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Brazil’s Locomotive Breath

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The process of growth and modernization in Brazil has been always described as an example to be followed by other developing countries. Nevertheless, the Brazilian ‘locomotive’ has stopped.

The country is going through a period of dramatic political and economic instability. Although the Olympics Games should have been an international show of Brazilian power, they revealed the structural weakness of a country full of ambiguities and contradictions instead. Petrobras’ inquiry, combined with negative effects of the economic crisis, seem to have temporarily buried the China of South America. Oil wealth becoming yet another time not a blessing but a curse.

“In a broader sense, the hydrocarbons and its scarcity phychologization, its monetization (and related weaponization) is serving rather a coercive and restrictive status quo than a developmental incentive” – diagnoses prof. Anis H. Bajrektarevic, and concludes: “That essentially calls not for an engagement but compliance.“

To describe the history of the nation we need to focus our attention on oil, because the black gold is the embodiment of the success -and fall- of the Brazilian economy.

Oil – how black is gold

One the central drivers of Brazilian economic growth has been the production and the export of natural resources and their products. Looking at Brazil’s GDP between 1982 and 2015, three main trends can be observed. (i) A stable growth pattern from 1982 to 2002. (ii) The GDP rocketing up between 2003 and 2012, with a light slowdown during 2009-2010 caused by the financial crisis. (iii) A fall of GDP’s values between 2012 and 2015. Analyzing the evolution of the percentage of annual GDP growth’s, it is not possible to identify a specific trend. The most significant point that can be made is the constant growth of the GDP between 2004 and 2008, which was around 5% per year. The economic growth does not just imply a dramatic increase of GDP but also the improvement in social-economic status of millions of poor brasilians. Starting from 2001 the level of absolute poverty – defined as the percentage living with less than two dollars per day – decreased 12%. The levels of relative poverty – defined as the percentange of people with less than 50% of the average income – fell by 25% between 2002 and 2013.

Graph 1: Trend of Brazilian GDP 1982 e il 2014

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Graph 2: Percentage of GDP Grotwh 1982-2014

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Graph 3: Trends of poverty levels 1995-2013

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The value of export and of the satellite activities of natural resources for Brazilian is represented by their proportion on the total GDP. As clearly shown in Graph 4, one of the engines of the Brazilian boom in the 2000s has been oil. Its incidence on GDP increased remarkably from 1999, a stable growth that reached its peak during 2000s. Between 2003 and 2006 oil rents produced around 3% of total GDP. Graph 5 shows the cost of oil per barrel from 1980 to 2015. To clarify, the most important oil reserve in Brazil is Pré-Sal, which needs to compete in a market in which the price is of at least 70 dollars per barrel in order to be profitable. The fall of the international price of oil, then, has been penalizing the Brazilian economy that was already damaged by the crisis of Chinese demand and the slowdown of FDI.

Graph 4: Percentage of oil and natural resources on Brazilian GDP 1982-2012 

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Graph 5: Trends of oil barrel 1980-2014

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Eike Batista, imagine of Brazilian fable

The story of Erike Batista is bond with the growth and the fall of Brazilian economy. Batista has been one of the richest man in the world, 8th in the Forbes rank of worldwide billionaires and owner of 30 billion dollars in 2012. However, this changed in 2014 when he admitted to the loss of his wealth and his debt of one billion dollars. How is it possible that this self-made billionaire lost his wealth totalling a whopping 30 billion dollars? The success and the fall of Batista’s business is connected to oil. In the 80s, after completing his metallurgic studies, he went to Amazon forest to implement machines in the research and the extraction of gold. In the 1983 he bought a small society in the Canadian stock exchange, of extraction and trade of natural resources., that gained the value of 1.7 billion dollars in a few years. In 2002 he sold his company for 875 million. The devaluation of the asset was due to wrong investment done by the society in Greece, Russia and Czech Republic, which cost million of loss.

