The EU Chemical Sector: On the Road to Recovery?

It is no secret that the European economy has been in trouble for some time, in fact the entire Euro Zone has been brought to its knees more than once in recent months by debt crises in Greece, Ireland, Spain and Cyprus. As a result it has had profound effects on all key industries from manufacturing to our very own area of interest: the chemicals sector. It was hoped that with the seemingly improved outlook for the recession hit EU that the embattled chemical production sector would follow suit. But data released from CEFIC shows that EU chemical production actually contracted in the first 5 months of 2013 by 2.1% year on year. Not happy reading but on a brighter note the same organisation said that whilst overall output is expected to detract by 1% this year it is expected to accelerate by 1.5% in 2014.

This indicates that there is a lot more going on underneath the ‘bonnet’, so to speak, than it might appear. No one can argue that chemical production has fallen from the highs of 2008 but the industry had to react not only to the recession but also the increasing prominence of other regions such as the Middle East and Asia. The key word here is competitiveness. European based producers had to raise their game in order to combat these concerns. One issue that has dogged the industry has been overcapacity which saw depressed operating rates for chemicals such as styrene and polyethylene. In fact it led to BASF and Ineos establishing the 50:50 joint venture company Styrolution, and more recently the proposed 50:50 merger of Ineos and Solvay’s vinyl businesses. However, divestment is not the only measure employed: the majority have been centred on operational efficiency, cost cutting and integration. The first two have meant avoiding steep declines in margins in the face of low operating rates but also high feedstock cost prices due to higher crude oil price.

It is also widely considered that integration could be beneficial for a number of European producers. Total recently announced a Euro 1 billion modernisation project to combine its refinery and petrochemical operations at Antwerp. In addition, it will include a plant to convert low value refinery gases into low cost petrochemical feedstocks as an alternative to naphtha. It is integration projects like this that will be a crucial exercise for producers as they seek to retain some competetive advantage. The European chemical industry faces further challenges in the future, perhaps most notably the impact of growing chemical exports from the U.S Gulf due to the shale gas phenomenon.

The above paints a general picture of cautious optimism for players in the European chemical markets. Expected demand growth is far from spectacular in domestic markets, but it is how demand is met and serviced across the globe that is key to maintaining Europe’s competetiveness in the chemical sector. The old anecdote of: ‘Two steps forward, one step back’ might be applicable over recent years, but either way the European chemicals sector is for the time being a force to be reckoned with.

SP blog 9 Oct

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