Innovative Approaches in Chemical Week

April 15, 2011 - New York, NY

From Chemical Week, April 15, 2011

by Robert Westervelt

The Chemical Heritage Foundation/NPRA Symposium on Entrepreneurship and Innovation in the Petrochemical Industry allowed three leading industry executives to share insight on how industry can grow and thrive in a more competitive global environment. Raj Gupta, former chairman and CEO of Rohm and Haas (R&H), received the 15th annual Petrochemical Heritage Award at the event, held as part of the 2011 NPRA International Petrochemical Conference in San Antonio earlier this month. ExxonMobil Chemical president Stephen Pryor and Celanese chairman and CEO David Weidman joined Gupta on a panel at the event.

Continued technology and materials advances will be needed to meet increasing appetites for energy, Pryor told attendees. ExxonMobil’s own forecast predicts that global energy demand in 2030 will be about 35% higher than in 2005. “It was not long ago that the U.S. was facing declines in natural gas production and had the highest gas prices in the world,” Pryor says. Scarce gas drove companies to explore new methods of drilling. “Innovation in production from shale and other unconventional sources has enabled a 20% rise in natural gas production over the past five years, and restored output to levels not seen since gas production peaked in the 1970s,” Pryor says. “The increase in natural gas production is good news for the U.S. economy, security, employment and the environment,” he says. U.S. ethane supplies are up 25% since 2005, providing significant feedstock advantage and reinvigorating the U.S. petrochemical industry, he adds. “This was foreseen by virtually no one,” Pryor says. “Policy makers would be wise to keep in mind this example of the power of free-market innovation and the positive flow-through effects it can have.”

Weidman told attendees there are certain critical competencies that chemical makers should master to increase the value of their companies. “There will be three foundational pillars for success going forward,” Weidman says. “One is geographic growth, the second is innovation, and the third is productivity.”

The shift toward emerging markets, led by China, underscores the need for companies to become more global, Weidman says. By 2050, the Bric economies—Brazil, Russia, India, and China—will become a much larger force, and account for four of the globe’s six largest economies, according to Goldman Sachs. The U.S. will be number two and Mexico number five.

Innovation is a second lever that can improve value, Weidman says. Companies that have greater than 50% of revenue from new products have been able to increase revenue by 10%/year of the past decade, Weidman noted, citing statistics from ACC and the Council for Chemical Research (Washington). Companies with less than 10% of revenue from products created in the last five years demonstrated no growth, Weidman says. “And productivity is also essential for creating value for shareholders and to remain competitive,” he adds.

Companies need to pursue a balanced strategy across the three key fundamentals, Weidman says. A study commissioned by Celanese found that if a company was simply average in all three areas, enterprise value would decline 20%-25% over 10 years. A company able to deliver above-average performance on one of three elements will increase value 20%-25%, and one that can deliver on two strategies would increase value 60%-65%. A company able to execute all three strategies well would increase value by 120%-125%, the study found. “Aggressive strategies that execute two or three of the levers will increase enterprise value,” Weidman says.

Several shifts have changed the chemical industry landscape over his 40 years in industry, Gupta says. First is higher and more volatile prices for energy and feedstocks. Exchange rates have also become more volatile since the world’s leading economies adopted floating currency exchange rates in the 1970s. Also, different patterns of economic growth have emerged with new customers, new competitors and new markets coming to the fore. Geopolitical and macroeconomic events as well as natural disasters also have heightened risks as economies have become more interconnected, Gupta says.

Changes have forced existing players to adapt, he says. At R&H, the company shifted away from products such as Plexiglas and fungicides, which were becoming commodity oriented or the company did not have a position that allowed it to differentiate in the market. It emphasized sectors such as electronics, which required strong technical know-how and closer relationship with customers and were less tied to commodity cycles and energy and feedstock costs. “Marrying value with pricing is very important,” Gupta says.

In order to succeed, companies need to make necessary adjustments quickly, have a global presence, and invest in the best systems and the best people, he says. . . .

In comments at the event, Gupta also offered one of the best explanations to one of industry’s most vexing questions: What is a specialty chemical company? Broadly stated, he says, a company that has to explain the impact of external factors such as currency fluctuations and raw material costs on performance is not truly a specialty chemical company.

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