Chemical Industry Outlook for 2024

The chemical industry should balance short – and long-term goals to deal with the uncertainty of the current situation and prepare for the future.

After a challenging 2022, many in the chemical industry expect a modest rebound in production in 2023. By mid-2023, however, several chemical companies had slashed their forecasts. A number of factors have led to weak global demand for chemicals, including the economic recession in Europe, inflation in the United States and a smaller-than-expected rebound in demand in China. In addition, overordering in 2021 and 2022 led to high inventory levels, leading to months of destocking. As a result, chemical production in the first eight months of 2023 increased by less than 1% year-on-year, with production declining in many market segments. 2 Many companies have shifted their focus to reducing costs and improving efficiency to help offset the decline in production.

In the United States, recession fears have receded as signs of a “soft landing” have increased, but economic growth is still expected to slow, 3 leading many analysts to predict only a modest rebound in chemical production. 4 Destocking of many chemicals may transition to restocking, but underlying weak demand and excess capacity for some products may persist. Under such market conditions, chemical companies should balance their short-term and long-term goals. The American Chemistry Council expects capital spending in the U.S. chemical industry to remain largely unchanged year-over-year in 2024, before increasing to an annual growth rate of 3% to 4% in 2025-2026. But where chemical companies deploy this money will be critical in determining their competitive position in the coming years.

This is partly because the competitive landscape is changing. These changes can open up new opportunities for chemical companies, but they also expose the industry to new vulnerabilities. Over the past three years, stakeholder pressure and government policies have incentivized investment in the energy transition. As a result, the convergence of sectors related to the energy transition appears to be accelerating. For example, some oil and gas companies are moving into critical mineral extraction and processing, 6 agriculture, 7 and chemicals 8 to ensure clean energy supply chains. At the same time, some chemical companies are moving into lithium processing, battery manufacturing-9 and clean ammonia-10 for similar reasons. So while there are new opportunities for chemical companies, the industry is also competing with other industries that typically have stronger cash flows, such as large oil and gas companies.
To help companies begin developing strategies to address these issues, we examined the following trends in our Chemical Industry Outlook 2024:

Demand driver
Regional dynamics
Digital and artificial intelligence
Circular economy
Sustainability and trust

1. Demand drivers: Energy transition drives demand for chemicals
The energy transition is creating a wave of manufacturing activity that relies on chemicals and materials to support it. Over the past two years, new government policies and incentives have spurred investment in the energy transition. The Infrastructure Investment and Jobs Act (IIJA) was signed into law at the end of 2021, injecting more than $70 billion into electric vehicle infrastructure and clean energy transmission. 11 Then, in the summer of 2022, Congress passed the Creating Beneficial Incentives for the Production of Semiconductors (CHIPS) and Science Act and the Inflation Reduction Act (IRA), An additional $469 billion in tax incentives and funding was injected into industries such as domestic semiconductors, lithium-ion batteries, solar panels and other clean energy technologies, 12 as well as components and materials for these products.

As a result, while aggregate demand for chemicals is weak in 2023, demand for chemicals and materials needed to support the energy transition is expected to rise in 2024 and beyond as the effects of these policies reverberate through the economy.

Impact on demand
How will the Energy transition affect overall demand in 2024? In 2023, global energy investment is estimated at $2.8 trillion, with more than 60 percent invested in clean energy technologies such as renewables, electric vehicles, and battery storage. 13 Part of this is a response to US policies that have helped stimulate private sector investment. For example, in the year after the Chip Act was signed into law, the private sector announced $166 billion in investments in semiconductor plants, 14 In the year after the Inflation Reduction Act was signed into law, the private sector announced about $88 billion in investments in clean energy manufacturing. 15

As private sector investment rolls out, not only will new plants be built and production increased, but demand for U.S. sourced inputs is also likely to rise due to content requirements. While total U.S. manufacturing output in the second quarter of 2023 was essentially flat compared to the previous quarter, output in automotive and semiconductor manufacturing (the industries affected by IRA, IIJA, and CHIPS) increased by 11.3% and 6.7%, respectively. 16 Production in the chemical sector may not be significantly affected by the near-term increase in production due to previous inventory builds and destocking, but this is expected to change in 2024.

