Facing

Unprecedented

PressuresValueCreation

in

Chemicals

2023OCTOBER

31,

2023By

Andreas

Gocke,

Adam

Rothman,

Frederik

Flock,

Hubert

Sch?nberger,

Amit

Gandhi,

and

Jingshi

HuREADING

TIME:

15

MINThe

?ve-yearperiodending

on

December

31,

2022,

was

soberingfor

the

global

chemical

industry.

Theindustry’soverall

worldwide

average

total

shareholderreturn

(TSR)

was

7%

from

2018

through

2022.Fo

r

the

previous

?ve-yearperiod,

the

TSR

had

been

12%.

The

2018–2022

?gure

represents

the

chemicalindustry’sworst

?ve-yearshareholderperformance

the

since

2008–2013.Moreover,

nearly

all

of

thedecline

took

place

from

June

2021

to

December

2022.?2023

Boston

Consulting

Group1Investors

are

still

trying

to

?gure

out

whether

the

TSR

decline

isa

temporary

shock

or

a

new

normal

forthe

chemical

industry

and

what

it

will

take

for

shareholdervalue

to

bounce

back.

Yet

experience

tells

usthat

the

industry

is

highly

resilient,

and

already

it

seems

to

be

adapting

to

the

strongheadwinds

it

isfacing.Amongthe

recent

challenges

are

the

war

in

Ukraine

and

its

ancillary

shortages,

in?ation

and

risinginterest

rates,

energy

price

volatility

and

highercosts,

sudden

decreases

in

demand,

and

increasingregulatory

pressure

around

sustainability,particularly

in

Europe.

The

industry

islargely

committed

toreducing

carbon

emissions—an

expensive

but

necessary

transition.

In

addition,

the

distance

betweenthe

companies

with

the

highest

TSRand

those

with

the

lowest

TSRnarrowed,

a

sign

that

structuralfactors

are

a?ectingmany

companies,

regardless

of

their

strategic

position

or

managerial

andtechnological

excellence.The

chemical

industry

was

not

alone

infacingadverse

conditions.

Indeed,it

outperformedthe

averageTSR

for

all

industries,

whichdropped

in

2022

from

12%

to

5%.That

isnot

muchconsolation,

however.All

geographies

except

emergingmarkets

were

a?ected,

and

so

were

all

?ve

industry

subsectors:agrochemicals,

base

chemicalsand

basic

plastics,

focusedspecialties,

industrial

gases,

andmultispecialties.

Unfortunately,we

have

seen

few

signs

of

improvement

so

far

in

2023:

the

industry’sTSR

didnot

reboundin

the

?rst

half

of

the

year.Nonetheless,we

remain

?rm

believers

in

the

chemical

industry’s

ability

to

weatherthe

storm.

WhileTSR

has

fallen

overall,

it

remains

high

in

a

fewgeographies

such

as

India,

Switzerland,

South

Korea,China,

and

the

Middle

East.

Furthermore,

some

high-?yingproduct

categories—such

as

electronicchemicals,

fertilizers,and

industrial

gases—have

prosperedby

focusing

on

a

speci?c

market

withstrongdemand.

Notably,

topTSRperformers

exist

in

every

region

and

subsector,

generallydistinguishedby

their

approach

to

businessand

operations.The

focus

of

thisyear’s

Value

Creation

in

Chemicalsreport

is

on

the

trends

a?ecting

the

industry,andthe

ways

in

which

they

vary

by

geography

and

subsector.

We

will

look

at

reasons

for

concern

along

withbright

spots,

and

highlight

factors

that

may

leadto

strongerperformance

in

the

future.

(See

“How

WeCalculate

and

Report

TSR.”)HOW

WE

CALCULATE

AND

REPORT

TSR

Total

shareholder

return

(TSR),

which

accounts

for

thechange

in

share

priceand

anyother

e?ects

on

shareholders’

net

wealthin

a

speci?ed

period,

represents

thepercentageincrease

in

a

company’s

value—stock

priceplus

dividends—over

a

givenperiod.

Only

companies

listed

on

publicstock

exchanges

can

providethedata

neededto

calculateTSR.?2023

Boston

Consulting

Group2Multiplefactors

a?ect

TSR.

