EY Chemical Market Outlook - February 2020

Remaining customer-
centric in an evolving
chemicals landscape
EY Chemical Market Outlook
Frank Jenner
EY Global Chemical Industry Leader
February 2020

Overview
Page 2
The chemical industry, a supplier to all other industries, is transforming like never before.
Globally, digitization and evolving demands from end-user industries have forced chemical
companies to develop new offerings and applications. These businesses must also develop
sustainable options for products, feedstock and automated processes to meet consumer
demand. And to do this, the companies should co-create sustainable solutions with end
customers.
Chemical players are embracing artificial intelligence (AI) and machine learning in R&D to
improve data analytics and digital platforms in high-potential technologies such as soft sensors,
edge computing and 4D printing – with the goal of transforming their operating models.
Industry convergence and technology-driven disruption in today's Transformative Age also
require businesses to rethink their talent priorities. With the right mix of permanent and
contractual employees, chemical companies can develop the culture of innovation and
customer-centricity needed to keep up with constant change.
In this edition of our global Chemical Market Outlook, we explore the trends and drivers that will
shape the chemical industry of tomorrow.
Frank Jenner
EY Global Chemical
Industry Leader
frank.jenner@de.ey.com
February 2020 Remaining customer-centric in an evolving chemicals landscape

February 2020 Remaining customer-centric in an evolving chemicals landscapePage 3
Content
Evolving customer and
end-user needs
A new digital age of chemical
production
The road to sustainable
development
Prioritizing talent and culture to
drive growth
Changing global and regional
regulations

Key trends
Page 4
• A generational shift,
emergence of advanced
technology and
convergence of end-user
industries necessitate
robust solutions that
address customers'
changing expectations.
• The future of energy,
agriculture, mobility and
technology helps chemical
companies shape portfolio
planning.
• New technology is both a
driver of and partner to
innovation in the chemical
industry.
• 3D printing industry
drives an end-user
demand for specialized
inputs for example in
selective laser sintering
(SLS) printers.
• AI facilitates an efficient
innovation process.
• Advanced technologies
such as edge computing
and 4D printing can
further transform
chemical operations.
• The chemical industry
plays a crucial role in the
pursuit of the goals
established in the United
Nations' 2030 Agenda for
Sustainable Development.
• Several of these goals —
zero hunger; good health
and well-being; clean
water and sanitation;
affordable and clean
energy; and climate action
— will drive chemical
companies' focus on
health care and water
treatment chemicals, as
well as on energy
efficiency, recyclability
and use of renewable
feedstock.
• Besides focusing on digital
capabilities, chemical
companies must
encourage and foster
leadership,
communication,
innovation and other soft
skills to develop an agile,
skilled workforce.
• Global preferred
employers can be used as
models for developing a
culture of innovation,
growth and employee
well-being.
Evolving customer and
end-user needs
A new digital age of
chemical production
development
Prioritizing talent and
culture to drive growth
Changing global and
regional regulations
• Chemical companies
consider regulatory
uncertainty and volatility
as growth barriers.
• A global sulphur cap
targeting the
petrochemical industry
and tighter environmental
rules in China have
widespread impact.

Evolving customer
and end-user needs
Page 5 February 2020 Remaining customer-centric in an evolving chemicals landscape

Placing the customer at the beginning of the value chain creates real value
Chemical companies must work with customers as a part of their ecosystem to co-create sustainable solutions that meet their needs
Source: EY Industrial Products Continuous Innovation Survey 2018 (120 chemical-industry respondents surveyed in April 2018).
Chemical companies, which recorded a
10%+ profit margin and 5%+ revenue
growth in recent years, prioritized
Collaborating with customers to
redesign or create products
and services
Improving reliability and
availability of products and
services
Enhancing the speed of
delivery of products and
services

The chemical industry must develop futuristic products driven by dynamic
customer preferences and issues impacting end-user sectors
Automotive sector
• Increasing demand for electric and
connected vehicles, and
ride-sharing and -hailing models
• Emission reduction standards
• Growing market for automated
vehicles
• Decarbonization across industries
through electrification using
renewable resources such as solar,
wind and hydro
• Rise of "prosumers" — consumers
who both produce and use
electricity
Energy sector
• Increased demand for high-capacity
lithium-ion batteries
• Reduced ownership and increased
focus on utility
• Growing demand for lightweight
materials for vehicle bodies
• Need for retroreflective surfaces
• Increased commercial and industrial
use of solar energy, leading to
greater demand for solar panels
and solar cells
• Enhanced demand for energy
storage devices involving the use
of batteries such as lithium-ion
and flow batteries
• Emergence of a supporting industry
for the maintenance of solar cells
• Invest in in-house innovation to
develop smart materials such as
shape-memory alloys and cathodes
for fluid batteries
• Collaborate with research
institutes, the automotive industry
and start-ups to license the
technology around the future of
mobility
(e.g., retroreflective coatings and
dirt-repellent surfaces)
• Invest in the development of low-
cost solar technology
• Identify ways to commercialize
alternate fuel sources such as flow
batteries
• Develop dust-and water-repellent
solar cells to reduce maintenance
cost
Key priorities
for chemical
companies
Implications