More than 75% of all emissions-reduction technologies needed to achieve net zero emissions by 2050 are supported by the chemical industry. 17 For example, the industry makes battery materials for electric vehicles; Heat pump refrigerant; Epoxy resins, polyurethanes and lubricants for wind turbines; And semiconductor solvent. These sources of demand are likely to drive increased production in the chemical industry in 2024, as more than 100 projects are expected to come online in the coming year (Figure 1).

2. Regional dynamics: Regional competition is heating up, driven by commodity prices, policy and supply chain issues
The regional competitive landscape has changed significantly over the past three years, causing many in the chemical industry to rethink their long-term strategies. Volatile energy markets, changing regional policies and supply chain disruptions have raised concerns about deindustrialization in Europe and caused some chemical companies to re-examine their assets and supply chains. As technology evolves and decarbonization efforts increase, more changes in talent demand and clean power supply are expected (Figure 2). Chemical companies are expected to continue to transform their portfolios in 2024 as they make strategic decisions about the future of their business in this new landscape.

The impact of commodity prices
Historically, the relative costs of energy and raw materials have often affected the regional competitiveness of chemical production in the short term. However, for the foreseeable future, recent geopolitical events have changed this competitiveness; This has led some companies to reconsider the viability of their assets. Global liquefied natural gas (LNG) prices slowed in 2023 after reaching a record high in the summer of 2022. 18 Still, the LNG spot market is likely to remain volatile as the market balances new import and export capacity, which could leave much of Europe’s demand exposed to global prices until it shifts to cleaner alternatives or receives greater volumes under long-term contracts. Meanwhile, the United States and the Middle East are expected to benefit from relatively cheap domestic sources of natural gas and liquefied petroleum gas (LPG), while China is likely to benefit from oil and gas trade with Russia and large volumes of LNG under long-term contracts.

Policy impact
New climate-related policies are also affecting regional competitiveness. In February 2023, Europe announced the “Green Deal Industrial Plan” to counter U.S. subsidies and prevent the outflow of industrial activity from Europe. In addition, the Cross-border Regulation Mechanism (CBAM) was adopted in May 2023 to help level the playing field between the EU and foreign producers by setting a carbon price for certain carbon-intensive products. The impact of the carbon border regulation mechanism is not expected to be fully realized until 2026 at the earliest, but it is likely to divide the global market into more carbon intensive product markets and less carbon intensive product markets, which could have implications for global chemical producers. At the same time, domestic manufacturing has grown following the passage of the Inflation Reduction Act and the Chip Act, and foreign investment in manufacturing in 2022 has risen to its highest level in more than eight years (Figure 3).

Impact on the supply chain
Onshore outsourcing, nearshore outsourcing and dating outsourcing are gaining momentum. Supply chain disruptions have become common during the COVID-19

pandemic and have been exacerbated by the Russia-Ukraine war. In addition, the pressure to decarbonize is incentivizing the localization of supply chains.

Localization not only improves the economics of biobased and recycled raw materials, but also reduces long-distance transportation and supply chain emissions. At

the same time, the Circle of Friends aims to help mitigate geopolitical risks, as seen in a recent deal between Australian and American companies to merge to secure the lithium supply chain. 23

Olefin and polyolefin market share battle
One area where regional dynamics are changing the landscape is olefin and polyolefin. In 2023, China completed more than 20 petrochemical projects, increasing its share of global petrochemical capacity to 25%. 24 Chinese refineries have switched from fuels to petrochemicals in response to falling demand for fossil-based transportation fuels. As China moves toward self-sufficiency, it has expanded capacity downstream in the supply chain, adding ethylene, propylene, polyethylene and polypropylene. At the same time, factories in the United States and the Middle East also benefit from more competitively priced raw materials. As U.S. ethane production grows, companies are building ethylene and polyethylene capacity to absorb feedstock even as ethane exports continue to increase. 25 However, global utilization of polyethylene and polypropylene plants declined as supply exceeded demand. 26 Thus, one question for 2024 is whether low utilization will lead to the permanent closure of plants in China and Europe, or whether these plants will be able to withstand challenging market conditions until the market balances.

