Decarbonization, Supply Chains, & Future Growth: Themes from WPC 2024 - Ep 157

And I think for others as well, and number one is the energy transition and the critical role that chemicals has to play with the energy transition. The second piece is around supply chain and. Um, 20, 24. Much like 20, 21 and 2022, I think is the year, the year of the supply chain, right? Since we've had some dramatic, uh, challenges with it so far, already this year. Um, and I have a great conversation that I had with Rahul Kapoor from S&P Global that you'll be hearing, um, and a little bit.

And then the third thing is that really this expectation of a future upside, an upturn. Probably not till the end of the decade. So don't be looking too closely for upside because what we really know is that there's dramatic oversupply currently in many markets. So, you know, as a chemical industry leader and I'm kind of drawing my conclusions first here, this time as a chemical industry leader.

What can you do about this and with this, and when you listen to the, to this episode, and as you're thinking about it, Um, What can you be doing? And so, number one, I would say, first of all, is understand the role that you and your company play in the energy transition, whether it's providing products for new technologies. Right. When I think about. Batteries and EVs and even, uh, solar panels and solar cells and a wide variety of things.

There is no doubt that the energy transition is not possible without chemicals. So that's one piece, um, And then the second piece that goes with it as around, you know, reducing your footprint and your carbon footprint while still supporting growth, maybe is a little easier said than done, but nonetheless, that's, that's one of the considerations. The second piece is around building supply chain resilience. So we've been talking about this for a few weeks on and off here on the chemical show.

Um, and really for a couple of years, about the importance of supply chain resilience. This year's events with crisis and the Red Sea and a crisis in the Panama Canal have created some dramatic challenges. Um, What does that mean for you? And what do you need to be thinking about doing is number one, building optionality, right? So understanding your options and alternatives as it relates to your supply chain. And then number two. Um, looking at alternatives, right?

So, uh, alternatives in product. At alternatives and supply points. Alternatives and suppliers. Having a really robust strategy and frankly not just a strategy. An execution plan that's been tested and understood and is ready to go is really critical. The third piece is preparing for a future upside. So there is investment underway, even though markets are long and they're going to be long for quite a while. However, as we all know, this industry is cyclical and markets will tighten up again.

So, um, preparing for that future upside with financial discipline. And in fact, one of the speakers on stage talked about the fact that, um, the focus right now and for the next several years is truly financial discipline, particularly in Asia. It was a, a speaker from Asia who was referencing this and financial discipline is really critical. And then practice playing a long and strategic game. So, what I mean by that is really looking at today's markets and responding, but don't over respond.

However understand the markets and the products where you are going to be winners and losers in the longterm and positioning yourself to move into those markets, finding opportunities to differentiate. Right. And differentiation is key. What I think is interesting. You'll hear from me later. And, and this was a topic of conversation with folks when we were talking about like who's paying for it and how do we pay for quote, unquote green.

chemicals, whether it be green ammonia, green, hydrogen, uh, other products would even talk a lot about green surfactants and bio-based surfactants throughout these. Nobody really wants to pay more for what is effectively a drop in replacement. So therefore figuring out how to create meaningful differentiation. Understanding your markets, understanding what you're bringing to tape the table, what your customers need and differentiate, differentiate, differentiate.

That's probably my number one message for you guys today. We're going to segue over to our onsite recordings. And let me know what you think about today's episode. And if you were at WPC, what you heard and saw and what your takeaways were. We'd love to hear from you. Hi, I'm recording today at the WPC World Petrochemical Conference 2024, which is sponsored by S& P Global. The theme of this year's conference is Positioning for the Next Upturn.

And it's actually been a really interesting mix of conversations both on stage and off stage about what that actually looks like because there is, you know, a number of key themes around this. One of which, and in fact, this is the overarching theme, is that, yes, well, we're in a bit of a downturn at the moment, right? There's no doubt. Supply, or demand is flat, or appears to be relatively flat. We're in oversupply. Inflation has had an effect. What's going on in China has had an effect.

Interest rates have had an effect. Yet, the industry continues to be cyclical, and that we are clearly poised for an upturn. Maybe not this year or next year. But certainly when we think about by the end of the decade, there is an expectation of significant growth and investment restarting globally. So a couple of big themes that we talked about here at the conference that I think are just worth sharing. Number one is decarbonization.

In fact, I spent a lot of time this week in conversations around decarbonization, hearing from people on stage as well as off stage. And so what's really interesting is the onstage carbon onstage conversations for 80 percent of the time where basically that, Hey Decarbonization is here. We need to get there. Um, we need to be investing in hydrogen. We need to be reducing our greenhouse gas emissions. We need to be targeting 2050.

