A growing focus on sustainability will see the chemicals needed to reach net zero rise in demand. But what does that mean for the industry and its customers?
The chemicals industry contributes trillions to the global economy every year and plays an active role in some of the world’s largest value chains. But recent socio-political developments have started a sequence of events that will bring big industry changes in the coming years.
Primarily, a growing emphasis on green initiatives from governments, stakeholders, and consumers is accelerating investment in sustainable technologies. And the chemicals industry plays a huge role in enabling those technologies. In fact, Deloitte tells us the chemicals industry supports more than 75% of the emission reduction technologies needed to meet net zero goals by 2050.
Whether it’s lithium, NMC, and LFP in the batteries used to store electricity generated by renewables, or the chlorine used to manufacture wind turbines, demand for the chemicals and materials required to fuel these technologies will inevitably increase – and prices will follow suit. This will be a welcome boon for chemicals on the back of a slow year driven by European recession and stateside inflation.
It’s not all good news though, as there’s something of a paradox at play here. As one of the biggest contributors to carbon outputs, chemicals producers face their own pressures to make production processes cleaner and more sustainable. And this could prove a challenge in the face of rising demand.
A changing landscape
One of the major drivers pushing the renewables market is a changing regulatory landscape.
In the US, policies such as the Infrastructure Investment and Jobs Act, the CHIPS Act, and the Inflation Reduction Act are focused on reducing dependency on China to meet the country’s energy needs and driving homegrown production.
These policies are infusing more than $500 billion dollars into sectors that can drive clean energy generation. This includes semiconductors, lithium-ion batteries, solar panels, and other technologies.
This huge increase in sustainability investment will be welcomed by many, but it’s interesting to note that only a small fraction of this has been earmarked to fund decarbonisation technologies for heavy industry, like chemicals and materials producers.
Similarly, in Europe, a combination of legislation and treaties like the Paris Agreement are driving forward the sustainability push, and various government incentives across the continent are seeing organisations position sustainability as a priority. In the UK alone, almost £5 billion in funding is available to help businesses become greener and drive the government towards its 2050 net zero target.
All of this will contribute to a surge in sustainability investment. The International Energy Agency reports that in 2023, roughly US$2.8 trillion was invested in energy, and a huge 60% of that was put towards clean energy technologies like renewables, EVs, and battery storage.
But financial and legal incentives aren’t the only factors. The changing attitudes of people and a collective shift in recognising the importance of sustainability is also driving the need for change.
The insights required to drive change
As companies face growing pressure to replace fossil fuels, sustainable supply teams across all industries will be looking at ways to lower emissions while still controlling costs.
Energy transition requires a huge amount of investment into technology and land, as well as transmission, distribution, and storage solutions. So, for most, starting with short-term quick wins will be a go-to strategy.
One consideration in this context will be finding the right suppliers for their green initiatives. Data from Deloitte tells us that Scope 3 emissions contribute to more than 70% of most organisation’s total emissions, so re-strategising supply chains to ensure suppliers themselves are using best-in-class sustainable production and distribution methods becomes key.
For the chemicals companies set to play a key role in the renewable future, this poses both a challenge and an opportunity to become a go-to supply partner. As a result, we’re seeing many invest heavily in greener production, with products like blue ammonia and blue hydrogen, and alternative chemicals like lithium iron phosphate that can replace cobalt and nickel.
Other technologies like carbon capture solutions, advanced recycling, and even nuclear process electrification are also on the rise. And it’s reported that members of the American Chemistry Council are dedicating around 25% of their budgets to sustainable manufacturing.
The environmental and reputational benefits of this new approach will provide a genuine competitive advantage for chemicals and materials manufacturers in a market where organisations increasingly seek environmentally friendly collaborators.
Some of the costs of this clean production will inevitably be passed onto customers, but a combination of brand benefits and government grants and incentives should make this an investment that pays dividends for both producers and buyers.
What this means for buyers and producers
For organisations looking to meaningfully pursue sustainability initiatives and those that rely on chemicals to produce sustainable technologies, gaining insight into the manufacturing processes and supply chains of those who produce chemicals and materials is key. And chemicals and materials providers who are transparent about their processes stand to gain an advantage in this area, as potential clients become more rigorous in their strategies around short, medium, and long-term supply partners.
Producers of chemicals and materials should track technology advancements and industry developments to ascertain which materials and production processes are most likely to be required to meet industries’ both short and long-term sustainability needs. Further, category intelligence should be used to assess supply and demand dynamics of the sustainable materials.
On both sides of this spectrum, expert market insights can play a significant role in managing change and optimising the results.
At The Smart Cube, our specialists regularly work alongside procurement teams in the energy sector to explore industry trends and provide the supply chain insights that help power more strategic decision making. We’re currently helping companies gain insight into how government sustainability investments will trickle down into the market, how new initiatives will drive change, and the immediate and future opportunities worth embracing.
If you’d like to see how The Smart Cube can help you make the most of the transition to clean energy and create a data-driven strategy to thrive in a changing landscape, get in touch.