This blog is intended to as a contribution to the debate regarding the future of the chemical industry in The Netherlands (see http://www.heeftdechemietoekomst.nl). The topic is large and this blog will only touch on the main trends. The trends now visible in society are clear and have already been spotted by senior politicians and by companies and industry bodies. In other words, this blog does not present some science fiction, way out, abstract, high level, view. No, on the contrary, this view of the developments relevant for the chemical industry are based on the current reality.
The chemical industry would appear to be between a rock and a hard place. On the one side the rock or shale of the US with all its cheap gas,and on the other side the hard reality of the booming economies of the East. For an international chemical company, it is not an immediate and natural choice to invest in the slow growing European economy.
Let me give you some numbers. The reserves of shale gas in the US are at larger than the current reserves of Russia and the price of gas on the Henry Hub Nymex Spot is approximately € 5,7 per MWh which is 80% lower than the price in on the European TTF gas market and 50% lower than Asia. The economies in Asia are growing at an enviable pace, comparable to the growth rates in Europe in the 1960’s. To make matters worse, reports involving Ikea and Tata in the US would indicate that labour costs in the US and its “right to work states” are on their way down, faster than in Europe.
The fact is that the European market remains important, if only because of the number of consumers, and there should be nothing that stops European companies from benefiting from the economic growth in the rest of the world. But if you want to sell in competition, you will have to have a unique selling point. Where can the Europeans take a lead on their competition?
The economic situation is challenging, but, irrespective of the economic situation, it is common sense that, to take a lead, one has to innovate. The lead created is greater if the innovation is more fundamental and if the innovation can be used to cater for a latent present demand. If on top of that government regulation were to favour that particular innovation, things can move quickly. So quickly that if a company is not at the fore front of it all, it will be left far behind.
Two things are important here: Firsty, innovation based on a major invention can create a giant leap forward. I will first focus on this giant leap in the first part of my presentation. Secondly, we all know that companies cannot sit still waiting for the next quantum leap. This means that in the mean time innovation by small steps is an absolute necessity to stay ahead of the competition.
Based on the trends as discussed below, it is a realistic possibility that the chemical industry in Europe will move quickly towards sustainability. Not only because its employees have the talent, but because it will give them the lead required to win in the international competition.There are 5 big trends which together form the building blocks of the next quantum leap: the fundamental greening of the European economy.
The first major development is that it is the value of nature and all its resources that has been calculated by the World Bank and PWC. The value of all different aspects of nature from clean water to coal reserves, from pollination to mangrove forests, it has all been given an economic value. The total sum is 44 trillion dollars. Now that it is measured it can also be managed. We expect the cost of environmental externalities to become a standard part of accounting. Chris Knight is one of the leading accountants in this field. He gave a succinct overview of the actvities of PWC, WAVES (Wealth Accounting and Valuation of EcoSystems) and the TEEB report (The Economics of the Environment and Biodiversity) during his presentation at the “Ecosystems Comes to Town” Conference in London on 18 October 2011. Examples from Volkswagen and Puma clearly show that the environmental impact of companies can be measured and given a monetary value. In Puma’s case PWC calculated that the impact it has on the environment is valued at 94 mln euro. Puma currently does not have to pay for these externalities but if it had to, it would halve its annual profit. Puma was the first company, but definitely not the last, to publish an Environmental Profit & Loss account. Companies that adapt their production taking into account nature and its value, will have an advantage over other companies.
The second major development is that we now know how much CO2 has been emitted to put a product on a shop shelf (or in a letterbox). Just as with the valuation of nature, this is supported by thorough scientific research sponsored by trustworthy institutes such as The British Standard Institute. Even better: independent apps such as the The GoodGuide App are available enabling customers to compare which products have emitted more or less compared to other products in the same category. Here too, we now have a way to measure and subsequently a way to manage. Reducing the CO2 emissions caused by the production of a product will become a competitive advantage.
The first and second mega trend together mean that we can now calculate the value of a forest based on their ability to sequestrate CO2,and we can calculate how much CO2 has been emitted producing a product. The importance of this new possibility depends on the consumer, the politician and the investor. It is clear from the policies of companies such as DSM, AkzoNobel, Teijin Aramid and BASF that they have all recognized the importance of sustainability. The Dutch chemical industry association, the VNCI, described in its recent report on the future of the Dutch chemical industry, a future scenario in which third generation biomass will, in 15 years time, account for more than 15% of total feedstock for the chemical industry. The chemical industry in this scenario reacts to demand from the market. “Triggers for this scenario are the continued greening of consumers and the marketing strategies of consumer business companies like Nestlé, Philips, Unilever and the The Coca Cola Company.” The Coca Cola Company uses FIRA to verify its sustainability reports adding impartiality and trustworthy expertise to the report.
These companies are reacting to the third mega trend, a growing demand from customers for a reduction of CO2 emissions. Demand from customers is driven by emotion, not necessarily facts. In Europe, climate change is now the second most important topic according to a EU Poll. In the Netherlands we will, in the next 10 years, be faced with the consequences of the melting North Pole. It is now possible to sail to the North Pole at the height of summer in August , and the North Pole ice cap has retracted so far that Cairn Energy has started drilling test wells for the exploration of oil and gas in Greenland. The rising water can be as much as 1,30 m for countries around the North Sea. As a consequence the iconic images of the next 10 years, here in North West Europe, will be the polar bear jumping from ice slate to ice slate to find the last bit of solid North Pole ice and, of citizens carrying sand bags to keep their feet dry. These consumers will want products and services with a lower CO2 count, giving an advantage to companies that take the environment into account when producing these products or delivering these services.
This emotion will be used by our politicians, they are the fourth mega trend. They will demand accounting principles which take the costs of externalities into account, and they will consequently use the fact that the carbon footprint can be calculated, to tax that footprint. A carbon tax on the carbon footprint will be a fair tax as it will tax the polluter. It will be accepted by the voters emotionally influenced by the perceived effect CO2 has on the climate, and it will be a welcome and necessary source of revenue for our governments chronically short of cash. The French government has taken the lead with Grenelle 2. Under Grenelle 2, 170 companies will give their products a carbon label as discussed above. The law states that this will be obligatory for all products sold in France. The recent decision by the European Parlaiment to reduce the allocated CO2 emission rights also proves the point.
It is possible that politicians will opt for an alternative measure, for instance a global introduction of cap and trade. This is less likely as it requires global rather than just European agreement. The result on consumer prices however will be the same. Producers creating less carbon will be at an advantage.
Finally the investor, the shareholder. Maybe I should have started with the pressure the shareholder are exerting. Currently, sustainability is an important aspect in the choice of investors. A point in case are the investment policies of major pension funds. All the funds are looking for long term security of income and have come to realise that companies rated highly in the Dow Jones Sustainability Index are a better investment than companies with a low or none DJSI rating. So far $ 8 billion has been invested in Dow Jones Sustainability Indices. It would not surprise me if the recent publication in Science regarding the production of plastics from biomass will attract a lot of attention from investors and that Dow Chemicals as one of the sponsors of the project will benefit most.
To summarize: some think that all the talk about climate change is a hype. The fact is that major clients of the chemical industry, the clients of those clients, politicians and investors all consider sustainability important. Therefore, a company able to use the fact that the carbon footprint can be exactly calculated, to fundamentally innovate its processes, its products and its services, will be the winner. It might well be that this change comes first to the EU and that Asia and the US will follow. Once they follow though, they will have a disadvantage.
Amsterdam, spaklerweg 20
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