And yet, um, aside from one bold panelist who talked about how we're paying for this, that, that was really primarily the sidebar conversation. Almost every break I was in after every panel or every discussion was Decarbonization is great, but who's paying for it? The investment in hydrogen, ammonia, methanol, um, as the future of the energy transition is expensive. It's expensive, it's costly, it requires a public and private partnership, and it's not yet clear, really, who's paying for it.

Because, of course, there's a conundrum, and, and you guys know this, and I know this, and, is that, um, People want or think they want sustainable products. They want greener products. They want products with a lower carbon footprint. However, they need to be offering something more. Otherwise they're not paying for them.

And so this is a little bit of a dilemma I see is that, you know, if we think about some of these products that are very much commoditized, um, let's take ammonia, for example. Ammonia is ammonia is ammonia. Now, okay, somebody who's producing and selling ammonia, you might tell me differently, but the reality is it is very much a commodity product. And so there needs to be a bigger differentiator. People are not buying on product alone. What is the rest of your differentiation story?

And that is something that frankly, we did not talk about a lot here on stage, but I think it's something to talk about and we'll be continuing to talk about on The Chemical Show. Cause as you guys know, I like to talk about the customer experience, how you differentiate your business. Um, and, uh, How you really create value and you're not creating value by doing the same thing. You have to create value by understanding your customers' "why".

Creating a differentiation, whether it be in product or in service or an offering or how you package it all together. Um, and that is where the value comes in. /Hi, I'm here with Rahul Kapoor from S& P Global today here at WPC 2024. Um, and we're going to be just talking a few things about the shipping industry and what's going on there. So, Rahul, thanks for joining me.

So we went through that, it normalized, freight rates corrected, freight rates actually went to record highs, we were actually looking at 20, 000 per TEU, and that has made an impact on many of the chemical companies, right? So the whole supply chains were disrupted. We went through that, then we had Russia, Ukraine, right? I think that led to many trade flow changes. When you look at the pet camps, when you look at the oil markets and so on, so that had an impact as well.

And just recently, back in November, we had this Red Sea crisis, right? So back to back, shipping has been facing some of these geopolitical crises. Uh, just talking about the Red Sea, and if, uh, you want to go there, because that's a major disruption which we're seeing.

What we have here is we have to understand that, uh, uh, within the commercial shipping, there's a principle of freedom of safe navigation, right? That's been severely challenged. These are commercial ships which are passing through a narrow channel and they become an easy target. Uh, the only time we've seen that is back in 1980s when we had the tanker wars, right? But otherwise commercial shipping, despite the wars and all of that, continues to flow through.

So essentially coming here is we've seen almost 80 percent off. Container trade, which has been diverted, right? What that means is you're spending more time at sea, additional two weeks on. So that is high inventory cost, right? We did hear about some of the European customers, particularly suffering because of this high inventory cost as well as most, uh, time at sea, right? So there is a bit of a disruption. The good thing was demand is soft as we were talking earlier, right?

So I think that has helped and some of the capacity has been, uh, coming back. So overall the impact on prices, freights are still higher, but they're not to the level of it's, it's not as bad as COVID it is bad, but nothing comparable to what we had back then.

When I talk with companies, we're talking about, one of which is regionalization, and when we look at potentially shifting to more regional supply chains, and in some ways regional independence of supply chains.

But COVID actually brought to the fore what we call supply chain resilience. And last year at WPC, we actually did that track was the supply chain resilience. And this year we're doing decarbonization, right? Supply chain resilience is very important. And that was challenged massively in the COVID time. So there is a small effort towards what you would call a French shoring, reassuring. Right? Some of these, but China still stays at the center of the global factory of the world, right?

It's a very long drawn process. We've seen some of that move to Vietnam, India, and so other places, but it's a very slow process I would say.

So what do you see happening from that space?

Uh, if you look at particularly on the transport side, right, and we talked about Red Sea, Uh, energy security essentially means that the ships which are rerouting now are emitting three times to four times more. So in the times of energy security, the sustainability goals take a hit because the ships have to reroute, they're speeding up, they're spending more time at sea and burning more fuel, right?

But if you look at what, where we are coming from, as well as what we look at, uh, the supply chains, particularly on the transport side are going from what you used to call a single bunker or for that matter, bottom of the barrel, uh, heavy fuel oil, low sulfur fuel oil to what we have today is ammonia, methanol, we're talking about hydrogen, carbon capture, right? It's a multi fuel future. which is going to be costlier, right? So it will have an impact on the chemical value chain.

It will have an impact on the global supply chains in terms of higher costs.

And as it works in the free market, all of that should settle down.

A bit of that coming back to, I would say the Americas a bit on the Europe side. That would be one. Second is everybody would take a part, or stakeholders will be in order decarbonization, right? So it's a process. We have to be patient, but it will take some time, but we'll get there.

And the industry groups have done a great job when we think about harmonization It's to chemical products and I think about REACH as an example, um, while it started in Europe, it certainly got global implications and the industry groups have been very effective in driving standardization, um, and alignment and creating a system that works, uh, across the industry and across the globe. Not true today when we think about sustainability and ESG measurements.

