By John Richardson
RORY STEWART, the former British government minister and MP, said – on this Rest Is Politics podcast -that when he was the MP for Penrith and the Borders in Cumbria, England, there was talk of doubling the town of Penrith’s population.
Doubling the population was seen as a way of making the residents wealthier and happier. But he quite righty argued that there is a big difference between increases in GDP and happiness.
Extra time spent in traffic jams may have eaten into senses of wellbeing. If Penrith had doubled in size, the extra wealth would also likely have gone to a small minority.
Growth for growth’s sake has applied just as much to the chemicals and polymers industry during the 25 years I’ve been crunching the data, analysing the companies, talking to as many people as possible and reading everything I can get my hands on.
I’ve ridden on the tide of the consensus view that every extra tonne sold is a good thing. Hence, my parsing of ICIS pricing, margins, spreads and supply and demand data to identify the trends that have helped our customers either make money or, in difficult times, minimise their losses.
The same obviously applies to my network as we have moved relentlessly from spread sheets to research papers to phone calls, Teams calls, emails, conferences and back again in search of the next volume-growth opportunity.
These conventional types of analysis have been driven by the tyranny of quarterly financial reporting. Every quarter, Western chemicals and other companies need to demonstrate that they have grown volumes and profits and will grow over the next quarter.
If you want to play football – while preferably supporting the greatest team in the world – you must follow the rules. The same applies to the rules of business set by the financial world. We need to escape this straightjacket, so companies can build multi-year transformation plans without worrying about a series of lost quarters.
Stretching the analogy perhaps to breaking point, you are not going to worry about losing your football boots, your shirts, socks and a mountain of footballs if someone else is picking up most of the cost.
We are therefore where we are today. Because companies in all manufacturing and service sectors haven’t been adequately charged for the natural resources they use, and the damage they cause to the environment, we face the risks of catastrophic climate change and more plastic in the oceans than fish.
The rules of the game are changing
if you are playing in the EU, levies on plastic packaging that is not recycled have been introduced, The region may introduce a carbon border adjustment mechanism.
The agreement between 175 countries, reached in Nairobi in March, to work towards a global treaty on limiting plastic waste within two years, will, hopefully, address a critical failing.
Some 3bn people, mainly in the developing world, don’t have adequate rubbish collection and storage systems. Around 2bn people don’t have any access at all to rubbish collection and storage.
Until or unless this glaring problem is addressed, levels of plastic waste in the oceans will continue to rise. Let’s therefore hope that a treaty on plastic waste is followed up by incentives that make the treaty effective.
Plastic taxes and credits which companies can trade may emerge. Polymer producers, converters, brand owners, retailers and shoppers, via the the taxes and credits, can fund providing the 3bn people with adequate rubbish collection, storage, and where appropriate, recycling systems.
Idealistic? Of course. But if we don’t shoot for the moon, the plastic waste crisis won’t be resolved. Incrementally, through the numerous restrictions on single-use plastics and investments in recycling, we are moving in the right direction.
I see a new green cost curve emerging where the competitive advantage of polymer companies will no longer be measured by access to cheap feedstock, efficient technologies and logistics and good economies of scale.
Success will instead be measured by how the companies reduce plastic taxes and earn credits. This green cost curve will also include how chemicals companies respond to the carbon change.
“Our base case view is that there will eventually be a global carbon tax. A tax needs to be factored into all long-terms chemicals price forecasts,” said a source with a major global chemicals company.
New business models will require new methods of measurement
Record high levels of inflation, austerity and volatile geopolitics will, I believe, accelerate sustainability, as I discussed in my 9 August post. This will lead to new chemicals business models which I see being built on these foundations:
- Innovation must accelerate in developing low or zero-carbon chemicals production processes.
- Companies must help fund collection, sorting, storage and recycling systems in the developing world.
- Companies must work more closely with converters, brand owners and retailers to reduce the need for virgin plastics in single-use applications.
- New chemicals and polymer solutions are required to make finished goods last longer. The solutions must again be developed through close collaboration with converters, brand owners and retailers.
- Companies must shift from volume to service models. Instead of success being judged on how many extra tonnes they keep selling, success needs to be measured on the effectiveness of service-based supply models.
- For instance, a synthetic rubber producer works with a tyre manufacturer to secure a 30-year contract with a car hire company. Fees are based on commonly agreed and shared environmental targets to reduce consumption of new tyres through data analysis of driver behaviour – e.g. the severity of braking and rates of acceleration over short distances. Car hire customers are incentivised to drive more smoothly. The synthetic rubber producer and tyre manufacturer are incentivised to make their products last longer.
- The shift to service-base models will enable companies to hit ever-more stringent emissions targets – and will allow them to capture market share as public and legislative pressure to make things last longer increases.
No longer would we then need to shuffle between spread sheets, research papers, emails, Teams calls, phone calls and conferences in search for every extra tonne of volume growth for the sake of growth.
Success would instead be measured by how companies grow sustainably, with, in some cases “less is more” (using less resources) a route to profitability.
Forecasts for increases in GDP and per capita incomes may no longer be as tied to increases in the demand for and supply of chemicals. Building ever-bigger plants to meet demand, especially if the plants are export-based, may also no longer by the way to win.
Watch this space as the discussion develops over what new metrics are needed.