Readers

of

BCG’s

ValueCreators

series

may

befamiliarwith

our

methodologyfor

quantifying

therelativecontributions

of

thevariouscomponents

of

TSR.

(See

theexhibit.)

We

use

the

combination

of

revenue(sales)growthand

change

in

margins

as

an

indicator

of

a

company’s

improvement

infundamental

value.

We

then

use

thechange

in

thecompany’s

valuation

multipletocalculatetheimpact

of

investor

expectations

on

TSR.

Together,

thosetwo

factorsdeterminethechange

in

a

company’s

market

capitalization.

Finally,

our

model

alsotracks

thedistribution

of

freecash?owto

investors

and

debt

holders—in

the

form

ofdividends,

share

repurchases,

and

repayments

of

debt—to

determinethecontributionof

free-cash-?ow

payouts

to

a

company’s

TSR.All

of

thosefactors

interact—sometimes

in

unexpected

ways.

Acompany

may

increaseits

earnings

per

share

throughan

acquisition

and

yet

createno

TSRif

theacquisitionerodes

its

grossmargins.

Moreover,

some

forms

of

cashcontribution

(such

as?2023

Boston

Consulting

Group3dividends)

can

impact

a

company’s

valuation

multipledi?erentlythan

others

(such

asa

share

buyback);

the

e?ects

are

complex.In

this

report,

theTSRs

used

for

groups

and

for

purposes

of

comparison

are

generallymedians.

TheTSRs

associated

with

individual

companies

are

straight

calculations

ofthosecompanies’

capital

gains—changes

in

share

pricevalueplus

dividend

value—rounded

to

thenearest

percentage.Investors

Switch

to

Large-Cap

CompaniesEach

year,we

explore

the

changes

in

shareholdervalue,

as

measuredby

?ve-yearannual

TSR,

forcompanies

in

the

chemical

industry

whose

market

value

exceeds

$1

billion.

Fo

r

the

currentassessment,

covering

2018

through

2022,

326

companies

quali?ed.

This

number

is

slightly

lowerthanthe

one

in

our

previous

report,

which

covered

338

companies

overthe

2017–2021

timeframe.

WeexcludedRussian

chemical

companies

from

thisyear’s

assessment

because

of

the

Ukraine

war,

andwe

excluded

Turkish

chemical

from

it

because

of

hyperin?ation

in

that

country.

Both

of

thesefactorsmake

data

comparisons

extremely

di?cult.?2023

Boston

Consulting

Group4As

in

previous

reports,

we

have

singledout

large-capchemical

companies—those

witha

market

valueof

more

than

$6

billion—forcomparisons

withotherindustries.

Wegenerate

thesemetrics

withBCG’slong-establishedValue

Creators

database.

There

are

93

large-capchemical

companies

in

thisyear’sreport,

up

from

79

in

last

year’s

report.

This

indicatesthat,

even

in

a

turbulent

market,

14

formermid-cap

companies

crossedthe

$6billion

threshold.

Anotherhopeful

note

isthat

the

chemical

industryremains

above

average

in

average

?ve-yearTSR,rankingin

the

top40%

of

the

33

major

industriesthatwe

track.

(See

Exhibit

1.)Nonetheless,

the

large-capresults

slipped

from

their

previous

rankingof

7thamong

33

majorindustries

for

the

2017–2021

period,

to

a

rankingof

13th

for

the

2018–2022

period.

Their

averageshareholderreturns

peryeardropped

from

19%

to

9%.Mid-capchemical

companies

faredevenworse.

Their

TSRdropped

from

10%

to

5%,markingthesecond?ve-yearperiodin

a

row

in

whichlarge-capcompanies

outperformedmid-caps—a

reversalfrom

previous

reports,

where

mid-capcompaniesgenerally

did

better.?2023

Boston

Consulting

Group5This

trend

may

turn

out

to

be

a

sustained

shi

,

and

several

factors

may

explain

it.First,

scale

canprovide

operational

e?ciencies,and

this

isparticularly

important

when

supply

chains

are

in

?ux.Functional

excellence

isalso

easier

to

achieve

at

large

scale.

