A Pivot to Asia: Obama’s Renaissance & China’s Challenge

By the end of last week, the US Supreme Court had announced a whole raft of rulings on a number of controversial issues that have dominated US domestic politics for much of the Obama Presidency. In a period that political watch dogs so often characterise as ‘a lame duck’ presidency (in other words the theory that a US President half way through his second term has no control of Congress cannot get anything done), Obama is in fact somewhat on the resurgence in the face of overwhelming political opposition. As he enters his twilight years at the helm of the world’s biggest economy, the Supreme Court’s backing of healthcare reform, same-sex marriage and the Trans-Pacific Partnership (TPP), can certainly be viewed as a major coup for ‘no-drama Obama’. In terms of chemicals and the world of Specialised Products shipping, it is this final policy endorsement that could possibly shape the way the industry develops in the years to come.

For a policy position that has been so often criticised as a danger to US economic supremacy and that it goes against the protectionist measures of old, the fact that it is now law is clear signal that the US is placing a greater emphasis in Asia. Something much trumpeted by its champions as much as its detractors. Much like earlier free trade agreements such as the North American Free Trade Partnership (NAFTA) agreed in 1994, the TPP is equally as important as the US and its allies ‘Pivot to Asia’. In terms of the chemical industry, the American Chemistry Council (ACC) has estimated that the TPP could generate as much as $1.2 billion in additional chemical export growth from the US, which undoubtedly would mean a greater demand for shipping and could induce a change in trade dynamics. This is particularly poignant when one considers the level of investment of new shale gas projects in the US. TPP is an agreement between 12 countries including Japan, Canada and Mexico but noticeably it does not include the major economic powerhouse and largest chemical importer – China!

So why is this? Surely, an economy such as China’s which is so reliant on imports would welcome such a free trade agreement? Well, no. In the world of geopolitics, China views America’s Pivot to Asia as a threat to its influence in the region and the TPP is just one of many measures aimed at harming Chinese economic power. Instead, the Chinese government has embarked on its own trade initiatives in Asia most notably in the development of the Asian Infrastructure Investment Bank (AIIB) which counts over 50 countries as signatories and the UK, Germany, Australia and South Korea as founding members. The bank is a direct rival to the US based World Bank and will actively fund Asian energy, transport and infrastructure projects backed up with initial capital of $50 billion, eventually rising to $100 billion. This is a clear challenge to US policy and it has certainly unnerved officials in Washington. Drilling into this once again for the world of chemicals, new projects and ports will undoubtedly lead to another possible shift in trade dynamics which will make for an interesting trading picture in the years ahead.

For now, the US Pivot to Asia is in full swing as the country looks to challenge the rise of China but will this new initiative in the form the AIIB harm this new strategy? It is too early to say, but with another free trade deal in the works, this time between the US and EU – the Transatlantic Trade and Investment Partnership (TTIP) – then the US certainly may have several different avenues to try as it looks to maintain its position as the top global economic powerhouse. China’s challenge is nothing to be baulked at and the AIIB certainly has a lot of clout resting behind it but will it all come to fruition? All we can say is that there are certainly challenging yet exciting times ahead for the chemicals markets and the world of Specialised Products.

Specialised blog 03 July

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Chemical Major’s Q1 Earnings: What do they tell us?

As is usual with the end of a quarter the market is flooded with a wave of earnings reports from a whole host of listed companies; from owners, to charterers – to brokers even! For many, particularly the general public, reporting seasons pass by having little impact on our daily lives but for numerous in the industry such reporting seasons are of real significance to show how a particular market is performing.

The last 9-10 months have seen a much discussed drop in crude oil prices due to increasing levels of production in the US and from the OPEC nations but there being concern over waning demand to use it. This coupled with global economic uncertainty, particularly in the Eurozone—Greece!, Japan, China and several other developing countries means we have been faced with a rather gloomy outlook from some areas to say the least!

