Shaping The Industry - The global chemicals sector was once again on solid ground as the first half of 2011 wrapped up. Revenue has been stronger due to higher prices, a result of chemical companies passing on the higher cost of raw materials, as well as increased growth rates in developing markets.

Volume growth, particularly in the developed markets including the U.S. and Western Europe, has been more subdued. Overall, it is anticipated that the sector will continue to gain momentum with a compound annual growth rate (CAGR) of 7.9 % over the near- term.

Deloitte Touche Tohmatsu Limited (DTTL)'s Global Manufacturing Industry group convened an international panel of sector leaders from Deloitte member firms around the world to delve into the most pressing issues facing the chemical industry. This outlook captures perspectives from the panel discussions and focuses on a midyear view of the chemicals sector and key trends shaping the industry.

Regionally, the story is a familiar one. Led by China, demand for chemical products in the Asia-Pacific region is expected to grow at a CAGR of 12.1% over the near term. As a result of the market momentum over the past few years, China is expected to overtake the U.S. as the world's largest chemical market by the end of the year.

This new market position for China is driven by increased demand from both domestic and international end markets, and the shift to produce more value-added products for higher profits.

While demand in the U.S. and Europe is expected to be modest in 2011, higher prices will likely translate into stronger revenues for chemical companies. The U.S. chemical market is projected to grow a CAGR of 3.5% for the near term, while its European counterpart will see a CAGR of 3.3% over the same period.

What End Markets Will Drive Growth in 2011?

In general, the more manufacturing-intensive end markets are expected to rebound from flat to moderate growth, however, not to pre-recessionary levels. One of the most significant end markets for the global chemicals sector is the automotive industry. Sales for the global automotive industry are expected to reach over 60 million units in 2011, a 5% increase from 2010 levels.

These levels are a direct impact from a growing global economy.

In China, automotive sales in 2011 are expected to increase 10% from the previous year. In North America, there are signs of optimism for the automotive industry with 15 million vehicles expected to sell in 2011. In Europe, a 5% increase in sales is projected for 2011.

The European automotive industry represents more than 20% of the chemicals sector's end customers, but GDP may have to improve further before the industry returns to pre-2007 levels. The sector is expected to benefit from the rising use of electric vehicles (EVs) and the development of more advanced batteries to power them. Battery innovation will continue to be revenue opportunity for the chemicals sector.

The continuation of the strong growth of the automotive sector in key markets including China should also drive chemical industry growth in 2012 and beyond.

Aviation, also a significant industry for the chemicals sector, is expected to be sluggish. Much of the growth for aviation will likely come out of Asia due to the increase in travel with the growing population. Both China and Japan have major initiatives planned and that should stimulate growth in those geographies. The 20-year global forecast for commercial-aircraft production is upwards of 30,000 units. Of those, over 14%, or over 4,000 new commercial aircraft, are expected to be placed into service in the Chinese airline industry.

There are mixed signs ahead for construction and related industries. While the overall outlook looks positive, the growth in these industries may be deferred into 2012 and beyond. Continued unemployment challenges in the U.S. have slowed the recovery of the housing market and the commercial market seems equally soft. In the U.S., completed housing units in March 2011 were approximately 500,000, which is about 20% less than rates in March 2010.16 In Europe, the euro has not weakened as speculated, enabling the housing and construction industry to remain strong in most markets.

China's housing sector, on the other hand, is faced with high-vacancy rates, which may hamper growth over the next year. Over the longer term, the construction industry is expected to have a strong recovery as the global economic situation improves.
The increasing need for efficiency in materials also plays a strong role in the construction sector's recovery and adds to the potential opportunities for the chemicals sector.

How Are Chemical Companies Responding To Global Megatrends?

Not all companies are well positioned to respond in the same way to global megatrends that will likely create disruption and at the same time, opportunity for chemical companies over the next decade. Some future megatrends, including sustainable housing and agriculture, are among the areas that are prominently in play by chemical companies this year in an effort to gain a competitive advantage.

Other activities, such as making materials lightweight or more efficient, reflect a narrower focus on subsets of larger trends but still of importance for companies in 2011. Most companies, however, are looking to take advantage of megatrends in the near future as they become more important to the industry. Some companies are directing their entire portfolios toward the megatrends for future opportunities.

Chemical companies that are proactively looking to capitalize on megatrends now are focusing their long-term business strategies on solutions critical to society. They are increasing their efforts in innovation and their focus on efficiency in commercialization, plugging into global innovation networks, and emphasizing key technology areas in energy, health care, and climate change.

While forward-thinking companies are meeting the challenges presented by the megatrends, others are slower to react. This is especially evident in the search for alternative energy solutions and the reduction of greenhouse gas emissions.

These trends are currently being leveraged by some companies, but many are not taking full advantage of the available opportunities, which may create more of a competitive disadvantage for them leading into 2012. Another reason why some companies have been slower to embrace megatrends is that some, including alternative energy solutions, require government subsidies to make them economical.

The concern is that these products will not gain full financial potential without perpetual government support. As chemical companies recover from the global economic downturn, stable and financially strong companies will have more financial resources to grow and transform themselves to take best advantage of the megatrends.