The globalised chemical
industry and its relevance
The chemical industry is arguably one of the most science-based
and continues to be far more globalised than most others. It has been so much
before the term became fashionable and that is not surprising considering that
the industry’s cost structure – at least for basic chemicals – is critically
dependent on the availability and price paid for feedstock. For the last half
century or so the industry has been driven by hydrocarbons – hence the name
petrochemicals – and has come to be centred in parts of the world where it is
abundantly available, e.g. the Middle East.
While much has changed in the industry in the past decades, what
has not is its relevance to modern living, as we know it.
The rationale for trade
Being essential for economic activity, demand for chemicals is
more widely distributed than production is or has been. This implies the need
for trade between centres that produce more than they need and vice versa. At
the same time, complexities and competencies in economies vary; while the
technological sophistication for making some chemicals may be relatively
simple, others can be complex. In the pharmaceuticals industry, for example, it
is not uncommon for active ingredients to be produced in multi-step reactions
that could number as many as 10-50 cascading steps.
While the chemical industry’s origins and much of its innovation
can be traced to the developed world – in particular Western Europe and North
America – competencies have been built more recently in several developing
regions as well. China, India, the countries of South East Asia and Brazil are
some parts of the world that now have a vibrant and broad-based chemical
industry, unlike say three or four decades ago. But in several parts of the
world – in the neighbouring countries of South Asia, in large parts of Africa
(with the possible exception of South Africa), for instance – the industry is
still primitive or virtually non-existent. Even basic chemicals are not
produced and need to be imported. This poses huge challenges for businesses. In
much of Africa even basic ingredients such as surfactants, fillers, fragrances
etc. needed to produce low-cost powder detergents, for example, need to be
imported. Given that many of these countries have poor infrastructure (ports,
roads, telecommunications etc.) and are stretched for foreign exchange,
disruptions in the supply chains are commonplace, adding to the already
substantial risks of doing business.
Drivers for globalisation
Globalisation of the chemical industry took off in the 1960s as
large companies located primarily in the developed world realised that much of
the incremental growth was likely to come from distant geographies and began
investing in these regions. The lowering of import tariffs as part of
multilateral agreements under the aegis of the World Trade Organisation
provided a boost to international trade in all sorts of commodities, including
chemicals. Efficiency improvements in chemical logistics – especially
containerised cargo and tanker shipping – further facilitated chemical trade.
Surprisingly, the desire for greater self-reliance in something
as vital as chemicals also provided a boost to globalisation efforts in
countries as diverse as Singapore, South Korea, Taiwan, Thailand Mexico, Brazil
and South Africa. When these countries built capacities, especially for
petrochemicals, they realised economies of scale demanded plant sizes that
domestic demand alone could not support. This was the genesis for the emergence
of an export-focussed chemicals industry.
Rise in global trade
According to estimates made by the American Chemistry Council
(ACC), an industry lobby group, world trade in chemicals grew faster than
global output in the last decade. In 2016, Western Europe was the biggest
exporting block, even after removing intra-European trade, accounting for 50%
of global chemical exports (this includes the intra-regional trade). Another
significant development over this decade is the elimination of the large
deficit that existed in the Asia-Pacific in the previous decade with Taiwan,
Japan, Singapore and South Korea – all major producers in the region – running
trade surpluses. Latin America now runs a large deficit in chemistry trade,
followed by North America and Central & Eastern Europe. The Asia-Pacific
region is now the second largest exporting region for chemicals, accounting for
28% of global exports in 2016.
The pattern is not very different when seen through the prism of
imports. Western Europe is also the largest importing region, accounting for
42% of global chemical imports (including imports within the region), while the
Asia-Pacific is the second most important, with a 28% share of global imports.
Within Asia-Pacific, China remains a net importer, despite a significant ramp
up of manufacturing capacity over the last 15 years thanks to an even faster
growth in demand in the period. In 2016, the last year for which reliable
global data is available, Asia-Pacific accounted for nearly $350-bn in capital
spending in the chemical industry, with about 80% of this in China (both by
local entrepreneurs as well as MNCs keen to tap into the fastest growing
chemical market in the world). In contrast, capital spending in Western Europe
and North America – the next two biggest investment regions – were under $50-bn
each, while that in Africa and the Middle East was about half that level,
indicating that the cheap oil/gas-led investment binge is over.
Trends in the composition of trade balance
The trends in the composition of the trade balance are also
revealing and point to the relative competitiveness of different segments of
the chemical industry in a region. It is well illustrated with the example of
the US, which from the 1920s to the early 2000s ran an overall trade surplus,
which reached a peak of $20.5-bn in 1995. In 1997, the pharmaceutical segment
posted a trade deficit for the first time, and that number has grown almost
every year over the past two decades, indicating a continuing surge of imports
of finished pharmaceuticals, especially from Western Europe. This is indicative
of a fundamental shift in the pharmaceutical industry in the USA – the shift in
emphasis on innovations leading to drug discovery, sales & marketing, and
the outsourcing of manufacturing, first of active ingredients and later
finished formulations, to cheaper centres in Asia and Europe.
In 2001, for the first time since reliable records were kept,
the overall business of chemistry in USA posted a trade deficit, which has
increased almost every year since then to reach a record high of $60-bn in
2016. It is also pertinent to point out that the chemicals business, minus
pharmaceuticals, has shown a positive trade balance in every year since 2000,
indicating that the region still remains a powerhouse in basic chemicals
production. In subsequent years and into the future this strength will be
reinforced by an investment binge in basic petrochemicals leveraging cheap
shale gas. Much of the incremental capacity that will be built in the USA will
need to be exported, though the trade war with China brings some uncertainty as
to where this surplus production will find markets.
Different but still very relevant
In the 1970s, the sociologist Daniel Bell in his book, The
Coming of Post-Industrial Society: A Venture in Social Forecasting, cited the
business of chemistry as the first of the truly modern industries, because its
origin lies in the intimate linkage between science and technology. Nearly 50
years later the innovativeness of the industry and its relevance to society
remains unchanged even as challenges related to sustainability have taken
centre-stage, and business practices and focus have evolved. The industry
continues to be a great enabler of modern living, imparting technological
innovations throughout several value chains to enable improvements in functionality,
gains in productivity, lower costs and expansion of markets.
What has also changed is the way chemical businesses are valued
today: not just on the basis of their sales, but on intangible assets such as
brands or corporate image, patents, customer relationships, unique skills and
knowledge bases. Intangible assets of businesses – employee skills, process
technology, granular knowledge of products & customers, etc. – are now
deemed far more valuable than mere physical assets created with capital.
- Ravi Raghavan
Chemical Weekly Issue date: 12th February 2019
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