The chemical industry now - how is it transforming and why does it matter?
Deep dive
The chemical industry is crucial in the energy transition, tackling emissions and enabling renewable technologies. Image: Getty Images/coffeekai
Fernando J. Gómez
Head, Resource Systems and Resilience; Member of the Executive Committee, World Economic Forum- The chemical industry is dynamically responding to global shifts and advancing internal innovations, playing a pivotal role in socioeconomic systems.
- The chemical industry is crucial in the energy transition, tackling emissions and enabling renewable technologies.
- The industry's transformation focuses on increased responsibility, resilience and productivity, striving for sustainability and greater societal impact through collaborative efforts.
The activities of the chemical industry are generally defined by the manipulation (and especially the transformation) of matter – mainly at the molecular level. These activities remain at the heart of all socioeconomic systems, including sectors like food, mobility, global health or the information economy. Not only are we – as living organisms – incredible, integrated chemical factories, but the output of the modern chemical industry also allows us to thrive as a healthier, safer and more productive humankind. The machinery of the chemical industry matters a lot. Pun intended.
However, the chemical industry itself is in no way static. It is changing in various ways: the segments within it, its value delivery models, its performance or (most obviously) its products and services. This is a continuous process, and despite periods of accentuated change, the transformation of the chemical industry is more evolutionary than revolutionary. Leading companies spearhead this transformation, others follow and only when a critical mass changes along one dimension can we speak about the transformation of the entire industry.
At the end of 2023, the World Economic Forum invited members of its communities to contribute a brief commentary on recent, upcoming and detailed views of the chemical industry and its transformation. This is one of them.
The forces behind the transformation of the chemical industry
The most cited causes of industry transformation are exogenous. This has caused the process of industry transformation to be generally understood as reactive instead of proactive. The chemical industry is often seen as transforming in response to changes in the external environment, such as:
- Changes in the availability of inputs or enablers for a particular industry. Examples include an industry agreeing to switch to only renewable energy, the full shift of capital to a subset of investments (effectively reducing the availability of financial capital for an industry), or slow skill replenishment.
- Changes in the policy and regulatory environment, with the most notable being a global carbon price or the prohibition of certain substances from manufacturing.
- Changes in the socioeconomic systems where products, technologies and services from an industry deliver value. Examples include buildings becoming more modular, the move to plant-based diets or the electrification of the economy. These systemic changes ripple as changes in the chemical industry through shifting demand patterns.
- Changes in the global landscape or macro conditions often cause changes at industry level. A deep recession may cause permanent changes in retail channels; a new trade block may remove barriers that hinder shared logistics across key producing or consuming countries.
- One-off events such as global shocks impact sector transformation rates. The COVID-19 pandemic caused an acceleration in the rate of digitalization of the chemical industries while erasing profits, jobs and established capabilities from the aviation industry. Conflict and political tensions are changing the entire semiconductor value chain.
Nevertheless, the chemical industry also changes for endogenous reasons, following an intent to transform that is both inherent and deliberate. These include:
- The outcomes of innovation – the experimentation with new products, services and technologies as offers into markets. This also includes the renewal of internal competencies brought along by human capital inflows.
- The outcomes of internal optimization, especially those derived from deploying newly available or emerging technologies. Examples include materials discovery by self-driven laboratories.
- The consequences of portfolio activity within a sector, where mergers, acquisitions, divestments and carve-outs change an industry or some of its segments.
Among the socioeconomic systems changes driving the transformation of the chemical industry, the energy transition deserves special mention at the onset of 2024. Here, the industry has two key roles. On one hand, key transformations (cracking, reforming, ammonia manufacture) are highly energy intensive, and the sector’s ability to address its scope 1 and 2 emissions depends strongly on our ability to upgrade the energy mix used in chemicals production. On the other hand, the industry supplies crucial products and technologies that enable more sustainable energy systems. Renewable energy technologies (polymers, resins, critical components for solar panels, wind turbines and energy storage) are well-established examples of performance through functional materials. In other words, no chemicals, no energy transition. This dual role entails a significant transformation within the chemicals industry while simultaneously playing a vital role in driving the transformation of other industries and ecosystems.
The COVID-19 pandemic caused an acceleration in the rate of digitalization of the chemical industries while erasing profits, jobs and established capabilities from the aviation industry.
”
Today, the role of regulatory and policy frameworks continues to be highly relevant, serving as crucial external drivers for transformation. Critical processes such as the United Nations Plastics Treaty or the International Conference on Chemicals Management (ICCM) will prove definitive in the sector’s future product portfolio, collaborations and even the definition of its role in the business environment. Their implementation will call for creativity in offers, for deploying the industry’s capabilities to collaborative efforts and, more importantly, for the sector’s consideration of extended product responsibility or the redefinition of its product mix/volumes into the future.
How is the World Economic Forum facilitating the transition to clean energy?
The direction of change
Three dimensions appear to encompass much of the transformation, with the industry on a journey to become:
- More responsible. This ranges from the obvious upgrade of product and process performance in environmental sustainability (emissions, resource use intensity) to the exciting opportunities in addressing the overall sustainability of the socioeconomic systems in which it operates.
- More resilient. The industry must be equipped to withstand external shocks by focusing on workforce renewal and integrating transformative technologies into its daily operations. Within ecosystems, the industry should assume leadership roles by fortifying value chains, diversifying offerings and cultivating an adaptive mindset to address chronic risks.
- More productive. To meet the imperative of delivering greater value to society and ensuring profitability for stakeholders, the industry must challenge itself. This involves a commitment to driving resource efficiency, promoting innovation and redefining performance dimensions. Additionally, the industry should invest in the creativity of its human capital and allocate financial resources where they can bring about the most significant systems change.
None of these transformations will be achieved without multistakeholder collaboration. As an organization, the World Economic Forum is privileged to support leading chemical companies in their efforts to drive change.
Why this moment of the transformation matters
No matter which image of the future we build, chemical substances and materials will remain its essential building blocks. The performance they almost tacitly deliver to shelter, transport or nutrition may shift across dimensions, and product portfolios will likely evolve, but the essence of what we consume, build with, compute on or wear will remain rooted in materials.
However, the resilience and the ability of the industry to continue delivering social and economic value depends not only on the elements mentioned about but also on fundamental relationships that need to be redefined for success. We highlight four:
- The relationship between the current feedstock base with the energy base. Efforts to decouple emissions for productivity must consider their implication on raw materials. For the petrochemicals segment and therefore for most segments downstream, energy and feedstock are too tightly related.
- The relationship among performance criteria. Not only because some products have packed too much technical performance at the risk of underperformance in the environmental dimensions, but also because new performance criteria appear (e.g. certain hazards are better understood) challenging the choice of chemicals or materials for certain jobs.
- Its relationship with the environment. Ensuring that hazards are proactively managed – from greenhouse gas (GHG) emissions through threats to natural capital to the derivative risks to human health so that they no longer appear as defining the sector.
- The relationship between the industry and society. Without a better understanding and yes, acceptance of the critical role this industry has played in progress; without society visualizing its centrality in healthcare, the built environment or our mobility systems, it will be increasingly difficult to align a transformation with a better future.
We are excited about this moment of the transformation of the industry. It does matter. Pun intended.