For those of us involved in the world of Specialised Products the latest reporting round from the chemical majors made for some interesting reading. We know that with a decline in oil prices and therefore chemical prices, majors have generally suffered a dent in their margins with buyers facing reduced value chains and inventories halving in value also. Therefore from the start, results expectations were not particularly upbeat. We saw towards the end of last year and at the very beginning of this year, some companies announcing cost cutting and consolidation measures which were in part a reaction to stymy the impact from the fall in oil prices. However, when the starting gun fired at the beginning of April and the markets were greeted with early morning earnings announcements things were not quite as gloomy as the doomsday brigade may have predicted. For example, we see that BASF reported slightly higher volumes for its intermediates business in the quarter but lower volumes for its monomer and petrochemicals business. Whilst Shell continued to suffer from problems with its cracker at Moerdijk and reported that chemicals sales volumes were down 2% year on year. Meanwhile, general the downstream sector seems to be in better shape due to healthier demand levels. We see that Bayer’s MaterialScience division reported an overall volume improvement here whilst Huntsman’s MDI volumes increased in the Americas and in Europe. It looks as though the industry “has been riven by the drop in product prices but, at the same time, buoyed by lower liquid feedstock costs”, so says ICIS. This coupled with a weak Euro has lifted European based producers while hurting the US based ones. We see this in BASF’s report once more where its chemicals segment prices dropped by 16% and sales fell by 12% but the positive impact due to the currency effect was 8%, therefore resulting in improved margins in Europe – gross Q1 chemical earnings were up 21% to Euro 726 million.

This paints quite an interesting picture for all of us involved in Specialised Products. The latest Reuters Oilpoll (drawn from investment banks) for April, forecasts an average 2015 Brent crude oil price of USD 59.4 per barrel and an average 2016 price of USD 70.8 per barrel. This pricing is not always accurate with the oil price being so closely linking to global events and other factors but it does tell us that things may not be as dreary as they once looked. Lower oil prices in the long term boost consumer demand and drives global growth and as Specialised Products markets are so closely linked to the end consumer then further good news for producers, traders and owners may be on the horizon. Of course, in the short term, things are still uncertain but the future may now be a little brighter than it was at the beginning of 2015!

Earnings Character Showing Earning Revenue And Profitable Incomes

Earnings Character Showing Earning Revenue And Profitable Incomes

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M&A Activity in the Chemical Industry. What makes it Tick?

As with any industry sector, mergers and acquisitions (M&A) are a focal point of interest for competitors, employees, the media and in some cases it even peaks the interest of the general public. The proposed acquisition of BG Group by Royal Dutch Shell is one such example. But what drives these deals? What makes them so interesting to us?

To properly answer these questions we must look to the global environment and review the current business and financial climates. It does not take a rocket scientist to work out that we currently live in rather uncertain times both economically and politically. After what was the worst financial crisis in history we are now seeing steady growth in the US but the situation in China, Europe and Japan is not so rosy, indeed neither is the state of emerging markets particularly those of Brazil and parts of South East Asia. Europe is an interesting case study with the state of the Eurozone and the matter of Greek debt which continues to hold the EU on tenterhooks. These issues of growth are against a backdrop of political violence and unrest in the Middle East where the rise of ISIS and other tyrannical non-state actors threaten the stability of the region and are playing havoc with the traditional status quo. All of this serves to increase the pressure on capital flows, economic performance and exchange rates. This all sounds rather negative but there have been bright spots such as the fall in oil prices which has benefitted many economies, the revival of the Indian economy with a change in government and several quantitative easing programmes in Europe and Japan.

Against this, few would argue that earnings performance of the chemical industry as a whole has been robust but there are areas of weakness for some petrochemical companies. These are mostly linked to uncertain demand levels and the falling oil price which has dented performance in first quarter of this year. When one takes the geopolitical tensions and concerns over the global economy into the fold there are some uncertainties. All of these factors are central to how the chemical industry behaves on an M&A basis. CEO’s and executives are looking for growth, strong cash flows and strong earnings however they may now begin to exercise some caution because of these factors. To put this into perspective, let us briefly look at the figures. According to Young & Partners there were 108 chemical deals completed in 2014 compared to 83 in 2013. This is a 30% increase in the number of deals completed year-on-year and a higher number than any year since 1986. Looking across all of these, the two leading chemical sectors were commodity chemicals with 33 deals and high value petrochemicals at 28 deals. (See Equity Deal Value Table for USD Year-on-Year Figures)

