger scale neighbours.

The Middle East, China, Korea, Singapore andIndia have many new locations where clustered highly integrated energy and manufacturing now takes place. These relatively new and modern manufacturing locations represent a challenge for the older chemical producing locations in the western economy which have recognised these challenges and have begun work to identify where their more fragmented, often older manufacturing units, can be reintegratedespecially interms of energy usage and the newer technologies such as carbon capture.

ENERGY AND MATERIALS SYMBIOSIS

Looking forward it is likely that we will see significant further clustering of the chemistry using industries including metal manufacture such as steel works alongside other large scale manufacturing. This isbecause there is more and more understanding emerging that integration, or in some cases, reintegration of the process industries is one of the very few ways that we have of actually making quick and very significant in-roads into reducing the carbon footprint of the sector and thereby society as a whole. This is an important response to the challenges of climate change. Studies are beginning to show that integration in all types of industrial manufacturinglocations can bring about a much lower carbon footprint for manufacturing sectors. This is particularly important for those sectors that cannot avoid the emission of carbon dioxide but could participate in a communal carbon capture and storage initiative. We should not be surprised therefore that more locations where the chemical sector is clustered are looking into the prospect of industrial carbon capture and storage alongside the similar decarbonisation of fossil fuelled power stations. In the European Union studies investigating the impact of integration on both efficiency and carbon reduction are being performed. LOCIMAP (see www.LOCIMAP.com) led by NEPIC with 12 other participating locations will report by the end of 2014 how energy integration, product and process symbiosiscan significantly contribute to carbon emission reduction opportunities. It is likely that significant policy changes will be proposed from these studies to encourage greater integration and ever more clustering of manufacturing industries, not just for chemicals manufacturebut also for other industries who may be able to utilise the low grade heat and energy sources available from larger scale manufacturing units.

Further change in the chemical industry has been brought about due to the impact of energy prices and also on the availability of key carbon resources. The Clustering of industry is already driven by issues such as access to raw materials. This has always been a significant driver for the location of the chemical process industry. By the end of 2000 this driver had been somewhat diluted by the growth in logistical solutions for basic raw materials like oil and gas. All of us have seen the ever increasing scale of oil and gas tankers and ever extending fingers of cross continental oil and gas pipelines. Securing raw materials today makes international news, take for example the recent news that China has signed huge contracts for Russian gas. Across Europe the chemical industry has growing concerns about access to raw materials and energy. The European industry is also heavily dependent on Russia for gas, but in the European case these dependency concerns are compounded by political moves "against" nuclear energy for example in Germany and elsewhere in the EU "for" tax payer supported renewable energy investment,both of which will inevitably lead to higher energy costs to industry.

BASIC RAW MATERIAL SOURCES

In terms of industry change most recently we have seen the dominance of the Middle East challenged as a supplier of the sectors most basic raw materials.The Middle East has for many decades used its oil advantage to influence the chemical manufacturing through its access to huge raw material reserves. It is a region that is selling its ever expanding chemical production capability into all the major markets of the world. For many years there has been an expectation that the oil fields of the Middle East would dominate the chemical sector for years to come. Their access to carbon raw materials being a predictable key differentiating factor. Middle Eastern oil companies have after all controlled the price of the chemical sector's key raw material, oil, and have also therefore influenced the price of gas.However, change is currently occurring, the dominance of the Middle East is being challenged by the emergence of shale oil and gas from the USA and Canada. For all intents and purposes the decline in the North American chemical industry, the migration towards the Middle East and Asia, is currently being reversed. Large scale chemical manufacturing units are either being reopened or built in North America to take advantage of the shale gas bonanza.

Elsewhere, for example in Northern England where NEPIC is based,some are predicting a new chemical manufacturing era because technologies developed in seeking oil and shale gas can be used to access other carbon reserves such as coal and shale that are abundant across the middle portion of the British Isles. These huge reserves across the UK continental shelf are reported by the Geological Society of London,as more than 3,000 billion tonnes (possibly as much as 23,000 billion tonnes of coal plus more than 13,000 tcfof shale gas). This represents a significant multiple on all the energy that has ever been used by the UK since the industrial revolution.Even if we assume the UK continental shelf has only 3,000 billion tonnes of coal, the lowest estimated amount, and forget about the shale gas, this equates to 3,000 years of energy at current annual UK energy usage, as determined by the Digest ofUnited KingdomEnergy Statistics2013. Using modern underground coal gasification technologies to access these reserves is therefore likely to provide energy and raw materials that will lead to a significant rejuvenation of the UK chemical industry.

DELIVERING A SUSTAINABLE FUTURE

Change has been a continuous driver of the chemical industry since its inception, whether it be new technology, business strategy& customer vs product focus, company size, sub-sector change, raw material sourcing. Future change in the sector is currently being driven by the lower carbon agenda and technologies that enable the capture and recycling of carbon. Where new chemistry and thermodynamics allow this to take place profitably this makes good sense even to the most ardent of climate change sceptics. Energy and carbon efficiency will drive further clustering of chemical manufacturing unitsaround large scale infrastructure whichwill enableeconomies of scale, greater use and reuse of energy and significantly more materials symbiosis.

Chemical manufacturing locations will become more and more port centric and those that are successful are likely to have access to carbon capture and storage infrastructure as well being ever closer and have greater access to sources of carbon based raw materials. These are the large scale strategic issues that will bring about sustainability of the chemical industry through the 21st and into the 22nd century. There is yet more change to come.

DR. STAN HIGGINS is CEO of the Northeast of England Process Industry Cluster (NEPIC), a leading European Cluster for the chemical process industries see www.nepic.co.uk. NEPIC and ICC work closely on business development projects. Any opinions expressed in this column are those of Dr. Higgins alone.

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