Today’s New Normal
“Basic industries in Europe are grappling with historical challenges. Demand is declining. Investments in the continent are stalling. Production has dropped significantly, and sites are threatened. We want to drive the transformation of our companies.” (Martin Brudermüller, President of Cefic)
We have suggested for some time that the end of the BabyBoomer SuperCycle makes chemical industry transformation essential.
And now The Antwerp Declaration, signed by EU President Ursula von der Leyen and leading industry CEOs confirms this need.
SCENARIO PLANNING IS ESSENTIAL AS UNCERTAINTY BUILDS
Geopolitics and demographics are now driving decision-making, not economics.
Markets are having to relearn how to live with levels of international tension last seen during the dark days of the Cold War.
In turn, companies and investors need to understand the implications of three potential scenarios, as the chart shows:
- Business as usual – Continuing instability and military flashpoints. European economies need to resolve their structural problems and support major increases in defence spend
- Growing disruption – Move to increasingly protectionist trade policies. Companies and investors will divide into winners and losers as trade wars start to develop
- All out trade war – Global supply chains are replaced by a local-for-local focus. Governments nationalise “at risk” assets to preserve employment and tax revenues
A decade of central bank stimulus and zero interest rate policies has now created vast capacity in the global petrochemical industry.
As John Richardson of ICIS has highlighted, oversupply hit 218 million tonnes last year. And new capacity continues to be added, even though demand growth remains very weak.
This creates a major threat. Essentially, rebalancing global supply and demand would require all of Europe’s core petrochemical capacity to close. And the same is true for many other key industries. A fairly rapid move towards all-out trade war seems very possible.
European governments can’t afford to allow subsidised imports to destroy their industrial base – and all the jobs that it supports.
DEMOGRAPHIC CHANGES ARE HAVING A MAJOR IMPACT
At the same time, end-user markets are seeing major change due to Europe’s ageing society, as the charts confirm:
- The Perennials 55+ cohort is now the only source of population growth
- As German government data confirms, their spend declines rapidly as they move into retirement
To become a winner in today’s New Normal world it is critical to focus on what companies and investors need.
TRANSFORMATION IS NOW ESSENTIAL
Businesses in the New Normal will refocus on ‘needs’, not ‘wants’
The key issue is that we have lost the demographic and peace dividends that powered the SuperCycle. As Denmark’s premier, Mette Frederiksen told the Financial Times last month:
“From a European perspective we have to admit that we haven’t used enough money on our own defence and security. Since the end of the Cold War in the early 1990s Denmark and others had cut military budgets. When we did that, we were able to spend more money on welfare or tax reductions”
“If the world is changing in the direction I think it will, then you cannot spend your penny, or your dollar, or your euro, or your krone two times.”
Essentially, this means that taxes will rise to pay for defence. And so people will have less money to spend.
The formerly profitable middle-market of “affordable luxury” is already disappearing. Instead, as the chart shows, businesses need to refocus on “needs” rather than “wants”.
WHAT DOES THE TRANSFORMATION INVOLVE?
Customers, rather than cost-curves are now critical for profitability
The end of the SuperCycle means that businesses have to return to a market focus.
The key question today is no longer, “Do we have low-cost supply? ” It is instead “Do we have a customer who is willing and able to buy from us“.
The 10-point Antwerp Declaration highlights the major changes now underway:
- Europe needs an Industrial Deal to set the agenda for the 2024-29 period. And it needs a Clean Tech Deployment Fund as a core part of this
- Europe must prioritise new renewable energy projects, and make it easy to install the necessary infrastructure. World class recycling structures are also essential
- ‘Local-for-local’ domestic supply chains will be critical for achieving security of supply. Governments need to lead in boosting demand for Net Zero, low carbon and circular products
- Europe needs a strong Single Market for waste and recycled materials, and energy. It also needs an Innovation Agenda that accelerates the transition from demo to implementation
- Europe also needs to return to legislation based on robust data and scientific evidence. And it needs a strong First Vice-President in the Commission to make all of these ambitions real
Restructuring, repositioning and rethinking are now essential for the chemical industry’s survival.
We will look more closely next week at how companies and investors can address the key questions raised by the Antwerp Declaration and the major transformation now underway.