However with the uncertain outlook it is likely that fewer deals will be completed this year but Young & Partners says that the appetite for such activity will continue despite this due to demand for growth and the build-up of cash amongst strategic buyers and available low cost debt financing and unused funds for financial buyers. They say that “We expect that 2015 will see at least $55 billion in completed deals and the number of deals completed will slow down from last year’s 108 to below 90”. For Specialised Products and the shipping markets M&A activity in the chemical industry is an important indicator of how the trade is performing and it could be argued that an increase in M&A deals may serve to reinvigorate the Specialised Products marketplace.

specialised blog 20 may 2015

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Good Times Ahead for the US Petrochemical Industry?

All too often the usual rhetoric of doom and gloom surrounds growth and the economy in all matters, not just the petrochemical world. However, following a release of the latest US petrochemical growth figures from the American Chemistry Council we can see that there might yet be some light at the end of the tunnel!

For 2015, the American Chemistry Council (ACC) has forecast 4% growth for the chemical sector (this figure excludes pharmaceuticals). This is quite a jump from previous growth rates where the ACC has given lower and less optimistic forecasts – 2.4% for 2014, 2.7% for 2013 and 1.9% for 2012. The reasons for this optimism, says the organisation, is because the overall US economy will also grow over the year thus spurring on the petrochemical industry. The IMF predicts that US GDP will grow by 3.6%; a higher estimate than the ACC’s 3.2%.

The key reasons for these predictions are linked to higher consumer spending due to higher wages, employment and lower fuel prices: ‘The overall net [effect] of a virtuous cycle is going to kick in’ says a senior ACC policy director. Naturally, these factors contribute to growth through increased consumer demand but there is also expected to be growth in the house building and automobile markets both of which are key chemical end user markets.

This is all very upbeat stuff and will help inject some energy into the Specialised Products markets which will no doubt come as a relief. That said, we need to look at this a little more objectively and recognise the US petrochemical industry will still face challenges this year. Chief among these challenges is that of the falling oil price which have fallen dramatically and caused a sharp decline in rig counts which in turn has caused lower demand for oilfield chemicals. Oil prices have also caused prices for downstream chemicals to fall which led to some companies destocking at the end of 2014, although ICIS reports that these same companies have now stopped this. However, oil related threats remain including being stuck with high inventory levels, being locked into long term contracts obligating companies to buy fuel and feedstock at earlier higher prices and the erosion of margins for some products such as naphtha. Naphtha prices have fallen with oil thus reducing costs for foreign producers who rely heavily on the feedstock. The only area not affected (for now!) by the falling oil prices are the whole raft of projects related to shale gas, as mentioned in this report before: No company planning on building large petrochemical plants has announced any cancellation with the exception of one gas to liquids project, but this was a fuel project rather than a chemical one.

So with these reasons it is possible to see why the ACC has predicted such strong growth. There is no doubt that low oil prices with inject some much needed stimulus into the economy thus boosting GDP and demand for chemicals. In the long term, the future looks brighter but it may be a rocky road in the short term which leads us to coin the phrase once more that the overall outlook is one of ‘cautious optimism’ for the US and Specialised Products markets.

specialised blog 27 april 2015

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Delays, Collisions & Strikes: A Thorn in the US Port System

The old adage of ‘Time is Money’ is often thrown around with great abandon but when the cost to businesses reaches USD 1 billion per day due to ten day strikes and delays on the US West Coast in 2002 then this old phrase written by Benjamin Franklin, a founding father of the United States no less, rings a little more true with those companies who are effected.