Disruption in end-user industries will drive the specialized chemical portfolio of
the future
Agriculture sector
• Increasing threats to crops
• Trade wars and embargoes that
affect commodity prices
• Consumers' preference for
healthier, traceable options
• Increasing popularity of new
agriculture techniques such as
hydroponics and desert farming
• Growing 5G applications include:
• Industrial Internet of Things
(IIoT) and robotics
• Mobile broadband
• Connected mobility
• Precision agriculture
• Invest in sustainable technology
and products such as seaweed-
based plant nutrients
• Integrate blockchain into the supply
chain to enhance transparency for
the customer
• Develop value-adding products to
combat price drops due to
commodity price volatility
• Enter markets that are still in the
nascent stage of collaboration with
niche suppliers and start-ups
• Invest in the development of
chemicals for advanced electronics
Telecommunication sector
• Growing demand for health-and
environment-friendly pesticides
• Implementation of blockchain in
sources that supply chemicals,
particularly those catering to the
food industry
• Emerging demand for chemicals
that enable growth in
nonconventional agriculture
• Increased use of touch-screen
electronic devices across industries
and vehicles
• Increased use of sensor networks
across industries
Key priorities
for chemical
companies
Implications

A new digital age of
chemical production

Digital technology is now a necessity as it aids growth by supporting companies
across their segments and functions
Source: EY Digitalization in Chemicals survey (the respondents could select 3 options from a list of 11 digitalization topics), July 2019.
High-potential areas of technology,
per key global players
Improved data analysis (e.g.,
big data, business analytics, AI
and predictive maintenance)
Improvement and integration
of data management
(e.g., master data)
Digital marketing platforms
(e.g., digital markets)
39% 36% 33%

Chemical companies are leveraging digital technology to develop new business
models, explore new markets and increase innovation efficiency
Source: EY Industrial Products Continuous Innovation Survey 2018.
Digital technologies
creating area
of demand
AI for
innovation
Services
enabled by
digital
technology
• New technologies such as
3D printing and 5G will drive
the demand for enhanced
materials to complement
their use.
• A major European chemical
company has acquired
several startups and
suppliers that provide inputs
(e.g. plastic powders) for
SLS printers.
• A US chemicals provider has
developed integrated
solutions for 5G services.
• Some major chemical and petrochemical companies are using AI to
automate scientific work.
• AI and machine learning are being deployed for experimental
iterations to reduce R&D time and costs. For example, a US
chemicals producer is partnering with a machine learning and
computing company to develop quantum computing tools for
material science and chemical research.
Digital and
innovation
• Several US and Europe
coatings players are enabling
collaborative innovation
through labs where their
customers can test and
create prototypes.
• Global agrochemical
companies are offering more
than just products by adding
data-analytics services to
their portfolios to develop
holistic customer solutions.
• Digital technology is
facilitating a wide range of
innovative services and
solutions, and chemical
companies are developing
new business models to serve
the resulting customers.

New technologies can boost operations and open new avenues of growth
Why does
chemical
manufacturing
need soft
sensors1?
Can be used to predict
product quality
Helps achieve
accurate quantities in
R&D and operations
Facilitates the smart
factory (more efficiency
than hard sensors),
maintenance
and transportation
How can 4D
printing2 help
shape the product
portfolio of
tomorrow?
Why is edge
computing3
relevant to
chemical
operations?
Helps in the development of
materials whose functionalities
can be expanded
Can be used to develop products
with self-assembly feature, to skip
the middleman
Enhances the effectiveness of
cloud and IoT systems for plant
management
Reduces equipment
failure to minimize
maintenance cost
Promotes plant
and employee
safety
Helps increase efficiency
through service flexibility,
and lower capital, time-to-
market and inventory
requirements
1. Soft sensors are inferential models that use easily measured variables to estimate process variables that are otherwise hard to measure because of technological limitations, large measurement delays or high investment costs.
2. 4D printing is the process through which a 3D printed object transforms itself into another structure over the influence of factors such as temperature, light and pressure.
3. Edge computing involves deployment of data-handling activities directly to the individual sources of data, such as laptops, tablets or smartphones, reducing reliance on centralized and always-connected network segments.
Advanced technologies
such as soft sensors,
4D printing and edge
computing can help
chemical companies
enhance product
quality, develop new
business models and
accelerate innovation.

