It’s been a tough year for companies in the chemical industry, with ongoing supply chain disruptions, global inflation, and growing instability in many parts of the world among the biggest obstacles to profitable price setting.
As 2024 unfolds, chemical companies stand at a critical juncture in history. On the one hand, there are resounding calls for sustainability from consumers and regulatory institutions across the globe. On the other, there’s still a pressing need to safeguard profits against unpredictable fluctuations in energy costs.
How can we apply what we’ve learned from last year to inform more strategic moves in 2024?
In this article, we’ll outline trends to look out for in 2024 and share what we think companies in the chemical industry should focus on next to prepare for another uncertain year ahead.
Our Top Chemical Industry Predictions and Trends for 2024
Businesses in the chemical sector will need to prioritize green energy initiatives in this year’s agenda to stay competitive and compliant. These initiatives include increasing the use of low-impact materials and processes, including bio-based chemicals, low-emission electricity, and renewable energy, and reducing waste at every level of production.
Still-relevant and recent developments in climate change legislation impacting chemical production in the United States and the EU include:
United States: Notably, the Global Framework on Chemicals, recently established during the International Conference on Chemicals Management (ICCM5), outlines 28 targets aimed at addressing climate issues linked to chemical pollution and waste. These targets in part involve phasing out dangerous chemicals and pesticides, responsibly managing chemicals in different sectors, and shifting towards safer and more eco-friendly alternatives.
European Union: The 2020 introduction of the Chemicals Strategy for Sustainability, which aims to curb the use of toxic chemicals and promote safer and more sustainable alternatives, has since altered how chemicals companies can carry out production. More policies have been introduced or amended since, including updates to the labelling and packaging of chemicals (CLP) and tighter regulations on the use of formaldehyde, a chemical commonly used in construction, among others.
However, the move towards sustainability in the chemical sector isn’t driven by regulatory push factors alone.
Sustainability trends in chemicals are supported by the circular economy (recycling) and diversification for ICE (internal combustion engines) to electrification (hybrid, battery-only, and fuel- efficient products driven by lightweight petrochemical composites).
There are plenty of rewards in eco-friendly chemical production to look forward to this year; for example, the US Inflation Reduction Act, which encourages companies to reduce greenhouse gas (GHG) emissions with financial incentives (e.g., tax credits) to ease the cost of taking on clean energy resources, is still going strong.
2. Bright Spots Ahead Despite Ongoing Global Uncertainty
However, remote working, fuel efficiency, and the inability to pay for gas due to inflation are largely to blame for the decline. Once prices go down, we expect consumption to stabilize again; in fact, the IEA has raised its oil demand forecast as the market is expected to shift into surplus in 2024.
The energy crisis in Europe continues since the advent of the Russian invasion of Ukraine in 2022. The event led to an EU-imposed seaborne Russian crude oil embargo, followed by a ban on Russian refined oil and a commitment to reducing Russian gas imports by two-thirds. As of late, efforts continue to mitigate this crisis creatively, remaining an ongoing concern in affected markets.
Meanwhile, things are looking up in the US: ExxonMobil’s acquisition of Pioneer Natural Resources last year
And in other parts of the world, oil demand remains high in countries like China, India, and the Middle East, primarily driven by China, while global oil production at large has increased, driven significantly by contributions from Nigeria and Kazakhstan.
So, while in 2023, the chemical industry faced its fair share of geopolitical turbulence and shifting supply and demand for energy resources, declining marginally as a result, companies in the sector can expect slight growth in the year ahead.
3. Refocus and Expansion into Alternative Markets
In response to slowed demand for chemicals globally, particularly in advanced economies facing recession and inflation such as the United States and those in the EU, chemical companies will likely need to place a stronger strategic emphasis on expanding their commercial activities in emerging markets.
These markets, particularly in Asia, demonstrate comparatively higher levels of demand for chemical products to meet their growing infrastructure and industrial needs, with China among the leaders driving this uptick in growth.
Companies moving chemical production abroad might need to make some tough decisions to offset costs, including downsizing existing operations in slow-growth and high-cost markets. Many big players in the sector have already made that call, with BASF, the world’s largest chemical producer, permanently downsizing its European sites in its move to expand operations in China.