The key issue here is the state of the US ports system and its ability to handle the expected increase in chemical exports that are on the horizon due to the shale gas phenomenon. Once again, overnight we saw that the Houston Ship Channel is closed due to a collision involving two vessels, last month is was closed due to fog and last year it was closed due to an oil spill resulting from yet another collision. The impact this has on charterers and owner’s logistics can be extremely disruptive and can potentially cost both sides a lot of money. With the current closure there are roughly 80 Specialised Products vessels in and around the Channel either at anchor or on berth. The problems the Port of Houston faces are further exacerbated with the impending opening of the Panama Canal expansion project in 2016. However, Houston is not alone in these problems. Other ports particularly on the west coast are facing regular threats of strike action over contract disputes which can often drag on and on, as we are seeing with USW strikes at the moment which have halted more than a dozen refinery operations. The threat to the US port system is so severe that chemicals sector officials joined 100 other industry groups last year and urged the White House to intercede in negotiations warning that a fresh shutdown in US West ports could cost as much USD 2 billion per day. The Federal Government did step in and a new five year agreement was reached on 20th February of this year between the union and Port Owners for 29 ports on the US West Coast. This is important as with several projects on the US west coast due to come online in the not too distant future, particularly on the methanol side, the agreement will allow port operations and therefore exports to flow to Asia without issue. At least in theory anyway. Commenting on this the sub-committee chair of the Senate Commerce Committee Deborah Fischer said “A shutdown of America’s West Coast ports, even for a short period of time, would have a devastating economic consequences…(it) would disrupt 405,000 jobs, reduce US GDP by almost USD 50 billion and cost the US economy USD 2.5 billion per day”. So successful dispute resolution is one thing but significant infrastructure investment is also required to handle the predicted increase in activity in these crucial areas. Turning back to the Port of Houston we see that the authority is embarking on a ‘Capital Improvement Project’. In 2015 it plans to spend USD 275 million which includes terminal, railway, channel development, renovations and technological improvements. However, the key question is whether this is enough?

Erring on the side of caution particularly with the current short to medium term uncertainty of the crude oil markets there is the possibility that some shale gas related projects could be delayed thus giving the ports some breathing space. However, no projects appear to have been delayed or cancelled as of yet and so it is not clear whether such investment is enough. For the Specialised Products markets, delays, collisions and strikes are nothing new, particularly if we look at other countries – India has another one looming now, but they are unhelpful and unavoidable in some cases. Delays do tighten space availability and thus spot freight rates can firm but on the other hand such is the contractual nature of our markets then there can be a knock on effect for owners operating at the higher end who have complicated rotations and schedules—thus it should be remembered that delays can hurt owners bottom line as well as charterers. However, any potential to avoid such issues through investment and proactive dispute resolution will go some way to create more efficient supply chains.

SP blog 25 March

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Is the US Shale Gas Phenomenon Under Threat?

The much publicised fall in crude oil prices over the last 7 months has caused an awful amount of chatter and jitters in the commodity markets. Brent crude prices fell by the end of January to below $50 per barrel for the first time since May 2009, US West Texas Intermediate crude followed suit and fell to below $48 per barrel. The key reasons for this have been weak demand in many countries due to insipid economic growth coupled with surging production.

The rumour mill also tuned up to overdrive late last year when there was considerable speculation by the ‘talking heads’ over when or not OPEC would cut production in order to steady the falling price. OPEC, led by Saudi Arabia, of course did not do this and continues to pump out oil at the same rate as it was before. Thus, prices continued to tumble and have only recently rallied above $50 per barrel.

As result of the price tumble, questions have been raised about the perceived profitability of the planned US shale gas projects and this has meant that some companies may now review the viability of their proposed plans. There is even a chance that some of these project might be cancelled, although this has yet to happen. So why is this?

Upon the advent of shale gas several companies announced their intentions to either expand existing plants or build new ones. The reason for this was down to the cost advantage that US producers could exploit from gas based feedstocks when much of the wider world relies on oil based naphtha. However, the sharp decline in the oil price has dented this advantage since the spreads between crude and natural gas has narrowed substantially. The President of Petral Consulting comments that “It has to force everybody who is planning to invest a couple of billion dollars in ethylene and propylene capacity to at least redo their economics based on a significantly lower price environment for at least a few years”. However, reviewing a project doesn’t mean it will be cancelled, since the fall in oil price quickened last December; no US projects have been cancelled. In short, to determine a projects feasibility over a life span of typically 20-30 years then the focus needs to be about better understanding the future.