3. Digital and Artificial intelligence: Data is becoming an important feedstock for chemical excellence
Digital and artificial intelligence (AI) technologies are important to the future of many industries, but in the chemical industry, data is becoming an important feedstock for innovation and operational excellence. The chemical industry has been digitizing its operations for decades, but only recently has digitization accelerated to the point where companies should go digital to help maintain a competitive edge. Companies seem to be moving beyond solving specific use cases in silos and toward a broad digital approach that integrates systems across operations and businesses. Through digital integration, companies will benefit from increased productivity, accelerated innovation, improved decision-making, and stronger customer relationships.

Adoption rate
Digital investment declined in 2023, partly due to a slowing U.S. economy and high interest rates. After growing 6.6 percent in 2022, the chemical industry’s spending on information technology is expected to decline 0.1 percent in 2023. However, 94 percent of leaders surveyed by Deloitte said AI will be critical to their organization’s success over the next five years. 28 The decline is therefore expected to be short-lived. Several chemical companies have announced AI initiatives to accelerate research and development (R&D) of sustainable products, 29 to predict the impact of changes in the production of a product or other process, 30 and to gain insights by tracking data across the value chain. 31

The rise of artificial intelligence
The chemical industry is experiencing an increase in the adoption of AI technologies. Many chemical companies are using Industry 4.0 technologies such as the Internet of Things, digital twins, and robotics to collect data and automate processes. However, companies that have advanced further on the digital Maturity Model33 are beginning to use AI across lines of business (Figure 4). For example, some companies are using AI and machine learning (ML) to build predictive models to help optimize operations or predictive maintenance. However, the next step is to implement AI or ML and other technologies to accelerate material discovery, reduce time to market and optimize operations across the board. A chemical company recently partnered with a tech company to use generative AI to identify new applications for existing products by analyzing data from patents, news, social networking services, and the company’s product dictionary.

Companies can realize the potential of digital technologies by collecting, storing, processing, and communicating large amounts of data. Data can come from a variety of technologies in a variety of business activities, including sensors on machines, customer transactions, and research and development activities. The quality of this data is important for the effective use of AI and other sophisticated analytics techniques to help spot patterns and trends that can be used to improve decision making.

Chemical and materials companies are expected to continue digitizing across all business dimensions in 2024. However, chemical companies should consider a number of limitations and risks when developing an AI strategy, including the cost of the technology, ethical use, potential bias, and intellectual property protection. However, companies that can anticipate these challenges and develop a digital strategy that includes governance may be better able to take advantage of the benefits of deployment.

4. Circular economy: Companies continue to develop supply chains to support circular investment
Chemical industry leaders seeking a competitive edge are often aware of the great possibilities of the circular economy. It can provide a clear path to achieving the Sustainable Development Goals by minimizing waste and reducing Scope 3 emissions while preserving economic value. Momentum is expected to grow further in 2024 as new projects are announced or come online.

