Building resilience in petrochemicals Navigating disruption and preparing for new opportunities Deloitte Oil, Gas & Chemicals professionals offer you the integrity, innovation, and insight to help you meet the most complex challenges. We support you in developing and executing initiatives that achieve your strategic objectives to deliver value to your stakeholders. Through audit and assurance, tax, consulting, and risk and financial advisory, our Deloitte Oil, Gas & Chemicals team provides comprehensive services and solutions to help move your business forward. Learn more Contents The changing petrochemicals landscape 2 A period of profound transition 4 Changing end markets 6 Changing feedstock dynamics 11 Overcapacity 15 International trade barriers 18 Sustainability and the circular economy 20 Building a more resilient petrochemical company 22 Riding the next wave of growth 26 Endnotes 27 Building resilience in petrochemicals The changing petrochemicals landscape HE US PETROCHEMICAL industry is • What will be the impact of overcapacity? transforming. The industry’s future is being • How can companies cope with international Tshaped by shifts in end-market demand, trade barriers? changes in feedstock dynamics, overcapacity, and a • How can the industry become more sustainable growing push toward sustainability. Moreover, and circular? most industry leaders are concerned about the uncertainty of the current macroeconomic Deloitte conducted a series of executive interviews environment being shaped by COVID-19. Five with more than 25 senior North American fundamental questions could help determine the petrochemical industry leaders to offer insights on industry’s future trajectory: significant shifts that are likely to impact petrochemical companies in the next 10 years • How are the end markets changing? (figure 1). Each shift varies in the time horizon of • Will US companies continue to enjoy a long- its potential impact, the scale of disruption it could term feedstock advantage? deliver, and the preparedness of petrochemical companies for its expected impact. FIGURE 1 Five major shifts expected to impact petrochemicals through 2030 Degree of Petrochemical Time horizon disruption company preparedness of impact Shifting end markets Changing feedstock dynamics Overcapacity International trade barriers Sustainability and the circular economy High Not prepared Short term Moderate Prepared Medium term Low Well prepared Long term Note: Short term denotes one to two years, medium term three to five years, and long term six years and beyond. Source: Deloitte analysis. Deloitte Insights | deloitte.com/insights 2 Navigating disruption and preparing for new opportunities All these shifts could define how the industry could The petrochemical possibly look by 2030. This article examines the major shifts and recommends how petrochemical industry’s future is being companies can navigate this changing industry landscape and prepare for new opportunities. shaped by shifts in end- market demand, changes in feedstock dynamics, overcapacity, and a growing push toward sustainability. 3 Building resilience in petrochemicals A period of profound transition HE US PETROCHEMICALS industry is at a Where companies operate: As base chemicals crossroads as it is experiencing both cyclical capacity continues to shift to demand markets such Tand structural shifts. While the industry was as China and India,2 new manufacturing already facing cyclical pressures such as technologies such as crude-oil-to-chemicals overcapacity, pricing pressures, and trade (COTC) could reconfigure global supply chains for uncertainty before 2020, many post–COVID-19 certain base chemicals, especially aromatics. To changes have a structural or disruptive character. address future demand needs and mitigate supply Unlike the past downturns that were primarily chain shocks, companies could move to manage more cyclical in nature, petrochemical companies some of their downstream operations and are now experiencing significant fundamental production more regionally. This would redefine shifts in demand, changes in how they operate, and the global footprint for many companies as the way they interact with and serve customers on industry players would be required to open new a much larger scale. As a result of these profound channels and focus on strategic sourcing activities. changes, the industry will likely look very different For instance, Air Liquide has built capabilities in in the next decade. major international markets in an effort to strengthen its proximity to customers and markets The industry could further consolidate, with fewer and accelerate decision-making.3 companies operating in the future. The top three petrochemical players currently account for 40% How