Larger

companies

can

more

easilymanage

regulatory

burdens,

which

seem

likely

to

increase

for

chemical

companies,

and

they

havemore

resources

for

sustainability-related

investments.

They

are

less

vulnerable

to

in?ationary

costs,too.

Still,

thesefactors

may

not

help

all

large-capcompanies.

Forexample,

as

a

group,

multispecialtycompanies

didnot

fare

well

in

this?ve-yearperiod,

eventhough

they

tend

to

be

relatively

large.A

Storm

with

Many

HeadwindsExhibit

2

shows

in

stark

terms

howthe

chemical

industry

has

faredduring

the

past

?ve

years.

It

plotsregions

versus

industry

subsectors,

with

positive

average

TSRsshown

in

green

(if

they’re

above

10%)

orgray

(if

they’re

relatively

?at).

Red

circles

represent

the

subsector-region

combinations

where

TSRdeclined.?2023

Boston

Consulting

Group6The

shock

a?ectedjust

about

the

entire

industry.

Indeed,the

decline

in

TSR

in

eight

regionalsubsectors,

all

in

mature

economies,

is

unprecedented

in

the

industry

since

we

began

this

series

ofstudies

in

2010.

Only

a

fewproduct

categories—electronic

chemicals,

industrial

gases,

and

fertilizers—delivered

average

TSRsover10%,

withall

three

below13%.Multispecialty

companies

and

base

chemicalsand

basic

plastics,

in

particular,

were

adversely

a?ected.Geographically,

the

chemical

industry

struggledmost

in

Europe,

North

America,

and

Japan.

One

brightspot

for

Europe

and

North

America

was

industrial

gases,

a

relatively

small

group

of

companies

thatincludes

Linde,

Praxair,

and

AirProducts.The

best

overall

TSRperformance

came

from

emergingmarkets,

a

geographic

group

that

includesSouth

Asia,

Latin

America,

Africa,

and

the

Middle

East.

India,

at

23%,

was

the

only

country

withaverage

TSR

above

20%

(23%)and

it

was

followedby

Switzerland,

averaging12%.

The

two

countrieswith

the

largest-volume

industries,

China

and

the

US,

averaged8%

and

3%,

respectively.Exhibit

3

o?ers

clues

about

the

businessfundamentals

underlying

theseresults.

The

exhibit

breaksdown

the

average

TSR

for

our

rosterof

313

chemical

companies

accordingto

the

impact

of

key

driversof

shareholdervalue.

The

le-most

column

shows

revenues

risingrapidly—more

rapidly

than

in

anyprevious

?ve-yearperiodsince

2011.

Revenues

contributed

10.6%

in

shareholdervalue

between

2018and

2022,comparedto

9%

in

the

previous

periodof

2017–2021.Unfortunately,

several

otherfactors

helped

pull

TSRdown.

First,

worldwide

demandfor

chemicalproducts

and

raw

materials

isslowing.

One

strongindicatorof

this

is

the

fact

that

chemical

productionvolume

in

Europe

has

declinedfor

two

consecutiveyears,

in

2021

and

2022—a

phenomenon

we

havenot

seen

previously

in

thesereports.

This

suggeststhat

the

rise

in

revenues

re?ects

price

in?ation,

at?2023

Boston

Consulting

Group7least

to

a

small

extent.

Anotherindicatoris

theever-growing

number

of

sales

and

pro?t

warnings

fromglobal

chemical

companies

in

recent

months.

We

also

see

higher-than-expected

chemical

inventories.Because

it

supplies

virtually

all

otherindustries,

the

chemical

industry

tends

to

be

highly

responsive

tochanges

in

the

global

economy.

Fo

r

example,

as

rising

interest

rates

slowedconstruction

in

categoriesrangingfrom

wind

turbines

in

the

UK

to

residential

buildings

in

China,

demandfor

materials

also

fell.In

addition,

there

isa

demandceiling

in

geographies

withagingpopulations

such

as

Japan,

SouthKorea,

and

Western

Europe.

People

there

have

less

need

for

automobiles,

home

improvement,

orpersonal

care

products.