Plastic recycling
In response to brand targets and government policies, investment in plastic recycling continues to increase. Many brands have announced goals to use more recycled ingredients and design their packaging to be recyclable or reusable. 35 Companies upstream in the supply chain are also working towards similar goals in an effort to reduce Scope 3 emissions. Meanwhile, US states and Europe continue to adopt restrictions and bans on single-use plastics. The signing of a UN treaty to end plastic pollution is expected by the end of 2024; The details of the treaty could slow or speed up the plastic cycle. Despite this momentum, only about 9% of plastic is currently recycled. 37

While it is widely accepted that mechanical recycling produces fewer greenhouse gas emissions than advanced recycling, the limitations of mechanical recycling – such as the need for a limited type of plastic and low pollution levels when producing low-quality plastic – have led to an acceleration of advanced recycling announcements to reduce the amount of plastic that ends up in landfills. 38 Thus, while mechanical recycling currently accounts for approximately 96 per cent of total plastic recycling capacity, 39 due to feedstock constraints, advanced recycling capacity is expanding to meet demand. 40 If all announced projects are completed, advanced recycling capacity could more than triple between 2023 and 2026 (Figure 5). 41

In the past few years, 24 states have passed legislation that classifies advanced recycling as manufacturing rather than waste management, thus protecting them from stricter environmental regulations. 42 However, some states are still sorting through the wide range of advanced recycling technologies on the market and their environmental impact. In 2024, more states are likely to consider advanced recycling legislation than federal action, which could provide clarity to companies considering whether to expand capacity.

Battery recycling
Lithium-ion battery recycling has received a lot of attention in recent years and is expected to grow in 2024 and beyond. In 2021, while China’s existing and planned recycling capacity is almost three times that of the United States, 43 the United States and Europe have accelerated their development through their recent initiatives. For example, the Inflation Reduction Act made electric vehicle batteries recycled in the United States eligible for domestic manufacturing subsidies, spurring innovation and investment in the sector. In addition, while battery waste may initially become a feedstock for many of these battery recycling facilities, the number of end-of-life electric vehicle batteries is expected to increase significantly by the 2030s.

Biobased feedstock
The growth of bio-based feedstocks continues to show promise, and in March 2023, the Biden administration announced a goal of replacing 90 percent of plastics over the next two decades through the use of biotechnology and bio-manufacturing. While these are only targets, they indicate the direction in which the Government is moving. In early 2022, the U.S. Department of Defense announced that it would invest $1 billion in domestic manufacturing infrastructure for the bioindustry over the next five years to boost the industry. 47 These initiatives are still in their early stages but are likely to accelerate in the coming years.

Establish a localized supply chain
Building a resilient supply chain may be the key to the success of these circular solutions. So far, companies have demonstrated their ability to innovate through new business models and partnerships. Some companies have signed long-term contracts with raw material suppliers and recycled ingredient offtakers to help minimize risk. Some companies have expanded vertically, operating along larger parts of the supply chain. Other companies are working with the company to build a broader network of raw materials and processing. Strengthening cooperation across the supply chain is likely to remain critical through 2024 to ensure sufficient raw materials are available for these recycling facilities.

5. Sustainability and trust: Data and digitization can increase brand transparency and trust
Trust is important for brand competitiveness, but some events in 2023 affected the level of trust in the chemical industry. A study by the U.S. Geological Survey found that at least 45 percent of tap water in the United States may contain one or more perfluoroalkyl and polyfluoroalkyl substances (PFAS), adding to these concerns. 48

But while PFAS are a top consideration for many policymakers, the issue is emblematic of a larger shift in products, operations and supply chains as stakeholders increasingly demand that companies work to minimize negative impacts on health, safety, the environment and society. For years, chemical companies have been taking steps to minimize these effects. Still, it’s more important now that companies want to differentiate their products and brands by increasing transparency and improving collaboration with stakeholders.