However, for some it could already be too late to throw the gears into reverse as several companies have already broken ground on their projects. Indeed, there are other types of investments already being embarked upon such as the ethane terminals; three European petrochemical producers (INEOS, SABIC Europe & Borealis) have based their future feedstock supply needs on the back of these expansions and have procured long term time charters to import ethane gas to Europe. Others however, are looking at methanol based projects (Chinese investors are leading the way here) and gas-to-liquid (GTL) projects. These latter projects require a large gap between natural gas and crude prices since they would be competing with refineries on cost to produce fuel.

Perhaps the main concern for those producers who are relying heavily on outside financing is that they will have their plans more carefully scrutinised by the banks; these outside sources could become more doubtful if oil prices do not recover. Companies less reliant on outside financing may just wait it out and still pursue their projects. Ultimately, investing in a US shale gas project is still advantageous in terms of competitiveness, particularly when compared to Europe for example, as Brent crude would have to fall to $28 per barrel and the Henry Hub gas price would need to rise to $4 per MMBtu before this advantage could disappear.

Clarksons Blog 26 Feb 2015

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Geopolitical Footprints: The Obama Administrations Policy on Cuba & its effect on Specialised Products

Just before Christmas 2014 the US and Cuban governments shocked the world with what can only be described as an attempt to change one of the most steadfast foreign policy positions of the last fifty years. Both President’s Barack Obama and Raul Castro addressed their respective nations, at the same time no less, to announce a shift in foreign relations between the two arch ideological rivals in order to normalise diplomatic and trade relations.

What followed was the release of several political prisoners on both sides and the relaxation of the embargo on Cuba – new measures came into effect last Friday, 17th January 2015. Just as remarkable is on Wednesday 21st January the first high level diplomatic talks in 35 years took place in Havana. Barack Obama’s State of the Union address summed up the issue as an opportunity to “end a legacy of mistrust in our hemisphere…we are ending a policy that was long past its expiration date. When what you’re doing doesn’t work for 50 years, it’s time to try something new.”

These are bold and optimistic words and in fact today Fidel Castra has questioned the policy of the U.S. The fact remains that in what is now a Republican controlled US Congress overturning the embargo completely will be almost impossible – it is enshrined in law and will need both houses to ratify it for it to have any chance of removal.

However, let us imagine for a minute that a complete dissolution of the embargo is possible. What could that mean for Specialised Products and for trade links in the region as a whole?

In terms of shipping, the fact sheet released by the White House mentions that ‘general licenses will…allow foreign vessels to enter the United States after engaging in certain humanitarian trade with Cuba, among other measures’. Unsurprisingly the statement is ambiguous but it does answer our question to some extent: Currently, the relaxation of measures on shipping has no effect on Specialised Products and the 180 day rule still stands. But for other sectors such as dry bulk the US government grants licenses under humanitarian ground and so exempts them from this rule. Indeed, what is often overlooked is that the US is already one of Cuba’s major trading partners because of this. Total imports totaled $458 million in 2012.

So to assess what such a statement could mean and to answer our question in full we must dig deeper. Reports suggest that sanctions experts say the White House has indicated that the 180 day rule may change along with a broadening of commodities than can be shipped from the US to Cuba but by how much and when is unclear. The problem is how much can be changed by executive power without having to resort to congress; executive power has its limits and even then these decisions can be overturned. If White House officials are able to do as they plan then it could open the possibility of greater trade links with Cuba, a move that will benefit all shipping sectors. For Specialised Products markets the ongoing investment in US shale gas and the resulting chemical exports could open up a whole new raft of opportunities for producers, traders and ship operators. For an economy that has been hindered for so long by sanctions the scope for economic growth is huge.

So yes, in short a removal of the embargo should benefit Specialised Products markets considerably. However, the likelihood of this happening any time soon is very slim for the reasons outlined above and so for now we must watch carefully and see how this develops over the last two years of the Obama administration.

sp blog 04 feb 2015

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Evaporating Abenomics & Recession Blights?

