>> Karen Parker, editor-in-chief

Challenges, Innovation, and Strategic Responses for the Global Chemical Industry

This issue of ASI features our annual roundup of the latest innovations in raw materials offered to adhesive and sealant formulators and manufacturers. Additionally, I encourage you to visit our updated Raw Materials, Chemicals, Polymers, and Additives Handbook. This valuable resource offers a directory of companies that supply raw materials, additives, and chemicals used to manufacture adhesives and sealants. It is a go-to resource for anyone involved in the manufacture of adhesives and sealants, and I encourage you to bookmark it in your browser so that it can be an easy reference.

The state of the chemical industry is in flux as competitive pressures, geopolitical and regional changes, and moderating demand have challenged industry players around the globe. We are in a time of intense change.

In January, Cefic, the council for the European chemical industry, issued a competitiveness report that emphasized the need for “bold action from EU decision makers.” The study confirmed the severity of the EU chemicals industry, noting that over 11 million tons of capacity have been selected for closure for 2023 to 2024, with 21 sites being impacted. The study confirmed through data and comparative illustrations that “the European chemical industry is at a breaking point.”

Marco Mensink, Cefic’s director general, is quoted in a press release about the study in which he stated, "For the sake of our industry and the 1.2 million workers it directly employs, we need bold and urgent action today. Lowering energy costs, ensuring access to critical raw materials, and fostering innovation are absolutely critical. If our industry falls, entire value chains fall with it: healthcare, automotive, renewable energy, and the breakthrough Green Deal technologies that are essential for the transition. We say it again, louder and clearer: for the future of Europe, we need our new EU decision makers to act now!"

The press release stated that the study concludes that the competitive position of the industry has weakened on both cost and non-cost factors varying from high energy, environmental and regulatory costs to administrative hurdles around innovation and human capital; the latter often resulting in delayed investments or decisions to invest outside of Europe.

Europe is not a stand-out case in terms of the global chemical industry. A recent article published by McKinsey discussed why, after years of performing above the rest of the markets, the chemical industry is falling behind in terms of returns. The article also discussed how, in order to reverse the trend, chemical companies need to focus on innovation.

In the article, written by Chantal Lorbeer and Obi Ezekoye and published by McKinsey in December 2024, it listed the short-term drivers that have contributed to a slowdown within the chemical manufacturing industry. Among those drivers are energy prices in Europe, which have remained higher than in the years before the pandemic, the destocking and restocking cycle caused by the pandemic, and interest rates and inflation, which slowed consumption in industries that are at the forefront of demand for chemicals, such as automotive, consumer packaged goods, and construction.

The study went on to outline several long-term, structural factors that “point to lower-than-historical returns for the chemical industry.” Among these are: 1) the industry nearing the limits of linear demand growth – as economies mature, the correlation between GDP growth and chemical consumption weakens; 2) capacity additions exceed demand growth--especially true in Asia, where the capacity of state-owned enterprises can be as much as 50% higher than demand; 3) changing regulatory environments in Europe and the United States are impacting the cost of compliance and operational strategies; 4) the pause in fundamental innovation and the rapid commoditization of products. The article states that, “One reason for this is that chemical companies have gotten closer to their customers but not necessarily to their end markets. They have focused more on incremental innovation, rather than on designing transformative solutions that address unmet needs for end users and command higher margins.”

So, how does the industry respond to these short-term and long-term pressures? The McKinsey article offered a number of ways to mitigate continuing pressures on the industry. Among them are investment in innovation, being prepared to respond to shifts in the industry caused by consolidation, leveraging digital technology to change business models, reevaluate your company’s engagement across geographies, including building a more resilient supply chain, and finally, maintaining discipline as companies keep tighter control of costs and inventory.