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Circular economy key to future growth of chemicals companies

Nov 24, 2019
7 min read
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The chemicals industry in the Middle East is calling for the adoption of the circular economy model to lower operating costs and create new products and services that facilitate incremental value creation and sustained growth, according to a new report published by the Ideation Center, the think tank for Strategy&, part of the PwC network.

The traditional and dominant linear economic model of “take, make, use, and waste” is unsustainable. The linear model is wasteful and environmentally damaging. Plastic use, for example – often epitomizing both single-use convenience and pollution – globally has increased twentyfold in the past half-century and is forecast to double again in the next 20 years. Customers want an end to the linear model and are demanding environmentally friendly products. The linear model’s successor is the circular economy (CE), which seeks to reuse products and treats waste as a loss of value. Companies are adopting the CE as it can lead to competitive advantage, offers a response to customers, and is less damaging to the environment. The CE can lower operating costs and create new products and services that facilitate incremental value creation and sustained growth.

Frederic Ozeir, Partner with Strategy& Middle East, further added, “In the past, companies adopted aspects of the circular economy model only to further their corporate social responsibility agenda. Now, they have started to believe that the model can be a source of competitive advantage.”

Various other factors are also pushing companies to act. Technological breakthroughs, and a customer base that is increasingly sympathetic to environmental concerns, pave the way for profitable innovation that capitalizes on the circular economy concept.

Dr. Yahya Anouti, Partner with Strategy& Middle East, said, “In the GCC region, sustainability plays an increasingly significant role in the governments’ national visions. Both the UAE and Saudi Arabia have set out ambitious targets on the treatment of waste, a focus towards renewable energy, and water recycling. These stricter environmental standards together with the economic potential are enabling a shift towards a circular economy.”

As far as the chemicals industry is concerned, companies should begin by deciding their commercial rationale for moving to a circular economy model. Once they define the business objectives, they can consider pilot projects that are likely to reap short-term rewards and inspire the confidence to continue within the organization. To further their circular transformation, they would also need to change their corporate culture so that circular economy becomes second nature to their staff.

The Strategy& report outlines competitive advantage of adopting a circular economy for the region’s chemicals industry

A 2018 Strategy& Middle East poll of chemicals executives found that much of the chemicals industry grasps the potential competitive advantage from the circular economy. Around half of industry representatives said that circular economy was a growing priority on the corporate agenda, while a similar percentage stated that circular projects will create value.

Leveraging the circular economy model, chemicals companies in the region can adopt different methods for competitive advantage that include; circular procurement, customer value chain integration, circular products, and end product recycling, noted the report.

a) Circular procurement

Circular procurement turns procurement of products into leasing, maintenance, and sharing services. It reduces damage to the environment because of its strong recycling component. An additional benefit for companies in markets such as the Gulf Cooperation Council (GCC) is that circular procurement will encourage companies to bolster local production through refurbishment and manufacturing activities. 

For instance, barrels and pallets are widely used in the chemicals industry for storage and distribution of goods. The shift to a circular procurement approach is creating new markets for barrel reconditioning and for pallet pooling.

In Saudi Arabia, the market for barrel reconditioning remains underdeveloped. Yet there are significant cost-saving opportunities from using reconditioned barrels. In the Kingdom, the price of a reconditioned barrel is between 50 percent to 60 percent of that of a new metal barrel, and between 60 percent and 70 percent of the cost of a new plastic barrel.

Saed Shonnar, Principal with Strategy& Middle East, added, “The barrel reconditioning market enables chemicals companies to use reconditioned used barrels instead of new barrels. Chemicals companies can opt for either a “buy” or “lease” model depending on whether they sell their products with or without the barrel. Companies can recondition barrels multiple times and can achieve the same attributes as newly manufactured barrels. This is particularly true for plastic barrels, which are also increasing in demand due to their growing popularity in the petrochemical industry.”

b) Customer value chain integration

Under this approach the chemical suppliers can provide chemical leasing services to their customers. Customers and chemicals companies agree on a fee for chemical management services, payable for each unit of product treated instead of annual volume contracts. For example, in chemical management for water treatment, the basis for payment is cubic meters of purified water. This approach leads to cost saving for the customer, and more efficient use of resources.

There are other benefits too. This outsourced chemical management model helps the companies that buy chemicals to reduce health risks. Similarly, these companies can improve environmental practices by achieving a lower concentration of polluting chemicals. Chemical suppliers are also better equipped to ensure safe transportation and storage of hazardous chemicals contributing to further health, environmental, and cost benefits.

c) Circular Products

The CE model goes against the grain of what had traditionally been chemical products that are disposable, energy-intensive, and non-recyclable. Chemicals companies have a major opportunity to create circular products that are sustainable while also offering vital solutions and strengthening several sectors. For example, some chemicals companies have been producing more durable, multi-use packaging products, while others have produced additives that reduce the energy intensity of industrial processes (e.g., asphalt additives that reduce heating requirements.)

The chemicals sector must respond to a general public that is becoming more conscious of environmental concerns. Such a dynamic could encourage chemicals companies to innovate, such as by introducing new recyclable or biodegradable products and packaging to replace existing ones.

d) End-product recycling

Consumers and companies tend to get rid of products in their original state in landfills or other disposal sites. With a circular economy approach, however, companies put end-of-life products through mechanical or chemical recycling, recovering materials and components during the process. This prolongs the life of these components, potentially reduces negative environmental effects, and helps economies to become more self-sustainable and self-sufficient.

Jana Batal, senior fellow with the Ideation Center said, “Tire recycling for instance presents a promising opportunity for chemicals companies in the GCC region. We estimate that Saudi Arabia scraps around 30 million tires annually, of which only a third are recycled — compared to an average 50 percent worldwide.”

Adopting a circular economy approach is about using sustainable methods that are consistent with competitive advantage. Chemicals companies can exploit wholly new avenues for revenue generation by offering chemical management expertise, or by developing high-quality durable or recycled products.

“These changes go beyond products and processes; they require a change in mind-set and corporate culture, along with the building of relationships with partners and governments. Successful pilot schemes and then wider implementation of circular initiatives should allow first movers to secure an advantage over slower-moving rivals,” said Dr. Yahya Anouti, Partner with Strategy& Middle East.