The

extent

of

thisdemandceiling

isnot

yet

clear,but

for

now,

at

least,it

seemsto

be

havinga

dampening

e?ect

on

TSR.Another

major

factor

in

the

decline

in

TSR

was

the

volatility

of

supply

and

demand—imbalancesgeneratedby

the

turbulence

of

the

pandemic

and

its

lockdowns,

together

witha

rapidreductioninbuildingand

infrastructure

construction.

There

were

also

some

periods

of

extreme

shortages

inproduct

categories

such

as

medical

equipment

and

paints.

Chemical

companies

respondedby

quicklyrampingupproduction,

oen

to

see

demandfall

again.The

second

column

of

Exhibit

3

shows

that

margins

were

squeezed,

leading

to

a

small

loss

in

TSR

(–0.7%).General

in?ation

playeda

role

here,

especially

for

companies

that

had

deferred

investment

andwere

then

adversely

a?ectedby

debt.

Production

costs

increased

for

most

companies,

and

the

volatileprices

of

fossil

fuels

had

varied

e?ects—bene?tingcompanies

in

Asia,

for

example,

but

hurtingthosein

Europe.

Supply

chain

costs

have

risen,

too,

as

many

of

the

pandemic’sdisruptions

remainunresolved,and

as

logisticshave

generally

shiing

from

global

to

more

local

footprints,

even

forcomplex

products

like

batteries.An

evenlargerdecline

in

multiples,shown

in

the

third

column

of

the

exhibit,re?ects

investor

concernsabout

overall

market

conditionsand

margin

e?ects,along

withotheruncertainties

about

the

future.The

Russian

invasion

of

Ukraine

added

immeasurably

to

geopolitical

tensionsandfurther

disruptedsupply

chains,

whichwere

already

weakenedby

the

pandemic.

No

one

knows

how

longthat

con?ictwill

last.

Fluctuations

in

supply

and

demandmay

persist

for

some

time.Potential

investors

in

this

industry

are

also

factoringin

the

costs

of

sustainability

and

decarbonizatione?orts,

which

are

driven

in

large

part

by

government

regulation

and

market

pressures.

Shareholdersare

also

concerned

about

regulatory

shis

that

might

a?ect

costs—proposed

limits

on

poly?uoroalkylsubstances

under

the

US

Toxic

SubstancesControl

Act,

for

example,

and

limits

on

food

additives

inthe

European

Union.Cash

?ow

e?ects,shown

in

the

fourth

column,

represent

the

sum

of

?nancial

factors:

net

debt

change,dividend

yield,and

changes

in

the

number

of

shares.

The

annual

rise

of

6.8%

in

thesee?ectsovertheperiodfrom

2018

to

2022

is

about

half

that

of

the

previous

?ve-yearperiod.

We

attribute

this

relatively?2023

Boston

Consulting

Group8low

growth,

in

comparison

withprevious

reports,

to

in?ation

and

othere?ects

of

a

generally

dismalyear.Regions:

A

Bright

Spot

in

Emerging

MarketsThe

problems

of

2018–2022

were

not

distributed

evenly.

A

fewgeographies—most

notably

Germany,Japan,

Australia,and

East

Asia—enduredthe

most

dramatic

declines

in

TSR.

Other

industrializedgeographies

experienced

?at

or

modest

growth.

(See

Exhibit

4.)With

the

mature

consumermarkets

hitting

a

demandceiling,

the

greatest

sources

of

growth

for

thechemical

industry

are

emergingeconomies—particularly

South

Asia.

(This

year,all

South

Asian

mid-cap

and

large-capchemical

companies

are

headquarteredin

India.)

The

average

TSR

in

2018–2022was

almost

twice

for

chemical

companies

in

South

Asia

(23%)

as

for

those

in

Switzerland,

the

nexthighest

geography

at

12%.?2023

Boston

Consulting

Group9The

average

Indian

chemical

company

has

positive

multiplesand

a

steady

cash

?ow.

India’s

growingbase

of

wealth

and

its

expandingmiddle-classpopulation

support

steadily

expandinglocal

demandforconsumerproducts,

construction,

and

ultimately

chemicals.At

the

same

time,

India

still

has

a

verylowasset

base,

consisting

mainly

of

base

petrochemicals,pharmaceuticals,

?ne

chemicals,

intermediates,agrochemicals,

fertilizers,and

dyesand

pigments.