It's the targets that are, countries and companies are expecting us to hit. Marine Schroeder, who's managing director of Stolt Tankers, she expressed on stage, she said, "I wish we could turn all of the people that we've got working on reporting. Um, and the complexities of reporting because the reporting requirements are different in every single jurisdiction. If we could turn all of those people and that money, that investment into those people and their time and resources into innovation.

Into innovations to figure out how to become, uh, sustainable and decarbonized." And, um, Developing the future platform for the industry, both from a product perspective, from a supply chain and logistics perspective, and more. And so that is, you know, a source of real frustration that I've certainly heard the theme coming through from stage is, um, that currently we don't have a lot of great alignment, um, on some of these standards. across the globe and we need to get there.

The second piece that goes with that is really the request that we are less prescriptive in terms of how we get to carbon and greenhouse gas reductions and instead be and instead of being prescriptive about the how be prescriptive about the what. Right.

And so allow the chemical industry and the creative minds across the industry to identify the best and the optimal products and technologies and solutions to get us to a more circular, lower carbon, um, profitable and world that we're all looking to grow and be part of.

The third piece of that and the third theme that really comes through throughout the conference again, both from on stage and off stage as I talk to people across the conference is the fact that the chemical industry is a really vital part of the energy transition. And in fact, I spoke with Tony Potter from S& P Global and I'm going to include a clip with Tony, so stay tuned for that.

But Tony, um, talked about how we actually need more chemicals in a low carbon energy transition world when we think about moving away from our traditional energy sources like oil and into energy sources like solar and wind and hydrogen We need more chemical products. Hi, I'm here talking with Tony Potter, who is the head of chemicals for S&P Global so, Great. Tony, we're, we seem to be living in a world of oversupply. That's certainly a concern when we talk to people.

Um, there's been a big discussion around decarbonization and what it means for chemicals. And I think some people see the pros of it and others perhaps see the cons of it. Um, but what do you see as the role of chemicals in the energy transition and in decarbonization?

Um, and, uh, whilst the chemical industry needs to decarbonize its processes, um, chemicals and thermoplastics play a key role in that. And in most scenarios that we look at, uh, we see people substituting these higher energy materials, uh, for plastic. Uh, you can't lightweight any form of transportation. Without plastic. No one's invented a paper car yet. Um, you don't build wind turbines without plastic and you don't build solar panels without plastic.

It seems like when we're talking about investments in the chemical industry, right? Are we going to be investing again? What do you see?

But beyond that, Look, we see a world where oil demand peaks, uh, around the end of the decade and then slowly starts to go into decline. We see no such peak for petrochemicals. We're doing forecasts out more than 30 years. We've never found anything that we could describe as peak polymer. Petrochemical demands will keep on growing as long as the population grows and as long as the wealth of that population grows.

I mean, I, I agree with you on the fact that we all seem to like to use plastics, and yet there are so many, um, you know, I think about the plastics treaty, which was really around, it went from, in fact, we heard Jim Fitterling talk this morning about it going from being about reducing plastics pollution to reducing plastic, and now we're back to reducing plastics pollution, um, I think there's some people that would say that's a big, uh, that this continued growth pattern Maybe cannot

continue.

But at the moment, if I take polyethylene as an example, probably seven or eight percent of polyethylene globally is, uh, mechanically recycled. Okay? Um, we see that number almost tripling in the next ten years, but the underlying demand growth for polyethylene is still such that we see virgin polymer demands continuing to grow. And one of the issues is actually building out the supply chain to collect, to sort, to clean waste, which in itself is carbon intensive.

Um, you know, unless you build a green supply chain, there's actually a danger you expend more carbon than you save.

We've heard from a number of people across on stage, Karen McKee from Exxon Mobil, others about the innovation that's going to be coming through from the industry, In order to enable the energy transition. So to sum it up, I would say, you know, the, the pulse and the theme of the week is the future is bright. There is an upturn. There is a lot of positivity. There is a concern about how are we paying for it and who is paying for it.

And are the experts in the industry, um, scientists, engineers, technologists, to really develop optimal solutions for us, for the world, as it relates to energy, greenhouse gas emissions reductions, etc. And, clearly a theme of who's paying for it. Right, so I think everyone, um, is clear that the economics have to work, and that's maybe a big shift, this fact that we actually need to have, we're shifting to where this has to make economic sense. It just can't make theoretical sense.

Sustainability, um, our reduction in greenhouse gas emissions by 2050 makes perfect sense in theory. However. It also has to make economic sense for companies, for governments, for individuals, um, in order to support the drive where we're going. So anyway, um, that's my summary from WPC 2024. I hope you've enjoyed it. If you attended, send me a note, let me know what you heard, what other themes came through for you. And I'd love for you to share that with me. Thanks.