Chemical industry outlook 2012

1 2 3 4 5 6 7 1 Chemical industry outlook 2012 In 2011 the different sectors of the chemical industry demonstrated impressive growth and top results. Camelot gained first hand insight by carrying out the CheMonitor survey in collaboration with CheManager three times during 2011. We got feedback from 300 executives of Germany’s chemical industry – small, mid-size companies and global corporations. Despite all the expected ups and downs in the world economy and European politics, throughout the whole year they expressed impressive optimism with respect to the level and further development of their business conditions. Evaluation of the current condition recovered after the economic crisis in 2008 and reached an overall maximum of 90% rating as rather favourable or favourable. Expectations of future developments were stable at 70%, but then decreased towards mid-year, in the face of first indications of slowing growth rates. However, at the end of 2011, more than 50% of the executives are still looking forward to stable or even improving conditions. This is an excellent result and clearly shows the self-confidence of management in facing the challenges ahead. Figure 1 illustrates these perceived conditions: The local conditions for the company are ... Figure 1: Current local % conditions 100 80 80 70 60 50 40 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 ... excellent / rather good ... stay excellent / will imporve While this gives an impression of the home base of the companies, the expected growth is distributed over a range of countries, which drive the EU and world economy. According to global studies, China is still the major engine for growth, followed by India and Russia. For EU-based companies, Turkey is a driving force, giving slightly more momentum than Brazil. Global corporations are going abroad, while the smaller size companies are focusing their strategies around their home markets. Figure 2 illustrates the expected growth potential by different regions: 5 I n d u st ry Pap er Focus Topics 2012 for th e C h e m ica l I n d u s t ry Figure 2: Perceived growth India 15% 17% 53% potential by regions in the chemical industry Russia 20% 32% 32% China 17% 17% 59% Brazil 14% 20% 21% Turkey 18% 14% 29% Domestic market 47% 35% 24% Other countries 51% 41% 26% 0% 100% Turnover < 50 million E Turnover < 50-500 million E Turnover > 500 million E This optimism creates a highly competitive environment, which could easily be tightened by a slow- down in economy. To stay ahead of the crowd, it is key to maximize company performance and opera- tional performance by focusing on end-2-end process optimization. Any frictions due to silo thinking will immediately weaken overall effectiveness and lead sooner or later to business losses. For all compa- nies it is mandatory to strengthen their grip outside their home base. This is challenging their operating models and the strategic design of their manufacturing and distribution footprint. The positioning of new manufacturing sites and the streamlining of distribution networks can be supported by simulation of the new scenarios. This gives an optimal transparency to identify the best solution and facilitates implementation. The high demand together with high levels of volatility put new challenges on planning strategies in the supply chain. Pure forecasting has been challenged after the crisis. The transfer of LEAN principles from manufacturing created LEAN SCM and changed planning paradigms. More streamlined planning processes, by making their first priority pull principles for production scheduling, allow more reliable and agile supply chain steering. Increased transparency and clear differentiation between operational scheduling and midterm sales & operations planning (S&OP) lay the foundation for better tactical management of the supply chain. Facing on-going capacity limitations, companies increased their pace to transform from a volume S&OP to profit based decision-making. By applying financial evaluations to the planned scenarios they progressed from classical S&OP to the integrated business management level. The on-going bottleneck situations even led to the introduction of margin-based order management in the OTC processes of chemical companies, especially in the commodity business. 6 1 2 3 4 5 6 7 The optimism of the executives is also visible when asked for their priorities for the next 12 months. Figure 3 illustrates the changing priorities of chemical companies regarding cost reduction and growth: Where will the priorities be set for the next 12 months? Figure 3: Changing priorities % 70 60 50 40 30 20 10 0 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Cost reduction Growth Both During and after the crisis, the leaders had to keep their companies in solid financial conditions while facing huge losses in sales and turnover. Therefore the focus on cost reduction rose to 35%. In this period, only 15% still focus on growth as a first priority. With the improvement in the business environ- ment since the end of 2009, the focus on growth increased to an all-time high above 50%. Companies that set their priorities on mere cost reduction dropped to 5%. Another 45% balanced both strategies. In total, this means that in 2011 95% of the executives went for growth. This is fully in line with the strong economic results of the chemical industry. Huge demand along the value chains led to high capacity load and stock outs. Triggered at the beginning by empty supply chains, raw material supply became a major issue. And it still remains a new challenge due to the different behaviour of the market which still shows a high level of volatility. A new dimension of supply risk entered the scene with raw materials shortfalls in 2011 intensified by single events like the nuclear incident in Fukushima. Since then, the management of supplier risks and business continuity have become top items on the agenda of CEOs. Nor is this just about supplier risk management. If we look at the top items in focus for cost reduction, number one is the reduction of raw material cost, followed by energy. So supplier management gets a high priority and is promoting new approaches to manage portfolios on a global basis, even taking advantage of raw material hedging. Improved early warning tools are being implemented that allow screening for signals of fluctuation. 7 I n d u st ry Pap er Focus Topics 2012 for th e C h e m ica l I n d u s t ry As Figure 4 shows, classical topics like general personnel reduction and R&D have receded in impor- tance. On the contrary, the companies are worried about the availability of qualified personnel becom- ing one of the bottlenecks for their targeted growth strategies. The third in the list of cost reduction is administration. So LEAN thinking is now being transferred to internal administration processes. The application of end-2-end process thinking and the removal of ‘waste’ will drive efficiencies through LEAN Administration in the same way it happened in manufacturing and SCM.