China’s disappointing Q3 GDP news last month which happened to be the slowest growth level recorded since the global financial crisis, has added worries over global growth. This is also coupled with the risk that it may miss its official target for the first time in 15 years. A few weeks after this we hear news from Japan this it has unexpectedly slipped into recession in the third quarter. Yet another event which has reaffirmed concerns over the global economic outlook. The much discussed policy of “Abenomics”, which is based upon “three arrows” of: fiscal stimulus, monetary easing and structural reforms took a hit when government data showed Japan’s economy shrunk by an annualized 1.6 percent, after a 7.3 percent drop in the second quarter when a sales tax hike hit consumer spending. Indeed, it prompted Japanese Prime Minister Shinzo Abe to call a snap election.

Consequently, shares of major Japanese petrochemical firms took a beating after the world’s third-biggest economy slipped into a recession in the third quarter. Asahi Kasei fell 1.49%, Mitsubishi Chemical slipped 1.49%, Mitsui Chemicals was 1.58% lower, JX Holdings was down 2.89% and Tosoh Corp slumped 3.54% in one day. Japanese consumption has declined sharply, particularly for crude oil. This is worrying as Japan is the world’s third-largest oil consumer and its disappointing data has heightened concerns about softening demand for crude amid an oversupply. It can already be seen that Japan’s petrochemical industry is facing a challenging environment with the proliferation of new capacity globally that is based on low-cost feedstocks in the Middle East and from shale gas in North America. This has resulted in some Japanese petrochemical players starting plant shutdowns. We see Sumitomo Chemical shutting down its cracker in Chiba in the second half of next year, whilst the crackers of Asahi Kasei Chemicals and Mitsubishi Chemical are due for unification in April 2016.

Since total seaborne trade in the Specialised Products sector is very closely related to general global economic performance, this increasing uncertainty and news of a Japanese recession is unwelcome news to players in this sector. The UK PM David Cameron hinted at a possible third recession in the Eurozone at a recently held G20 summit, and with slowing growth in China and other emerging markets, as well as Japan’s failure to sustain any sort of a turnaround, flashes only one question in mind – are we slowly slipping back into uncertain financial times once again?

SP blog 02 dec 2014

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So What About China?

Recently we saw the latest GDP results release from the Chinese National Bureau of Statistics. GDP grew by 7.3% in Q3 2014 compared to 7.5% in Q2 and 7.4% in Q1. Indeed, overall the first three quarters of 2014 posted a 7.4% year on year increase in GDP. Following the release, the usual media tannoys trumpeted that all is not well in the world second largest economy and oil consumer, and that unless things pick up soon there may be more tough times ahead for as all.

Well, you would be forgiven to believing such doom and gloom such is the current economic landscape in Europe (Germany’s economy contracted by 0.2% in Q2 of this year) and sluggish growth in the US. But we need to slam the brakes on a little and take a look at things more closely, particularly when one assesses the China factor. To begin, it could be argued that the current Eurozone crisis is essentially self-inflicted due to the EU sanctions on Russia. Europe relies heavily on Russian energy; the US much less so. More hawkish commentators would argue that it is clear which of these regions would suffer more from their own sanctions regime and so the current or upcoming crisis is nothing short of expected. Ok, so where does China’s supposed economic stagnation fit in to this? In short, it doesn’t. China has not imposed sanctions on Russia and all its agreements, treaties and business arrangements remain intact and operational. The figures published on a quarterly basis by the National Bureau of Statistics are viewed in negative terms only because they have failed to reach the heady heights of 14.2% GDP growth recorded in 2007. The 7.3% recorded for Q3 2014 and indeed the 7.7% recorded for 2013 overall is still impressive. In fact, a western country can only wish for such figures. One need only look to the size of the investment in feedstock production in the country to see that this giant looks as though it has merely gone for a quick nap.

