North American Chemical Companies Must Make Moves to Outmaneuver Competitors in Their Revitalized Industry

CHICAGO, IL--(Marketwired - Jul 9, 2015) -  Major market forces, primarily the availability of low-cost natural gas and natural-gas liquids (NGLs) and the return of manufacturing to the U.S., are powering a once-in-a-generation renaissance in the North American chemical industry. In this environment of increased growth, companies must adapt quickly to maximize their competitive advantages and seize new opportunities. North American Chemicals 2020: Capturing Opportunities in the Revitalized Industry, a new report out today from The Boston Consulting Group (BCG), analyzes the forces behind the industry's revitalization and recommends six actions North American chemical companies must take to win.

"The best-performing North American chemical companies will be distinguished by their ability to anticipate the challenges and prepare to capture value in this revitalized landscape," says Andrew Taylor, a BCG senior partner and a coauthor of the report. "Well-informed strategies will allow them to seize first-mover advantages and respond agilely as supply-and-demand developments reshape the chemical industry."

The report estimates that demand for the North American chemical industry's products will grow at a compound annual rate of 3.7 percent through 2020, outpacing the growth of the overall economy and driving sales to more than $1.2 trillion by 2020. A major rebalancing of supply and demand is promoting the favorable growth outlook:

• On the supply side, the availability of low-cost natural gas and NGLs, driven by the shale boom, is improving the fundamental economics of U.S. chemical production relative to that in the rest of the world.

• On the demand side, the chemical industry is benefitting from the reshoring of manufacturing to the U.S. from traditional low-cost countries, increasing incremental domestic demand for chemicals by at least $10 billion to $21 billion by 2020.

• Some industry segments will benefit from the changes in supply and demand more than others. Polymers, for example, stand to capture significantly higher revenues as a result of the increased incremental demand from the plastics and rubber industry, whereas bulk petrochemicals will benefit more from shifts on the supply side.

Favorable Dynamics Create New Opportunities

The abundant supply of natural gas and NGLs is also contributing to significant advantages for the industry's feedstock, particularly for ethylene producers. The price of ethylene continues to be set by higher-cost, naphtha-based production, but the availability of ethane from shale resources allows U.S. ethylene producers to shift to an advantaged raw material as well as a production process that requires less capital, has lower operating costs, and generates higher yields.

"We believe that the industry's feedstock advantages are sustainable, notwithstanding the recent sharp decline in crude-oil prices," says Abhijit Kodey, a BCG partner and a coauthor of the report. "The fundamental attractiveness of North America-based production of major chemical building blocks and their derivatives has not been significantly affected."

The report details three principles for determining the extent to which each chemical segment's costs will be affected by supply-side dynamics. Twelve segments -- primarily base chemicals and polymers produced only a few steps from base chemicals -- will experience the greatest impact.

"U.S. base-chemical producers enjoy favorable marginal supply economics and can reap the benefits from the feedstock cost advantage," says Adam Rothman, a BCG principal and a coauthor of the report. "These companies are now in a position to make strategic decisions about whether or not to pass this cost advantage downstream."

The industry's revitalization will have significant implications for corporate portfolios and the industry's structure during the next five years. Companies will restructure their portfolios and must decide how to invest: to increase specialization, to focus on their core businesses, or to expand their presence across the value chain.

A copy of the report can be downloaded at www.bcgperspectives.com.

To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com.

About The Boston Consulting Group
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