development

As suppliers to all industries, chemical companies will need to be part of the
circular economy long before other sectors.
of chemical companies
surveyed currently have, or
plan to develop, metrics for
measuring social value in the
next 12 months.
82%
20+
chemical companies, along with
consumer products companies,
cofounded the Alliance to End
Plastic Waste.
Source: EY Global Capital Confidence Barometer survey, October 2019. EY Advanced Manufacturing Global Capital Confidence Barometer highlights, November 2019.

The UN Sustainable Development Goals are expected to reshape demand across
industries …
UN
Sustainable
Development
Goals1
Subsequent
impact on
product
demand
for different
industries
Agriculture
• Focus on higher yield for the
rapidly increasing population
• Need for sustainable agriculture
Energy
• Focus on renewable sources of
energy
Life sciences
• Demand for nutrition supplements
• Need for easy availability of
lifesaving drugs
• Customized food for fighting
diseases caused by lifestyle
factors
Manufacturing (including industrial and consumer products)
• Demand for eco-friendly raw materials
• Focus on maximum product recyclability
(e.g., a global food and beverages producer
has taken steps to shift all of it products to
paper packaging by 2025)
• Demand for personal and home care products
that contain bio-based products
• Focus on reducing industries’ carbon footprint
(e.g., a global fast-moving consumer goods
company plans to halve its consumption of
new plastic by 2025)
• Responsible wastewater management
Government and public services
• Affordable health care
• Pollution control across air, water and land
• Regulatory enforcement focused on the "three R's" – reduce,
reuse and recycle
• Regulations to boost use of renewable energy sources for
commercial and residential purposes
• Encouragement of initiatives focused on water-source clean-
up and environmental preservation
Zero
hunger
Good health
and well-being
Affordable and
clean energy
Climate
action
Sustainable cities
and communities
Responsible
consumption
and production
Clean water
and sanitation
Life
below water
Source: “UN Sustainable Development Goals”, UN Sustainable Goals Knowledge Platform, UN Sustainable Development website, accessed 16 October 2019.

… which, in turn, would drive chemical companies to rethink their focus areas in
strategy and innovation
UN
Sustainable
Development
Goals
Key priorities
for
chemical
companies
Zero
hunger
Good health
and well-being
Affordable and
clean energy
Climate
action
Sustainable cities
and communities
Responsible
consumption
and production
Clean water
and sanitation
Life
below water
• Investing in R&D to
develop high-yield
fertilizers and growth
enablers
• Developing agrochemicals
with minimal effect on
the environment and
consumers’ health
• Expanding portfolios in
nutrition and bioscience
segments
• Investing in development
of innovative application
programming interfaces
(APIs) to respond to
increasing demand for
pharmaceuticals
• Investing in the
development of low-cost
solar cells and fuel
batteries
• Collaborating with the
energy sector for the
development of
sustainable fuel
• Developing lightweight
materials for the mobility
sector to reduce carbon
footprint
• Developing chemicals
with minimal ecological
impact
• Investing in R&D for the
development of bio-based
feedstock
• Upgrading the supply
chain to support a
circular economy by:
• Reusing carbon
emissions
• Reusing waste
chemicals and plastics
• Strategizing to
gradually increase
recyclable and bio-
based materials as
part of the company’s
portfolio
• Enhancing water
treatment and
purification technologies
• Collaborating actively
with recycling and waste
management firms for
reuse or treatment of
waste effluents
Source: “UN Sustainable Development Goals”, UN Sustainable Goals Knowledge Platform, UN Sustainable Development website, accessed 16 October 2019.

Prioritizing talent
and culture to drive
growth

Chemical leaders believe their company culture somewhat helps them address
key business priorities
Note: The survey included 121 chemical respondents, and the above data is for chemical respondents with positive profit margins for the preceding three years. Respondents could choose more than one option.
70%
Producing
high-quality products
67%
Reducing costs
65%
Customer experience
How effective is your culture in serving the following business needs?

In this Transformative Age, chemical companies are focusing on skills beyond their
technical know-how to develop an agile workforce
86% 85% 85%
Leadership InnovationCollaboration and
communication
Key skills at chemical companies
Chemical employers are focused on developing and nurturing their employees'
sector expertise and digital skills to facilitate the deployment of the latest
technology in their operations.