companies operate: Companies could be share of the industry revenue in the United States forced to change the way they operate, including in 2020, and this proportion is expected to be operating at variable utilization rates and more than half of the industry revenue by 2030.1 capacities; there will likely also be changes in how This has implications along three primary and where employees work. Many organizations dimensions—where companies operate, how they have already adjusted to working remotely. For operate, and how they serve customers. instance, Shell has restructured its infrastructure to support work-from-home capabilities for more The top three petrochemical than 70,000 employees.4 Moreover, there will be greater focus on asset reliability and performance players currently account to strengthen asset dependability using advanced for 40% share of the digital technologies such as the Internet of things (IoT) and remote monitoring. Many companies will industry revenue in the monitor their plants remotely using artificial intelligence (AI) to optimize individual assets and United States in 2020, and the entire value chain. Using connected this proportion is expected technologies across their plants, petrochemical companies can connect all the information to to be more than half of the simulate scenarios, predict outcomes, and take industry revenue by 2030. corrective action. 4 Navigating disruption and preparing for new opportunities How companies serve customers: The industry will likely become more sophisticated in how it sells products and interacts with customers. Many companies will increasingly use digital tools and offer self-service capabilities as leading e-commerce platforms provide. So, business-to- business (B2B) e-commerce solutions and remote selling that limit in-person interaction could prevail. Also, customers should expect a simplified ordering process, especially in a contactless environment, and better digital experiences for buyers, such as live chat. For instance, BASF has launched two personal care and cleaning solutions microsites to provide formulation expertise to its customers online.5 In the rapidly transforming petrochemical landscape, these trending shifts can quicken the pace of disruption, making it imperative for petrochemical companies to prepare accordingly. Let’s delve further into how these five shifts could catalyze changes in the next decade. 5 Building resilience in petrochemicals Changing end markets Growing need to create end markets are expected to contract in the near new applications and term, with some likely experiencing double-digit value streams declines impacting production volumes (figure 2).6 Vehicle sales and housing starts are likely to Petrochemical activity and production are closely recover to 2019 levels only after 2023.7 However, tied to major end markets such as automotive and petrochemical production is expected to rebound construction, where disruption is intensifying. by late 2021 on account of offsetting demand for Globalization, rapid urbanization, and increased plastics used in end markets such as electronics mobility—the megatrends that drove higher GDP and consumer packaging.8 and consumer spending over the past two decades— are slowing. As a result, all major US petrochemical FIGURE 2 Plastic resins are likely to lead petrochemical recovery US end-market growth (%) 2019 2020 2021 2022 2023 Electronics 4.2% –2.8% 16.1% 5.6% 4.1% Construction 1.4% –3.3% 4.1% 1.6% 1.4% Energy and resources 10.8% –4.0% –2.7% 1.0% 0.5% Consumer durables –3.5% –11.4% 11.5% 2.9% 1.8% Aerospace 2.3% –19.7% 17.0% 3.9% 2.6% Automotive –2.4% –26.6% 24.5% 7.0% 1.2% US petrochemical production volume growth (%) 2019 2020 2021 2022 2023 Commodity petrochemicals –1.5% –9.4% 15.3% 3.8% 1.5% Plastic resins 1.2% –5.5% 13.2% 4.5% 3.5% Synthetic fibers –2.5% –12.5% 3.5% 0.6% –0.6% Synthetic materials –4.3% –14.5% 9.0% 3.5% –0.1% Source: Deloitte analysis based on data from Bureau of the Census, Bureau of Labor Statistics, National Science Foundation, American Council (ACC), and ACC Plastics Industry Statistics (PIPS) Group. Deloitte Insights deloitte.com/insights 6 Navigating disruption and preparing for new opportunities Given the headwinds, it seems to make sense for and plastics. For instance, the average plastics industry players to find new growth opportunities content in an automobile still stands below 10%,9 and extract more from their existing assets and which offers an opportunity to incorporate more resources. With changing end-market demand high-performance plastics and other chemicals structure, companies could enter value streams into newer vehicle models to reduce weight and associated with future growth markets (figure 3). improve fuel efficiency. So, companies’