All

of

this

adds

up

to

a

market

with

veryhealthygrowth

prospects.It

has

taken

years

for

India

to

developa

chemical

industry

that

can

meet

domestic

demand.

Overall,industry

revenueshave

increasedby

more

than

6%

annually

since

2012.

Thisdecade

of

relativelysteady,rapid,

compoundinggrowth

has

solidi?edthe

chemical

industry’s

in?uence

and

presence

inIndia.The

government

provides

?nancial

incentives

for

launching

manufacturingoperations

inseveralindustrial

sectorsthat

the

chemical

industry

supplies:

automobiles,

pharma,

and

electronics.

Theseincentivesalso

apply

directly

to

the

chemical

industry.In

addition,

the

government

explicitlyencourages

and

subsidizes

new

industrial

parks

that

include

this

industry.

More

generally,

it

hasinstituted

regulations

to

make

doing

business

easier.Othergeographies

with

higher-than-the-median

average

chemical

company

TSRs

include

Switzerlandat

12%;

the

Nordic

countries

in

Europe,

averaging10%;

the

Middle

East,

at

9%;and

South

Korea

andChina,

each

at

8%.

(The

median

for

all

chemical

companies

was

7%.)

The

chemical

industry

is

oen

aharbingerof

the

future

of

business

ingeneral,

so

its

strongTSRperformance

in

India

and

the

MiddleEast

may

signal

accelerated

industrializationin

those

areas.Fo

r

Switzerland,

one

key

factor

may

be

the

presence

of

specializedcompanies

such

as

Bachem,

theonly

European

chemical

company

among

the

top10

in

TSRperformance.

Bachem

isa

market

leaderin

peptidesand

oligonucleotides.

It

has

maintained

its

TSRrankingby

consistently

investing

to

capturemarket

growth

and

expandingits

manufacturing

capacity.South

Korea

ishome

to

15

chemical

companies

whose

market

value

exceeds

$1

billion,and

most

ofthem

have

ties

to

growing

and

pro?table

product

categories

such

as

battery

materials,

electronics,

orlife

sciences.Meanwhile

Ja

pa

n’s

37

companies

in

the

large-capchemicalscategory

faltered,

deliveringan

average

TSR

of

–3%

overthis?ve-yearperiod.Although

China

hadthe

strongest

chemical

industry

revenue

growth

of

any

geography,

highly

de?atedmultipleskept

TSRsdown.

Investorswere

aware

that

the

soeningChineseeconomy

has

caught

someAsian

chemical

companies

o?

guard.

Less

vigorous

construction

activityis

a?ectingmany

chemicaland

materials

manufacturers—forexample,

those

that

make

PVC

and

otherplastic

materials.

Inaddition,

shis

in

global

supply

chainshave

a?ectedthe

Chinesemarket

for

raw

materials.

Untilrecently,

70%

of

the

chemical

industry’sworldwide

growth

had

been

projected

to

come

from

China.Today,

theexpected?gure

may

be

lower.

Finally,

the

Chinesechemical

industry’s

weakening

TSRperformance

may

leadto

a

soeningof

foreign

investment

in

the

country.?2023

Boston

Consulting

Group10Nevertheless,

China

had

some

strongTSRperformers

in

the

most

recent

?ve-yearperiod.

SKHSUis

anexample

of

a

Chinesechemical

company

that

has

demonstratedactive

TSRperformancemanagement.

Thisfocusedspecialty

company,

whichmakes

paints

for

Chinesebuildersand

homeimprovement

buyers,has

distinguished

itselfby

linking

businessperformance

to

a

clear

strategicnarrative—in

thiscase,

around

sustainability.

The

company

follows

a

carbon

reduction

regime

and

hasreleased

its

own

environmental,social,

and

governance

report.

Revenues

increasedby

22%

in

the

?rsthalf

of

2023,

indicatingone

path

to

growth.Subsectors:

A

Turbulent

Year

for

the

UnfocusedSince

2012,

when

BCG

began

publishing

value

creatorreports

on

the

chemical

industry,

the

risingmarket

value

of

focusedspecialty

companies

has

been

a

consistent

theme.

Thisreport

once

againcon?rms

that

?nding.