Response to PFAS
In response to concerns about PFAS, some brands have announced their intention to eliminate PFAS from their products. At the same time, regulators in the United States and Europe have also proposed new rules. As part of the Green Deal announced in 2020, the European Commission has pledged to ban thousands of “non-essential” hazardous chemicals, including PFAS, by 2030. 50 This hasn’t happened yet, but it could move in the direction of increased regulation. In the United States, the Environmental Protection Agency has proposed designating some PFAS as hazardous substances under the Comprehensive Environmental Response, Compensation, and Liability Act, which would increase transparency about the release of these chemicals. More than 20 U.S. states have also announced bans or restrictions on certain PFAS uses, such as firefighting foam, cosmetics, and food packaging. 52

However, not all PFAS have the same physical, chemical, environmental, or toxicological properties. For example, the two most studied PFAS, perfluorooctanoic acid and PFOS, were largely phased out by 2016 due to their toxicity, mobility, and bioaccumulation potential. 53 However, fluoropolymers are considered by many in the industry to be of low concern under OECD standards. To complicate matters further, there are currently no alternatives to fluoropolymers for certain uses, such as solar panels, green hydrogen, and lithium-ion batteries. As the industry waits to see if regulators will distinguish PFAS compounds in upcoming rules, some companies have announced that they will phase out the manufacture and use of PFAS, and some organizations are engaged in innovation for alternatives. 56

Differentiation through transparency and collaboration
Increased transparency and collaboration can go a long way toward helping chemical companies build trust and differentiate their brands. Stakeholders often want information about the products they use, the brands they buy, and the assets operating in their communities. As digitization leads to the ability to collect data in research and development, operations, and supply chains, stakeholders are demanding that companies be more transparent and make responsible decisions.

For example, the ability of companies to track input sources and track product emissions seems to be becoming increasingly important to customers. Earlier this year, a chemical company launched its end-to-end traceability technology with blockchain-enabled services; This technology enables buyers to precisely trace the origin of the ingredients in their products. Another chemical company has launched a pilot blockchain project for emissions tracking, marking a key step in reducing emissions across the value chain. 58

More and more companies are realizing that transparency and collaboration are important to differentiate their brands. Highly trusted companies tend to be four times more valuable than less trusted companies, 59 because highly trusted companies build stronger brand loyalty among customers and employees. Deloitte’s qualitative and quantitative TrustID™60 research shows that brand trust depends on four factors: reliability, competence, transparency and human touch. Chemical companies score relatively high in reliability and capability, and the gap between high and low performers is relatively small. However, there is a considerable gap between high and low performers when it comes to humanity and transparency, which presents a significant opportunity for chemical companies to differentiate themselves in the market .

Have a place in a sustainable future
Strategic positioning is crucial to helping a company maintain a competitive edge. Many companies get caught up in short-term uncertainty, but those that successfully position their business for the future can become industry leaders. In a down cycle, smart businesses often innovate and find ways to improve relevance, effectiveness, and productivity. This can give them an advantage in the upswing cycle.

As stakeholder pressures increase, markets change, policy incentives stack up, and technology advances, chemical companies should prepare for a high-tech, low-carbon future. Despite the current challenging market environment, industry leaders are likely to be the ones to make strategic decisions and secure a clear path to strong and sustainable returns.

As chemical companies head into 2024, here are some signposts they need to look out for:

Global economy: A recession in any part of the global economy could keep chemical demand low, putting pressure on already struggling companies and reducing available capital. However, the reverse is also true.
Policy and regulation: Expect ongoing policy activities affecting the chemical industry (e.g., permitting reforms, PFAS regulations, UN treaty to End Plastic pollution). Depending on how they are achieved, these policies may accelerate the momentum towards sustainability and all the factors that support it (e.g., material innovation, technology), or they may bring about adverse factors (e.g., adverse regulations on advanced recycling). As we move into an election year, there could be further uncertainty.
Digital outreach: The applications of new technologies, including artificial intelligence, seem endless. Where companies choose to launch their programs may indicate where they think their competitive advantage lies.
Collaboration across the supply chain: Whether building a new supply chain for EV development, strengthening an existing recycling supply chain, or tracking emissions in the supply chain to help minimize scope 3 emissions, collaboration across the supply chain has become critical. More partnerships, joint ventures or other collaborations could herald increased activity in securing resilient supply chains and innovative products and processes.