Batista exploited new opportunities that arose during the Brazilian economic boom. Between 2001 and 2002 he created and subsequently sold two companies to the Brazilian state; a thermodynamics and an iron production company. The holding that would make a Batista billionaire was OGX (Petròleo e Gàs Participacoes), specialized in the research and refinement of oil and gas. The market strategy of OGX was aggressive from the beginning. In 2007 he arranged the rights of exploration for 21 areas for OGX doubling the amount offered by its competitors. The next year OGX was able to produce barrels at the cost of 145 dollars per barrel and it announced their structures would be able to produce 1 million barrel per day in 2019. Batista’s ambitions and his confidence in Brazilian economy encouraged him to invest a large amount of money to build up an harbour at Acu, 400 km away from Rio de Janeiro. The project was supposed to create a centre for the refinement and the trade of oil products, thereby radically increasing OGX’ productivity.

From 2008 onwards, the Brazilian magistrate started to investigate bribes that Batista allegedly gave to the Governator of Amapà, Waldex Gòez, concessions of privileges for his companies. Even though the media caught wind of the investigation, the judiciary case was closed without any charges. The slowdown of Brazilian economy and the fall of the oil barrel started to strain foreign investors and foreign shareholders and lead them to reduce investments into Batista’s companies. The final blow was caused by the Abu Dhabi fund, Mudabala Development, which retired from EBX – one of Batista’s holdings – and asked for the liquidation of all their stock options which totaled 1.5 billion dollars. The financial pressure then cut the liquidity of Batista’s companies, which, having invested a lot of money, survived using financial leverage. Like a balloon, EBX snapped under the weight of financial debts that made Batista lose all of his assets.

Petrobas investigation

In March 2014, a group of Brazilian judges started to investigate the relationship between the Worker’s Party and the public oil company Petrobras. The charge was that executive directors of Petrobras and of the main building societies (Btp) developed a corrupt system in which Btp would receive contracts for the construction of oil platforms increasing the building costs between 1% and 3%. In exchange, governmental parties would obtain illegal funds to sponsor political campaigns. The companies involved were Camargo Corrêa, Oas, Utc-Constram, Odebrecht, Mendes Júnior, Engevix, Queiroz Galvão, Iesa Óleo & Gás e Galvão Engenharia and members of the Workers’ Party, the Brazilian Democratic Movement Party (Pmdb) and the Progressive Party. (Pp).

The main consequence of the inquiry was the delegitimization of the Workers’ Party that led Brazil from 2002 onwards. The President, Dilma Rouseleff was forced to leave office despite the fact she was not personally involved in the investigation. The successor of former President Lula endured immediate pressure to resign for her knowledge of systematic corruption as Chairman of Petrobras and Minister of Energy (2003-2005). Nevertheless, the impeachment of Rouseleff regarded the charge of having transferred public funds from national banks to finance social expenses that went beyond the fixed amount allocated for public expenses. However, the charges that led to her dismissal did not include the Petrobas scandal. Eduardo Cunha was the political leader leading the group that called for Dilma’s dismissal. Paradoxically, he was not only found with a secret million dollar bank account in Switzerland, but was also barred from assuming any public position for eight years due to an investigation for his involvement in corruption and bribes. Some representatives of worldwide left-wing parties talk about a conspiracy to dismiss the Workers’ Party. The Brazilian and international elite allegedly exploited the economic crisis to destroy the consensus of Lula and Rouseleff’s party, which had always had significant popular support. Lula won the election in 2002 with 46.4% of the votes against just 23.3% of his opposing candidate José Serra. In 2006, Lula was confirmed President with 48.6% in the next election. His successor, Dilma Rouseleff, won in 2010 with 46.9% of the votes. Even though she experienced a small decline, Rouseleff won the election in 2014 with 41.6% of the votes. These Brazilian governments made enemies in the international market due to their politics of nationalization and semi-nationalization of natural resources. For example, Petrobras, founded in 1953, was partially privatized during the 90s. However, Lula started a propagandist campaign in 2007 to return company under state control. In addition, to prevent the private exploitation of the Pré-Sal oil reserve, Lula’s government passed a law to give to Petrobras the monopoly to explore the area and extract oil from Pré-Sal.

