Building a competitive advantage through circular chemistry
GCC chemical companies are operating in a challenging environment. There are wild swings in commodity prices, scarcer resources, and stricter environmental requirements. Growth is, however, available if they abandon the traditional linear economic model and embrace that of the circular economy (CE).
At present economies work on the linear approach of “take, make, use, waste.” While this creates growth, it depletes resources and produces tremendous volumes of waste and emissions. By contrast, the circular economy has three foundations: optimization of the consumption of finite resources, maximization of product use, and the recovery of byproducts and waste. Technological advances and changes in consumer attitudes have rendered CE methods feasible.
CE models create a closed-cycle for materials as they travel through the process of production and consumption, an approach that regards waste as value leakage. All of this makes the circular economy attractive to the chemicals industry. These firms should stop looking at the circular economy from a corporate social responsibility perspective and instead examine the substantial business advantages that the circular economy brings.
The five differentiated benefits of the circular economy are, first, the reduction in natural resources consumption of as much as 30% by optimizing usage and recovery of spent material. Second, the opening of new customer segments and diversifying revenues streams through differentiated products and services that are sensitive to changing customer needs. Third, a smaller environmental footprint because of the maximal exploitation of resources, recovery of expended material, greater product durability, recycling, and energy efficiency.
“Some companies using circular economy techniques have slashed wastewater contamination as much as 70% and CO2 emissions as much as 75%.”
Some companies using CE techniques have slashed wastewater contamination as much as 70% and CO2 emissions as much as 75%. Fourth, companies adopting the CE are at the leading edge of product innovation and disruptive business models. Fifth, companies using CE methods can source more content locally within the value chain and more broadly from their supplier and consumer ecosystem.
Within the chemicals industry, companies can obtain competitive advantage in four areas thanks to the CE: circular procurement, chemical management, circular products, and end-product recycling.
The circular economy transforms procurement from a cost center that buys large volumes to a relationship in which suppliers become partners. Circular procurement also changes products into services that companies can lease, reuse, sell back, or share — known as “product-as-a-service.” As a result, products last longer, operating costs are lower, energy efficiency is encouraged, and there is less effect on the environment.
Such an approach also stimulates local refurbishment and manufacturing. One example is Philips, which now sells some customers lighting services as opposed to light bulbs. The customer pays a fee for a light service, rather than owning a bulb. In return, Philips owns the actual bulb, and provides maintenance and upgrades. This way, customers receive the latest technology, which means they are always using the most energy efficient lighting.
The circular economy also changes chemical management from being all about sales to a collaboration between producers and consumers. The idea is to create the most value through long-term service management contracts. This is the approach now taken by PPG Industries and the carmaker, Opel. Instead of an annual supply agreement, there is a partnership. PPG Industries has staff who work at Opel dealing with the painting of cars and managing the relationship with 50 second-tier paint suppliers. This has resulted in less waste: a 30% reduction in wastewater sludge measured by weight and 70% less chloride concentrated in wastewater. The accuracy of the paint job on cars is up by 90%, while painting cars now consumes 30% fewer resources.
Similar gains are available for GCC industries that are chemicals consumers. For example, utilities can reduce the amount of waste by getting the most from their chemicals consumption for water and wastewater treatment. Similarly, food producers can save money on cleaning and lubricating machinery, water vessels, decontamination, and packaging. Natural resource enterprises, whether oil and gas companies or mining and metals firms, can also make significant efficiency gains in their use of chemicals and reduce the amount of waste in general — and wastewater in particular.
“The circular economy leads to circular products that last longer, are energy efficient, and easily recycled.”
“Companies cannot achieve this transformation alone. Policymakers and regulators have to encourage the ecosystem of suppliers and customers through a mixture of incentives and regulation.”
The circular economy also leads to circular products that last longer, are energy efficient, and easily recycled. Such circular products meet changing customer demands, are innovative, and create growth opportunities. For example, Dow Chemical Company manufactures recyclable dishwasher pods thanks to collaboration with a green products manufacturer. AkzoNobel has created an additive for asphalt so that less energy is needed to pave roads.
In the GCC, the move to greater local content means more demand for specialty chemicals in such areas as aerospace and automotive, renewable energy, and recycling. Already, GCC governments are more demanding of importers in terms of recycling, bio-degradability, and recycling. Saudi Arabia now mandates that the plastic packaging on imports be degradable.
The final advantage the circular economy confers is through end-product recycling. Instead of throwing used products away, such as dumping them in landfills, the circular economy mechanically or chemically recycles them, which means recovering some materials and components. The result can be the growth of local industry and fewer carbon dioxide emissions.
In Canada, Environmental Waste International retrieves oil, gas, steel, and carbon black from old tires through a process of reverse polymerization. The extracted gas goes into electricity generation for the extraction process. In the GCC, there are opportunities for chemicals companies to use old tires as material for flooring, insulation, and soundproofing. They can make commercial grade chemicals, fuel, and feedstock from old plastics.
To implement the circular economy, chemical companies must understand the flow of materials in the value chain, so they can see circular flows inside their operations and in the surrounding ecosystem. This will allow them to spot leakages of value. Then they need to select pilot projects with considerable value, quick wins that will build momentum. The final step is operating model transformation — reworking of processes, funding, teams, resources, metrics, staff motivation, and governance — so the company becomes a CE-based organization.
Of course, companies cannot achieve this transformation alone. Policymakers and regulators have to encourage the ecosystem of suppliers and customers through a mixture of incentives and regulation. GCC chemical companies can take full advantage of the spread of the circular economy if they grasp its commercial advantages. By doing so, they can find new growth opportunities and improve environmental practices in the region.
About the authors:
Andrew Horncastle, Partner, Strategy&, (formerly Booz & Company), part of the PwC network
Saed Shonnar, Principal, Strategy&, (formerly Booz & Company), part of the PwC network
Jana Batal, Senior Fellow, Ideation Center, the leading think-tank for Strategy& Middle East