Evenin

a

turbulent

?ve-yearperiod,

in

whichlarge-capcompanies

improved

as

agroup,

the

two

overall

lowest-performingindustry

subsectors

remained

base

chemicalsand

basicplasticsand

multispecialty

companies.Global

TSR

for

base

chemicalsand

basic

plasticsplayers

was

just

2%.In

Europe,

North

America,

andNortheast

Asia

(

Japan

and

South

Korea),

base

chemicalsand

basic

plasticsrecordednegative

TSRs.This

re?ects

an

increasingly

challenging

competitiveand

regulatory

environment.

Fortunately

for

thesubsectoras

a

whole,

theseeconomically

mature

geographies

represent

a

relatively

small

industryfootprint.

The

companies

are

predominantly

centered

in

emergingmarkets

and

in

China,

where

theiroverall

TSRperformance

was

fairly

stable,

albeit

just

above

5%.TSRperformance

for

multispecialty

companies

was

still

lower:

0%

returnsover?ve

years.

Here,

again,the

most

dramatic

declinesoccurredin

Europe,

North

America,

and

Northeast

Asia,

whichhappen

tobe

the

home

regions

of

nearly

all

of

the

companies

in

this

category.≈

Their

–7%

TSR

in

Europe

isunprecedented.

Never

in

the

12

years

of

publishing

thisreport

have

we

seen

that

muchshareholdervalue

destroyed

in

a

regional

subsectorovera

?ve-yearperiod.Why

did

thishappen?

In

general,

the

capital

markets

have

punished

chemical

conglomerates

whoseportfolios

contain

unrelated

businessmodels.

As

shareholders

respondto

declining

multiplesbyexiting

further,

the

stockvalue

tends

to

race

to

the

bottom,re?ecting

the

conglomerate’s

worst-performinglines

of

business.

As

in

the

case

of

base

chemicalsand

basic

plastics,

theseoutcomes

alsore?ect

the

in?uence

of

external

factors:

highercosts

for

raw

materials,

greatersensitivity

to

energyprices,

higher

levels

of

environmental

regulation,

and

lowerdemandin

mature

markets.?2023

Boston

Consulting

Group11Exhibit

5

trackskey

?nancial

factors

for

multispecialty

companies

versusfocusedspecialty

companies.The

exhibit

shows

how

key

KPIs

in

thesetwo

types

of

chemical

companies

have

movedfartherapartduring

the

past

5

years.That

doesn’t

mean

that

all

focusedspecialties

did

well.Our

analysis

foundthat

poor

performers

in

thiscategory

were

associatedwithregions

burdenedby

stagnant

GDPs

and

relatively

mature

markets.Amongthe

most

challengedproduct

categories

were

inksand

pigments

(–6%),?bers

andintermediates

(–2%),and

paints

and

coatings

(which

saw

a

drop

in

TSR

from

15%

in

the

previous

?ve-yearperiodto

6%

in

2018–2022).Still,

there

are

exceptional

companies,

with

relatively

high

TSRs,

in

all

?ve

subsectors,

includingmultispecialty

companies.

And

in

the

?rst

half

of

2023,

multispecialty

companies

appear

to

be

doingbetter.

Tw

o

examples

are

Posco

Chemical

in

South

Korea

and

Mitsubishi

Chemical

in

Japan.

Thissubsectorhas

recently

regaineda

median

5%

TSR—above

average

for

the

chemical

industry.Top

Per

for

mer

sWithin

SubsectorsOverall

di?erencesamong

product

categoriesduring

our

?ve-yearperiodwere

striking.

Perennial

high-performingproduct

categories

such

as

electronic

chemicals

(13%

TSR)

and

industrial

gases

(12%)stayedstrong,

buoyedby

persistent

demand.

Fertilizers

(at

11%)and

agrochemicals

(10%)reboundedfrom

past

lowerperformance.Thesenumbers

seem

to

re?ect

thisyear’s

agricultural

shortages,?2023

Boston

Consulting

Group12includingthose

associatedwith

the

war

in

Ukraine,

which

led

othergeographies

to

compensate

byboosting

food

production.The

otherproduct

categories

that

performedabove

the

global

median

line

were

all

specialty

chemicals:personal

care