Some influential voices, such as independent Brazilian experts and academics raised concerns about the nature of the process. Pedro Fassoni Arruda argues that there were secret powers behind the impeachment that were also involved in the coup d’etat in 1964. In a similar vein, Pablo Ortellado criticised the framing of Rouseleff in the media. Sapelli contends that the modern political history of Brazil is characterized by a deep fragmentation of parties, which means every President has to deal with many small personalist parties. The external support that every government needs to administrate generated the construction of a system of corruption intrinsic to Brazilian society. Many experts believe that judge’s actions could enforce the trust of markets and investors in Brazilian institutions. Cutting the ambiguous bonds that exist between parties and companies should help to make the legal framework more stable and safe, strengthening the power of the Law. This could be a message from Brazil to all the world, that whoever is corrupted, no matter what status, will be punished.

Recently, the news reported the Brazilian parliament approved a law with 292 in 393 to abolish the monopoly of Petrobras on the reserve of Pré-Sal. This law seems to be just the first step of a greater project of privatization pursued by President Michel Temer. With strong politics of liberalization for Brazilian natural resources, Brazil seems to offer intriguing opportunities for business and investments for many multinationals. If Petrobras’ inquiry is just conspiracy or smart intuition is hard to understand. Surely, the destiny of Brazil will be, another time, defined by black gold. For better or worse.

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Hydrogen Could Be A Key Player In The Recovery And Resilience Plan

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Thanks to the contribution of vaccines, the Covid-19 pandemic is slowly beginning to abate and gradually lose its aggressiveness, with the consequent reduction of its impact on people’s health worldwide.

However, while the health effects of the pandemic appear to be fading, the negative economic effects of a year and a half of lockdown and forced closure of many businesses are being felt heavily at a global level and seem bound to last well beyond the end of the health emergency.

With a view to supporting and encouraging the “restart” and revival  of the economy, the European Union has launched a “Recovery and Resilience Plan”, allocating a huge amount of funds that shall be used in the coming years not only to help countries in difficulty with contingent measures, but also to stimulate economic and productive growth capable of modernising production models with specific reference to environmental balance, which is increasingly facing a crisis due to the use of non-renewable, highly polluting energy sources.

Italy will receive over 200 billion euros in European funds to develop its own projects to get out of the economic-pandemic crisis and rightly wants to use them not only to plug the leaks caused by the various ‘lockdowns’ in the national productive fabric, but also to implement a series of strategic projects capable of making not only the productive sectors, but also the public administration and the health and judicial systems more efficient.

In short, the “Recovery and Resilience Plan” that is currently coming to the fore may prove to be a powerful driving force for Italy’s development and modernisation.

The projects submitted by Italy to the EU institutions include an initial allocation of over 200 million euros – out of the 47 billion euros planned for the next decade – to promote research and development in the field of renewable energy and particularly in the hydrogen sector.

Why Hydrogen?

Hydrogen is potentially the most abundant source of “clean” energy in the universe. It is versatile, safe and reliable; when obtained from renewable energy sources, it produces no harmful emissions to the environment.

Nevertheless, it is not available in nature in its gaseous form – which is the only one that can be used as an energy source – as it is always bound to other elements, such as oxygen in water and methane as a gas.

The traditional processes used to “separate” hydrogen from oxygen in water and from methane use up large amounts of electricity, which makes the processes not only very expensive, but also highly polluting, with the paradox that, in order to produce a clean energy source, the environment is “polluted” anyway, especially if – as has been the case until recently – the electricity needed is produced with traditional non-renewable energy sources (coal, gas and oil).

The best source of hydrogen in gaseous form is the sea. Electrolysis can easily separate hydrogen from oxygen and store it in gaseous form for use as an energy source.

The electrolytic cells used to develop the process use up large amounts of energy and, fortunately for us, science is finding a way to produce it without polluting, using solar, wind and, above all, sea wave energy.

The use of marine energy creates a sort of “circular economy” for hydrogen production: from the practically inexhaustible primary source of ocean water, hydrogen can be extracted with the energy provided by wave and tidal motion.

Forty per cent of the world’s population live within 100 kilometres from the sea and this shows the potential of sea wave and tidal energy as an engine for sustainable development in economic, climate and environmental terms.

Nowadays modern, non-invasive tools are available to extract electricity from sea waves, such as the “penguin”, a device manufactured in Italy, which – placed 50 metres deep – produces electricity without harming marine flora and fauna.

Another example of Italian scientists’ intelligence and creativity is the Inertial Sea Wave Converter (ISWEC), a device housed inside a 15-metre-long hull which, occupying a marine area of just 150 square metres, is able to produce 250 megawatts of electricity a year, thus enabling to cut emissions into the atmosphere by 68 tonnes of CO2.

With these devices and the other ones that technology will develop over the next few years, it will be possible to power electrolytic cells for the production of hydrogen in gaseous form on an industrial scale, at levels that – over the next 15 years – will lead to the production of at least 100,000 tonnes of “green” hydrogen per year, thus enabling to reduce air pollution significantly, with positive effects on the economy, the environment and the climate.

In the summer of 2020, the European Union launched a project called the “Hydrogen Strategy”, with a funding of 470 billion euros, intended for research and production projects capable of equipping EU countries with electrolysis tools to produce at least one million tonnes of “green” hydrogen by the end of 2024.

The fight against CO2 emissions continues unabated: in the United States which, after Trump’s Presidency, has reaffirmed its commitment to reducing emissions; in China which, in its latest five-year plan, has forecast a 65% reduction in carbon dioxide emissions into the atmosphere by the end 2030; in Europe, which has always been at the forefront in the creation of devices for producing wave and tidal energy and exports its technologies to the United States, Australia and China.

According to the Hydrogen Council, an association of over 100 companies from around the world that share a common long-term vision for a transition to hydrogen, in the future Europe and China will compete and cooperate in the production of sea wave and tidal energy and in the related production of “green hydrogen”.

With its 14th five-year plan, China, in particular – after having been for decades, during its whirling economic development, one of the main sources of CO2 emissions into the atmosphere and of global pollution – has undertaken the commitment “to develop and promote the harmonious coexistence between man and nature, through the improvement of efficiency in the use of resources and a proper balance between protection and development”, as clearly stated by its Minister of Natural Resources Lu Hao.

It might sound like the sweet-talk and set phrases of a politician at a conference.

In the case of China and its Minister of Natural Resources, however, words have been turned into deeds.

As part of the Roadmap 2.0 for Energy Saving Technology and New Energy Vehicles, China has set a target of one million fuel cell vehicles and two million tonnes of hydrogen production per year by the end of 2035.

The China Hydrogen Energy Industry Development Report 2020 forecasts that, by the end of 2050, hydrogen energy will meet 10 per cent of energy requirements, while the number of hydrogen fuel cell vehicles will rise to 30 million and hydrogen production will be equal to 60 million tonnes.

With a view to giving substance to these prospects, China has established the “National Ocean Technology Centre” in Shenzhen and developed – with the Italian “International World Group” – the “China-Europe cooperation project for energy generation and hydrogen production from sea waves and from other renewable energy sources”.

These are concrete projects in which – thanks to Italian creativity and Chinese rationality and pragmatism – we must continue to invest and work, not least to give the third industrial revolution a cleaner face than the coal-stained one of the second industrial revolution.

These projects appear to be in line with those envisaged both at European and Italian levels by the ‘Recovery and Resilience Plan’, which should guide us out of the economic doldrums of the pandemic. They deserve to be financed and supported as they can not only contribute to the recovery and revival of the economy, but also to the reconstruction of a cleaner and more liveable world (thus showing that good can always come out of evil).

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The ‘energy crisis’ and its global implications

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A particular news caught my attention this morning regarding energy crises. Before going into the depth of the news, I would like to introduce you to the concept of energy crisis and its global implications.  As introduced by Garrett Hardin in 1968; the tragedy of commons that the resources of world are limited, if the resources are used excessively soon there will come a time when they will become scarce. These resources can only be sufficient through cooperation of people among each other; there’s no other solution. The tragedy of commons is the best way to explain the concept the energy crises.

Now, the population world is growing at an exponential rate and with the growing population there is a need to provide a better lifestyle to the upcoming generations.  In a struggle for raising that standard of living, more and more resources of developed world are being utilized. The McKinsey Global Institute forecasted that by 2020 developing countries will demand 80 percent more energy which proved to be true as is evident in recurrent fuel shortages and price hike globally. A MIT study also forecasted that worldwide energy demand could triple by 2050.

Besides petrol, there is also a rise in demand for natural gas with only few reliable reserves all over the world. The natural gas reserves are mostly unreliable because they are usually found in deep oceans and mere accessibility can cost a lot of expense. Henceforth, the supply is limited, the price has fluctuated greatly and recent technological development has reduced dependence upon natural gas by providing alternatives such as fuel efficient or electric cars. Similarly, electricity supply systems are also not very reliable because there have been power blackouts in the United States, Europe and Russia. There have also been chronic shortages of electric power in India, China, and other developing countries.

If we specifically observe the Iraqi oil crises to understand the whole energy crises shebang, then according to today’s news in TRT World, in Iraq alone, $150bn of stolen oil cash smuggled out since 2003. Iraqi oil exports are even 30-40% below prewar levels. The acting president of Iraq is furious because insane amount of corruption is being carried out in Iraq where substantial quantity of oil is being smuggled. President Barham Saleh presented a legislation to parliament, where, under law any transaction over $500,000 would be scrutinized. This step, if materialized, can be very crucial in preservation of oil reserves in Iraq after the Saddam Hussein regime.

In United States, presidents have constantly been avoiding energy problems because they are very controversial. The recent Texas electricity outrage was a one that had been warned about. Before the Arab Oil Embargo Nixon in 1970’s was reluctant about energy and said ‘as long as the air conditioners are working normally, there is no energy crisis’ but after this incident Nixon began to change his tone and said on television that “energy is number one issue”. Then came Carter, who got a number of legislations passed on the issue of energy even when his own party was against it. In the 1970’s the prevalent thought for United States was that the world would run out of energy resources very soon so they started investing more in nuclear armament as an alternative. In 1990’s the combined cycle plants that used natural gas to create electricity were really efficient and economical that even gas at a high price could be competitive, also ethno-industry was crated at that time.

Then, the threat of climate change is also one of great relevance in the context of energy crises. The nonrenewable energy resources such as oil, water and coal must be used carefully and lack of which can be hazardous. It can cause drought, famine, disease, mass migration that will eventually lead to a conflict such as explained in the tragedy of commons theory. The now developed nations exploited natural resources to build its wealth. The resources such as wood, coal, oil and gas where on one hand are very economical, on the other hand they can be the originators of carbon emissions. Climate change also led to loss of biodiversity as well as environmental hazards.

Even though the developed world i.e. north provides a significant amount of assistance to the global North i.e developing countries, they cannot be a replacement for the shortage of resources. Also, they also face extreme price hike in the energy resources even though the developing nations are the ones owning the resources such Iraq for oil. Besides expensive resources, these developed nations also give rise to domestic and political tensions in the third world countries. Organizations like Al-Qaeda have openly declared their intent to attack oil facilities to hurt the interests of US and its close allies.

All in all, the pertaining threat of energy crisis has global implications. One person’s’gain is another person’s loss but this can be made inevitable if cooperation takes places. Sharing is caring and in this context sharing can prevent from future wars and hurricanes, floods and droughts and famines. The extent of seriousness of the problem must be taken into consideration not only be academicians but by policy makers as well.

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Stay in Oil or Race to Green Energy? Considerations for Portfolio Transformation

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Oil and gas (O&G) companies face a conundrum: capture the remaining value in hydrocarbons, or decide if, when and how much to invest in new, low-carbon energy business models.

The global O&G industry has the opportunity to redeploy as much as $838 billion, or about 20% of cumulative capital expenditures over the next 10 years, to further optimize their hydrocarbon business and/or pursue new growth areas including new energy ventures.

Of low carbon business models, market sentiment is currently strongest for renewable power with growing interest in green hydrogen and carbon capture as well.

Why this matters

In the wake of COVID-19 disruptions and an accelerating energy transition, O&G companies face a conundrum: stay and capture the remaining value in hydrocarbons or embrace new energy business models. Deloitte’s new “Portfolio transformation in oil, gas and chemicals” research series provides valuable insights into portfolio transformation and offers key considerations for companies making capital allocation decisions and exploring future business models.

Finding the right recipe for portfolio transformation

While companies understand the imperative to change, they are grappling with how much to invest and most vexing, in which green technologies? After all, while the high-growth phase of the oil market may have come to an end, oil demand is still projected to remain above 87 million barrels per day by 2030, even in accelerated energy transition scenarios.