Chemical employers can gain insights from leading industries to model
themselves as the preferred employer
What can chemical companies learn from
employers in other sectors?
What do the top rankers of Forbes1 best places to work have
in common?
1 ”Top 10 reasons to work at Google,” investopedia.com, https://www.investopedia.com/articles/investing/060315/top-10-reasons-work-google.asp, July 2019
9
7
6
2
1
Technology giant
• Lifestyle and health benefits
• Growth opportunities within the
firm
• Creative and innovative work
environment
Oil and gas company
• Supportive work culture
• Learning and development
opportunities
Life science company
• Collaborative work culture
• Investment in employees’ health
and well-being
• Focus on developing a safe and
environmentally responsible
workplace
Leading hotel chain
• Employee-focused workplace
culture
• Investment in employees’
comfort
• Additional benefits, such as
adoption assistance
Automotive company
• Strong corporate culture
• Widely recognized brand
• Investment in futuristic
solutions
Develop an employee-focused culture
Provide holistic reimbursements
beyond monetary benefits
Foster an innovation-focused culture
Develop a corporate brand
Offer adequate growth opportunities

Changing global and
regional regulations

A changing regulatory landscape also presents challenges to the chemical
industry
Page 22
67%
of chemical companies consider the following to be barriers to the growth
of their businesses:
• Regulatory uncertainty
• Geopolitical or local political uncertainty
• Supply chain disruption due to trade disputes
• New environment-related policies
The impact of the tighter International Maritime
Organization (IMO) on the global petrochemical industry
• The IMO’s limit on sulfur content in fuel oil for the
shipping industry is expected to have a dual impact on
chemical suppliers:
• Freight costs for chemical imports will likely increase
as shipping companies' capital expenditures are
impacted.
• Production of light crude oil will increase the global
supply of naphtha which may benefit the naphtha-
dependent petrochemical producers.
Environmental regulations affecting the chemicals
industry
• As the Chinese Government tightens environmental
regulations, chemical companies may be facing plant
closures and overall operations cost increases.
• On the upside, some segments have seen demand grow.
For many companies that have passed costs onto the
consumer, revenues and profits have grown.

The sulphur limit will have mixed effects on the
petrochemical industry
Page 23
• Effective 1 January 2020, the IMO is imposing a limit on sulphur in marine fuels to 0.5%
from 3.5%.
• Under new regulations, shipping companies would need to either shift to low-sulphur fuel
oils (LSFOs) or gas oil.
• LSFOs are generally more expensive than high-sulphur fuel oils; hence, navigation costs
for shipping companies may increase.
• Gas oil is less expensive, can be blended into diesel and may provide greater value for oil
and gas companies.
• Shifts in the types of fuel used may lead to higher freight charges for chemical buyers
that rely heavily on imports.
• The European polyethylene terephthalate and purified terephthalic acid industry, which
heavily depends on imports from South Korea and China, is expected to face increased
freight charges.
• Production of sweet crude or light crude is expected to increase alongside demand for
low-sulphur fuels. As a result, the global supply of naphtha will likely grow (sweet crude's
production is associated with a high quantity of naphtha).
• Petrochemical producers using naphtha crackers will likely benefit.

China’s tightened environmental regulations have mixed effects on chemical
suppliers
• Most chemical companies in China have been impacted.
• As a result of the regulations, some companies have faced heavy penalties, mandatory plant upgrades for effective waste
treatment, shutdowns of manufacturing plants responsible for heavy pollution and relocations of plants to an industrial
zone away from human inhabitants.
Threefold impact on revenue and profits
Regulatory costs are increasing
overall chemical and material
production costs in the country.
Certain Chinese specialty-chemical
producers that cannot pass these
costs onto the customer have seen
their margins take a hit.
2
As several plants with
unsustainable operations have
been shut down, China has
become an importer of chemicals
such as naphthalene, which may
benefit other economies, such as
South Africa and Nigeria.
1
Product prices have increased in
segments where chemical
companies can pass the costs onto
the customer. As competitor
facilities close, some producers are
seeing greater demand; coupled
with price increases, this is leading
to higher profits.
3
For more on how global trade impacts the chemical industry.

Key
contacts
Frank Jenner
EY Global Chemical
Industry Leader
+49 621 4208 18000
frank.jenner@de.ey.com
Jade Rodysill
EY Americas Advisory
Chemical Leader
+1 214 969 8650
jade.rodysill@ey.com
Our latest thinking
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a core process and value driver
Link
How chemical companies respond to
changing trends
Link
Visit ey.com/chemicals and follow us @EYManufacturing for the latest updates to learn how EY is helping chemical companies to transform.

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