Against this backdrop, investing more in chemical production in emerging markets will be a make-or-break opportunity for chemical companies to support ongoing growth and stay competitive in 2024.
How Can Chemical Companies Prepare for 2024?
1. Embrace New Strategies as De-stocking Crisis Nears Its End
Last year, chemical companies scrambled to meet inflated demand levels caused by covid-era bottlenecks and inventory exhaustion. The result? A lot of excess inventory (and dormant revenue) to move.
The end of this de-stocking crisis presents chemical manufacturers with a promising start to the upcoming year. But to balance inventory with demand in the upcoming months, companies will need to react strategically.
This in part requires a gradual shift in strategy towards a Make to Order (MTO) or Configure to Order (CTO) model, ensuring future inventory levels align closely with actual demand.
Next, companies should conduct an audit of their products at the SKU level to identify underperformance and adjust pricing where required. In the same way, they should closely examine their distribution processes that involve third-party vendors to identify any opportunities for streamlining there, too.
As lower-cost commodities appear in inventories, companies should expect to benefit from cost savings. At the same time, obsolete and slow-moving inventory (OSMI) should come with higher price tags to more accurately reflect their status.
2. Increase Transparency in Cost-to-Serve and Cost Recovery
With a heavy reliance on global raw material indices in pricing, chemical companies will continue to find themselves vulnerable to the fluctuating market conditions and geopolitical forces that influence them.
While index-based pricing affords limited control in commodity pricing, chemical companies can use cost-to-serve analysis in the year ahead to have a better handle on the factors within their sphere of influence. Having greater visibility into cost recovery by tracking cost-to-serve analytics KPIs, such as warehousing, packaging, and freight costs, allows companies to address underperformance and apply these insights in future agreements.
Given long-term contracts and customer resistance to price changes are near-permanent fixtures of the industry, the ability to integrate cost analytics into future negotiations will be crucial to any chemical company’s survival in an increasingly competitive – and often unstable – business landscape.
3. Focus on Value-Adding Services in Pricing
In a highly commodified industry with few opportunities for product differentiation, chemical companies should make concerted efforts in 2024 to tap into what their customers value and tier their price offers accordingly.
Surcharges, while justified attempts to stabilize pricing amidst global uncertainties, should be paired with value-added services for customers to stay competitive. These could include expedited delivery, extensive customer support, or innovative package solutions – just a few options companies can offer to customers to stand out from competitors and justify premium pricing.
By aligning pricing strategies with tailored services that add value, chemical companies can strengthen their market position while meeting customer demands – in a landscape where differentiation from competitors is integral to long-term success.
4. Digital Transformation of Price Management
As we step into an era defined by a global concern for climate change, chemical companies will need to adopt a smarter approach to managing the energy resources available to them, with operational inefficiencies and waste no longer a viable trade-off for profit gains.
As such, it will be critical for chemical companies to undergo a digital transformation of their pricing systems by incorporating data-driven tools using artificial intelligence (AI) and machine learning (ML). This transformation will enable businesses to optimize resources, reduce waste, and accurately adjust pricing to align with the expansion of product portfolios to include sustainable alternatives.
Pricing modernization led by AI and ML algorithms joins broader calls from industry experts to transform technologies across the entire manufacturing process, including leveraging automation and robotics, to support more efficiency and safer production lines.
2024: A Year of Cautious Optimism and Smarter Pricing
As we look to the year ahead, the impact of geopolitical disruptions (among other volatilities yet to surface) on chemical production costs is still largely unknown.
As supply and demand dynamics for energy resources are still in flux, global calls for sustainability grow louder, and markets may loosen their reliance on high-emission natural resources, chemical companies will need to introduce creativity and innovation into their production processes to remain profitable.
Integral to these efforts is digitizing chemical pricing processes to increase efficiency, tap into the right price points, and plug hidden margin leakage – which is where pricing software comes in to help.
Curious how Pricefx pricing software offers your company a competitive advantage in the uncertain times ahead?
Consider checking out our article on our top 5 features for chemical companies below: