April 2022

Trends and Resources

Business Trends: The economics of reliability: Global chemicals

Chemical manufacturers worldwide are navigating an inflection point. Following the pandemic-fueled demand crash of 2020, a strong but stilted recovery unfolded in 2021.

Krimmel, J., Pinnacle

Chemical manufacturers worldwide are navigating an inflection point. Following the pandemic-fueled demand crash of 2020, a strong but stilted recovery unfolded in 2021. In the latest World Economic Outlook (January), the International Monetary Fund (IMF) announced global economic growth increased by 5.9% in 2021 and is forecast to increase by 4.4% this year. The chemicals industry is feeling this surge. After recent revenue and profit declines, many chemical companies are unprepared to fully capture today’s market opportunities.

In the author’s company’s report, the performance of global chemical companies as it relates to industrial reliability was analyzed. The report defines reliability as a measure of how often something performs when you want it to. In the context of the industrial chemicals segment, the performance of the machinery and equipment assets responsible for processing feedstock into finished goods is of prime interest. These assets could be pressure vessels, storage tanks, pumps, compressors, heat exchangers, piping, mixers and countless other equipment types.

Specifically, interest lies in estimating how much global chemical companies spend on reliability initiatives, and what kind of results these companies see in return. Reliability initiatives include inspections, repairs, planned and unplanned maintenance, upgrades, expansions, overhauls and replacements, along with all the necessary materials, supplies and labor.

Three major reliability trends have affected or will affect the global chemicals sector. These include:

  1. The chemicals sector experienced a decline in revenue and profits in 2019 and 2020. In 2019, oil prices fell by 10%, dragging down pricing for many chemicals. In 2020, the COVID-19 pandemic destroyed demand globally, causing chemical companies to reduce their output.
  2. In response to falling revenue and profits, chemical companies reduced their capital expenditures. Many of these companies saw their machinery and equipment asset bases stagnate or shrink. Even when accounting for the slightly smaller asset base, the world’s largest chemical companies generated fewer dollar-for-dollar profits in 2019 and 2020 than they did in 2016, 2017 and 2018.
  3. The market picture changed dramatically in 2021 and is now abound with growth opportunities. However, after years of reduced capital expenditures and diminished asset productivity, chemical companies are struggling to fully take advantage of market tailwinds.

Reliability is a common thread that runs through all three of these elements. Reduced investment spending stresses the reliability of existing assets. Suboptimal reliability impairs asset productivity, which weighs against profits. In a market environment where response times are critical, improved equipment reliability can be a timely and cost-effective way to capture opportunities while pursuing longer-term, new construction in parallel.

Analysis methodology

The chemical reliability report relied on the following three data sets:

  1. The World Bank publishes data around the value added by the chemicals industry on a country-by-country basis. The report uses this data to estimate the total reliability spend of this segment of the economy.
  2. The report also studied the annual financial and operational reports of 18 of the largest chemical companies in the world. These reports provide much more detail than what can be found through the World Bank and provide more about the evolving competitive landscape in the chemicals space.
  3. The U.S. Bureau of Labor Statistics publishes a producer price index for domestic chemical manufacturers. This data set provides a sense of how chemicals prices have changed over time, from which important supply vs. demand details can be inferred.

The industrial chemicals sector has witnessed two consecutive years of declining revenues and profits

The author’s company estimates that global chemical companies spend approximately $236 B/yr on reliability. FIG. 1 shows the revenue, operating income and operating margin for 18 of the largest chemical companies from 2016–2020. There is a steady decline in revenue from $487 B in 2017 to $413 B in 2020. Over this same period, operating income and operating margin have both fallen continuously.

FIG. 1. Revenue, operating income and operating margin for 18 of the largest chemical companies, 2016–2020.

FIG. 1 shows the evolution of important metrics from the income statements of the companies tracked. Having a deep interest in industrial reliability, the author’s company wanted to study asset productivity. If asset bases are shrinking proportionally to declining revenues and profits, operators may be slightly scaling down existing operations. However, if revenues and profits are falling more quickly than asset bases are shrinking, then we are most likely seeing deterioration in asset productivity.

Value of machinery and equipment assets has fallen in the chemicals industry

Continuing with the analysis, the author’s company studied the balance sheets of the 18 largest chemical companies, specifically looking at the value of their machinery and equipment (M&E) assets, which is a subset of the property, plant and equipment (PP&E) line item. The analysis focused on machinery and equipment since these are the productive assets most directly involved in the processing of chemicals. The property subset is important, but interest in industrial reliability steers the focus toward machinery and equipment specifically. FIG. 2 shows the size of the productive asset base for the companies studied from 2016–2020. Their productive asset base has shrunk from its peak, and the most productive assets—the machinery and equipment—make up a smaller share of the remaining asset base than they did previously.

FIG. 2. Productive asset base (M&E and PP&E) for the companies studied from 2016–2020.

The economic value of the asset base of this portfolio of companies contracted by 4% points from 2018–2020. One important mechanism that can drive this contraction is a conservative capital expenditure program. If these companies invest below the level of existing depreciation, the value of the asset base will shrink. Another mechanism that could drive this outcome would be asset impairments, where value is marked down if any of these assets support production that is no longer economical.

We have seen from FIG. 1 that revenue and operating income has been trending down in recent years for some of the world’s largest chemical companies. FIG. 2 showed that while the productive asset base for these companies has shrunk, operating income has declined more rapidly. For every piece of machinery and equipment these companies own, they are generating fewer profit dollars today than they did in the past 2 yr–4 yr. The urgency to improve asset uptime and performance is very real in this sector of the global economy.

Reliability spending varies dramatically between chemical manufacturers

A comparison of reliability spending intensity across 18 chemical industry giants is shown in FIG. 3. The most important observation from FIG. 3 is the wide range of reliability spending intensities across the industry’s largest players. From 2018–2020, two companies devoted less than 1% of revenue to reliability spending. One company spent more than 2.5% of revenue on reliability, while one company spent more than 3% of revenue in this area.

FIG. 3. Reliability spending intensity across 18 of the largest chemical companies, 2018–2020.

FIG. 3 also shows a wide range of revenues, even though all these companies have multibillion-dollar revenue streams. Interestingly, the wide range of spending intensity exists even with companies in the same revenue range. Eight companies have average annual revenues between $10 B and $20 B. Of these eight companies, the smallest reliability spending intensity is at 0.8% of revenue, while the largest reliability spending intensity is more than three times larger at 2.7% of revenue. The point is that there is a wide range of reliability spending, even when the range of revenues are constrained.

Within this portfolio of large chemical manufacturers, there was no correlation between the size of the revenue stream and the intensity of reliability spending. The largest company in the portfolio generates about ten times the revenue of the smallest company, but the largest company directs slightly less of its revenue toward reliability spending than the smallest company. Spending intensity is most often uncorrelated with the size of the operator.

FIG. 3 provides circumstantial evidence that the average reliability program has not been optimized. If these 18 companies were collectively spending near optimal levels on reliability, there would likely be an economy of scale effect. The largest companies would spend less than their smaller peers, as the fixed cost of an optimized reliability infrastructure is spread over many operating facilities. Instead, reliability is too often practiced in a parochial sense, where each facility defines its own reliability protocols. In these cases, performance is sensitive to the personal philosophies and experiences of onsite reliability leaders, which is reflected in a wide range of spending intensities for companies of all sizes.


Industrial reliability has always been a critical performance driver for chemical manufacturers. Today, against a turbulent macroeconomic backdrop, the returns to optimized reliability programs are greater than ever. In this report, the author’s company analyzed several data sets to better understand the challenges chemical producers face regarding reliability. The following four key conclusions can be made from the investigation:

  1. Global chemical companies spend nearly $250 B/yr on reliability, with the Asia-Pacific region and North America accounting for two-thirds of the total. Specifically, it is estimated that these companies spend around $236 B/yr on reliability initiatives, which include inspections, repairs, maintenance, upgrades, expansions, overhauls and replacements, along with all the necessary materials, supplies and labor.
  2. The financial performance of many large chemical companies deteriorated in 2019 and 2020, as revenues and profits both fell from their 2018 highs. The annual reports of 18 large global chemicals companies were studied to better understand their reliability performance. The first step of the analysis was to study these companies’ income statements. For many of these companies, revenue, operating profit and operating margin all fell in 2019 and again in 2020. These declines are not all the result of the COVID-19 pandemic. Oil prices fell by 10% year-over-year (y-o-y) in 2019, which pushed down the prices of industrial chemicals broadly. The pandemic accelerated the slide downward. The result was two consecutive years of challenged financial results.
  3. In response to deteriorating financial performance, chemical companies cut back on capital expenditures, which impaired asset productivity. It was noted that many large chemical companies experienced falling revenues and profitability in 2019 and 2020. One important consequence was that these companies had less capital available to reinvest in the business. As a result, capital expenditures fell, which led to the stagnation, and even slight shrinkage, of the productive asset base. Interestingly, even when the analysis was normalized for the smaller asset base, these companies still generated fewer profit dollars in 2019 and 2020 than they did in 2018. Deferring capital expenditures was an understandable response to shrinking revenues and profits, but existing assets were undoubtedly strained. These bills are now coming due, with reliability spending likely to increase in the next several years to make up for the gap of the past 2 yr.
  4. As the macroeconomy continues to recover, chemical companies are scrambling to capture the plethora of newly available market opportunities. According to the IMF, the global economy contracted by 3.2% in 2020. In 2021, the market winds changed. Global economic growth increased by 5.9% and is forecast to increase by 4.4% this year. Chemical suppliers are already feeling this uplift. In the U.S., the U.S. Bureau of Labor Statistics has shown that industrial chemicals pricing was up 30% y-o-y in 2021. Several of the world’s largest chemicals companies have publicly declared their intention of expanding existing plant capacity to meet rapidly growing customer demand. The quick swing from pandemic-fueled demand destruction to recovery and growth in many commodity markets has left chemical manufacturers scrambling to add capacity for high-value products.

Reliability is the common thread

Reliability is the common thread that runs through this story. Eliminating wasted spending is the first order of business. A wide range of spending patterns exist, with large chemical companies dedicating anywhere from < 1% to > 3% of revenue to reliability expenditures. The wide range in spending intensity suggests an opportunity around cost avoidance. Some inspection, maintenance and overhaul activities simply do not generate a positive return. Cutting these expenditures provides quick relief to profitability.

However, the largest gains can be found when reliability programs are modernized as part of the industry’s ongoing digital transformation. Today’s reliability data strategies are too often shortsighted, subjective and siloed. Too much data is collected in some places, while too little is collected in others. More comprehensive, data-driven reliability programs can help expose the causes of many unexpected failures and identify ways to mitigate the resulting unplanned downtime. These programs can be fully implemented in much less time than it takes to startup new construction. While the capacity gains from new construction are undeniably large, incremental capacity gains in existing plants can be captured more quickly, and typically ride on a fixed-cost base the company already bears. In these cases, profitably grows aggressively. HP

The Author

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