INDUSTRY INSIGHTThought Leadership

On a path to recovery

Shifting sands in the trade landscape, a cautious economic outlook and the future of work are all key norms to consider when transitioning into the new reality. GPCA’s Insight speaks exclusively to Fernando J. Gómez, Head, Chemical and Advanced Materials Industry, World Economic Forum (WEF) to find out more.

How soon can we expect to see a global economic recovery and what shape will the recovery take?

With the COVID-19 pandemic still looming and with many dimensions in the concept of recovery, it is impossible to give an exact timeline as to when the global economy will have recovered. Especially since this depends partly on the containment of COVID-19, the pace of vaccine dissemination over the next year or two, and the level of global financial stress. What we know is that the world is at a global turning point where leaders must cooperate and innovate to secure a robust recovery process.

More importantly, economic growth and productivity indicators are not enough to reach a global economic recovery. We need to address many other issues that have become even more evident due to the pandemic such as inequality and the environment. It is the moment for countries and businesses to make sustainability and social inclusion central to recovery programs. We need safety nets for individuals and communities, we need fairer and more sustainable markets to support future prosperity.

When do you expect the chemical industry to recover from the shocks of the COVID-19 pandemic and what will the recovery look like?

The impact of the COVID-19 pandemic on the chemical and materials industry has been complex. After about one year of navigating it, it is tempting to only speak about economic or financial indicators of recovery: capacity utilization, trade volumes, prices or stock performance. In that sense (despite export volumes drops or demand level gaps) the sector seems to have recovered, according to year-on-year gains as per S&P 500 Chemicals Industry Index or ACC’s Global Chemical Production Regional Index.

These are, of course, aggregates and while some segments did experience a challenging dip, others such as electronic materials may have actually been lifted through the social and economic shifts we are still experiencing.

The pandemic dip came at a time when upstream petrochemicals were already in the process of managing supply-demand imbalances after the decade-long supercycle. Despite some expansion projects being delayed or scrapped, the sector will have to manage pressure on margins for some time. COVID-19 (among other reasons) may contribute to more challenging conditions to re-start the capital investments needed over a few years.

Moreover, there are other important dimensions in which the sector may not be fully recovered, especially in structural vulnerabilities that were addressed in response mode through 2020. For example, companies in our sector are yet to see the impact on employee engagement, due to the enforced physical disconnection with the workplace, and the changes in employees’ values structures. To maintain productivity employees have endured a burden whose mid-term effects could be significant.

Fernando J. Gómez

What will be some of the key risks and mega trends that the chemical industry would need to navigate in the new reality?

I like to think of the opportunities presented by the new reality, more than the risks. This is the moment to rediscover and illustrate how chemical products and materials deliver sustainability. Not because it is a new message, we have known it all along. But because society is increasingly demanding sustainable products and solutions. This ‘new reality’ gives this sector a new chance to capitalize on this appetite. This is the moment to lead the transformation of products and technologies into more sustainable options.

The sector is well positioned to capitalize on the accelerated consolidation of electric mobility. Direct demand in vehicles requiring ‘newer’ technologies can be very positive if the sector gets to keep more of the value brought about by advanced materials such as those used in batteries. Beyond vehicles, e-mobility is also creating demand for materials needed for a renewed power infrastructure.

Additionally, chemical products and technologies will need to be deployed innovatively to ensure that electrical mobility is safe, that minerals and other inputs are sourced and processed responsibly, and that circularity is embedded in early, collaborative design.

During COVID we witnessed an increase in nearshoring and protectionism. Do you expect these trends to continue post pandemic and how do you see them impact the chemical industry in the coming years?

Trade-offs between global and local are not new to this industry, nevertheless, the pandemic did expose two points of vulnerability. One is related to the importance of functional value chains and the role of an equally functional trade system. Although we did see disruptions, moves to position the sector as ‘mission critical’ in some important geographies, and above all the high level of flexibility and agility displayed by this sector were critical to keeping products and intermediates where needed.

The other is macro and more complex. Trade intensity for chemicals had actually decreased in the decade ending in 2018 as the share of knowledge and services components in the overall value chain output continued to increase. While there have been interventions to localize output as a way to prioritize local communities, value chains probably remain just as global. The difference may be a shift from efficiency to resilience as the operating driver. Highly concentrated sourcing may work well under ‘business as usual’, but the pandemic revealed weaknesses that may call for a redistribution of key links in global chains and this may enhance the perception of de-globalization.

The industry is already clear about the need for an effective trade system. The other two pillars that emerge in this space from our work in the Industry Action Group at the Forum are diversification where large concentration is a risk – not necessarily through repatriation but through innovative deployment of local competencies, and collaboration, ensuring that the business backbone of global value chains bring benefit to all system members.

Lastly, SMEs are critical for functional value chains, they may have been impacted disproportionately by reduced consumption and over-exposure to concentrated demand, and they may not have the visible, collective advocacy enjoyed by majors in the sector. If the industry strengthens SMEs, global value chains can only get stronger.

Do you expect to see the Circular Economy high on the agenda of chemical and business leaders in the coming years?

Absolutely, in fact, I am happy to see the level of commitment and how the concept of circular economy has matured within our sector. Building a circular economy is a journey and we still have a long way to go. This is a tangible opportunity to bring planet and people on par with profits. The list of requirements is long, of which three I consider to be critical for chemical companies.

The first of which is within our reach, chemical recycling of post-use plastics. The sector that has mastered the manufacture of high-performance materials is uniquely positioned to develop chemical recycling. However, it can only happen once we have the best scientists and significant investment capital. We need to develop it systemically, including critical peripheral steps.

Second, it’s important to go beyond closing materials loops, and designing materials circularity cannot be done in isolation. It requires change throughout lifecycles, at consumer and post-consumer levels, critically along value cycles and even upstream at feedstock level. This design is all about managing trade-offs, and this industry can take an active role.

Third, other circular schemes may open new opportunities beyond materials. The circularity of capital, for example – where sustainability premiums find their way back to fostering R&D or to structuring the de-risking instruments needed for recycling infrastructure. Smarter regulation to increase the functionality of global supply chains is needed to move and process materials. This is probably the moment to ask difficult questions about new business models: can this industry, really, nurture new models or is its destiny to match demand growth with new materials? No better time than today to challenge ourselves further.

What will be the challenges and opportunities for chemical companies as more flexible and digital work schemes are increasingly disrupting their traditional work models?

We’ve been very encouraged by the sector’s ability to deploy digital work schemes to maintain productivity through a connected workforce, we’ve been impressed by the employee’s commitment and drive. Some of these changes are here to stay as transactions and operations can be confined more and more to digital realms. I see a few areas of attention, namely how we discover, which I have mentioned above. How we learn, there is a lot of subtle knowledge, almost part of corporate culture that we still need to learn how to translate well to the digital interaction space.

Above all, to really go beyond, we need trust and we’ll have to learn together how trust is built and maintained as we connect less in person and more virtually. This is especially important as we realize that increased collaboration among stakeholders is needed to address big world issues. To deliver here, we’ll have to maintain a balance and maximize the benefit of digital tools while keeping human interaction in the equation.