How much to redeploy? $838 billion may be a starting point

To determine how much capital to redeploy, O&G companies could start with capital that is not earning the desired return. Deloitte analyzed 286 listed global companies and revealed that in a base case scenario, these companies could have the opportunity to optimize up to 6% of future O&G production which may not generate a 20% return at an average oil price of $55 per barrel. In other words, about $838 billion, or about 20% of future capital expenditures (CAPEX) across the global industry could be redeployed to optimize these projects and/or pursue promising green ventures. The findings suggest that the opportunity to redeploy will not decrease, but rather increase if oil prices stay above pre-pandemic levels. Among the company groups, supermajors, on average, have a potential to redeploy up to 36% of their future CAPEX.

Where to invest? Solar and wind most frequently mentioned

After performing text analytics and sentiment analysis on thousands of news articles to glean a directional sense of which low-carbon and new energy solutions are attracting the most media attention, the study found renewable power (solar and wind) had the highest share (47% among all green energy models). The tide also seems to be turning for green hydrogen (8% share of mentions).

“A confluence of factors, including climate, the pandemic, supply-demand imbalances, changing trends in end-markets, and growing appetite for sustainability investments, has given oil, gas and chemicals companies the need to progress faster around portfolio transformation. Many companies are eager to act but are seeking guidance on the speed and extent to which they expand into new, potentially high-growth areas, be it in new regions, markets, products or technologies. By taking a strategic, purpose-driven approach, companies can sustainably and profitably build a future-ready portfolio.”- Amy Chronis, vice chairman and U.S. oil, gas and chemicals leader, Deloitte LLP

Debunking myths: Turning hindsight into foresight to navigate portfolio transformation

While many O&G companies have transformed their portfolios over the years, not every change has been successful. The Deloitte analysis dispels conventional wisdom about strategic shifts and offers insights and important considerations about portfolio building in the O&G industry.

Myth 1: Agility and flexibility always deliver gains

  • Reality: Of the more than 286 upstream and integrated companies analyzed, only 16% of companies that made frequent changes to their portfolios delivered top-quartile financial performance.

Myth 2: Being big and integrated guarantees success

  • Reality: Only 28% of big (revenues above $10 billion) and integrated companies figured in the top-quartile.

Myth 3: Oil has lost its luster

  • Reality: Oil still delivers significant value for many. Two-thirds of oil-heavy portfolios deliver above-average performance.

Myth 4: Every “green” shift is profitable and scalable

  • Reality: Of portfolios that have become greener, 9% delivered top quartile financial performance, underscoring the importance of a strategic, purpose-driven approach to portfolio transformation.

Myth 5: Shale’s pain makes onshore conventional plays an obvious choice

  • Reality: Between 18-45% of non-shale portfolios analyzed delivered below-average performance.

Keys to building a future-ready O&G portfolio

There are four components of a forward-looking portfolio: growth engines, cash generators, profit maximizers, and divestment of value strains. Optimizing the energy transition is not just about selecting the correct technologies in which to invest; it also involves upgrading business models to incorporate new metrics, dynamic planning and AI-based analytics to become more agile. Companies should also consider strategic alliances to maximize their strengths and gain from others.

Chemicals and specialty materials (C&SM) face similar urgency for transformation

As the chemicals industry navigates its own portfolio transformations, focus is key. Deloitte’s analysis of more than 200 chemical companies over a 20-year period showed that focused companies — those that prioritize certain end-markets and product categories and derive at least 60% of the total revenue from that category — outperformed diversified chemical companies. In fact, focused chemical companies organically grew revenues at twice the rate, generated 70% higher return on invested capital (ROIC), and delivered 60% higher shareholder returns.

The top-performing chemical companies typically change their portfolio mix more frequently than others —usually changing their portfolio once every business cycle and remaining focused on their over-arching business strategy, be it low cost, differentiated products, or exceptional service.

Keys to building a future-ready C&SM portfolio

The study recommends C&SM companies make critical portfolio choices that create value. The ongoing disruption in end markets requires leaders to make conscious decisions about their competitive advantage and play in products and service categories where they can build and maintain that advantage. Moreover, given the growing emphasis on sustainability, chemical companies should consider investing in recycling technologies and incorporating renewable and recyclable materials in their product offerings.

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