If we were to look at the coal-to-olefins (CTO) and methanol-to-olefins (MTO) growth one can see China’s quest to remove its dependency on imports and become self sufficient thus leading to a reduced energy reliance which comes with increased political benefits. Both technologies are relatively new to the ethylene supply market and indeed only accounted for 0.4% of the global ethylene capacity as of 2013, according to HSBC. However, in the medium term this figure balloons to 28% when assessing the globes incremental capacity in 2014-2016. Quite a staggering figure but we must exercise some caution that most of this capacity is due online between 2015 and 2017 and the next 12-18 months will be crucial to see how significant and influential this new wave of unconventional supply will be. Only a few projects have been properly launched so far – 6 out of 46 of those that are completed/planned/proposed.

There is no doubt that as one of the largest holders of the world’s coal reserves this route to domestic reliance is plausible and despite the huge costs and uncertainties involved in the new technology the acid test will be in the next few quarters when it will become clearer whether CTO/MTO has really reshaped the global chemical industry or just created a temporary capacity vacancy. In terms of the overall performance of China’s economy compared to the rest of the world, the fact this type of investment is happening shows that there is not only hope but a belief (particularly among Chinese elites and investors) that growth will return to the levels seen before 2008-2009 global recession. Quite how long it will take is down to the performance of the global economy as a whole and so whilst it may take some time things may not be as bleak as they appear!

specialised blog 06 Nov 2014

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The European Chemical Industry: Where are We Now?

As another EPCA dawns on the Specialised Products market we thought it prudent to revisit the issue of the European region’s competitiveness and how it is performing against the ever present threat from the US and the dominance of the Middle East.

Over the last twelve months we have heard time and time again from industry figureheads that the European Chemical industry needs to diversify, consolidate and exploit new avenues to raise its global competitiveness. Jim Ratcliffe (Chairman of INEOS), no less, published an open letter to the outgoing EU Commission President José Manuel Barroso complaining about the lack of efficient policy making and how Europe will continue to lose out to the US and the Middle East until such a time as this fact is realised and steps are taken to raise the game.

Perhaps we could view this open letter as a ‘starting gun’ for a number of successive announcements from European based producers that they will be importing US based shale gas under long term time charter agreements with gas carrier operators. INEOS, who were the first, have six 27,500 CBM vessels being built, whilst Borealis has one 35,000 CBM and SABIC Europe have three 36,000 CBM. The fact that European producers are willing to do this shows how much of a theoretical cost advantage there is. Indeed, there are other measures being taken by European producers. INEOS and Solvay are consolidating their Chlor-Vinlys businesses to form INOVYN, ExxonMobil are investing €1 billion into their Antwerp refinery and Total are following suit with a similar level of investment in their Antwerp based operations. Whilst BASF have confirmed that they are to commission a new furnace in their joint venture with Total at their steam cracker in Port Arthur, Texas, increasing annual production to 1 million tonnes per year and have subsequently converted the cracker to consume NGLs therefore increasing flexibility.

The fact that these developments have occurred should not come as a surprise. CEFIC have said in their most recent ‘Chemical Trends Report’ that overall chemical production dropped by 1.2% in Q2 2014 compared to the same quarter last year, and is still 6.7% below the 2007 peak level. However, the first six months of 2014 show 0.6% growth year on year. This latter figure perhaps rings true with a stagnant yet modest growth forecast for 2014. Specifically, EU petrochemical production fell by 6.5% in Q2 2014 compared with Q1 2014, the largest production decline since Q4 2008 (measured on a Q-o-Q basis). More recently the German Chemical Industry Association, the VCI, has said that the downward competitiveness of Germany’s chemical industry has become steeper since 2008. A report commissioned by the VCI presented by its outgoing president says that “Germany is an attractive location for the chemical industry. But, the truth for the past two decades is that we have been losing share in global chemical trade and global chemical production. Politicians and the general public should realize that we are in a crucial phase as regards our international competitiveness.”

This quote has a lot of truth to it; Germany is an economic power house and has been a centre for chemical innovation and technology. Indeed, Europe as a whole has been a great innovator in this field so these figures and report are nothing short of depressing. And so, as EPCA 2014 begins we are left with the familiar sounding klaxon drone that if the European chemical industry wants to compete it needs to raise the stakes but to do that the EU needs to grease the gears and do some meaningful policy making!

SP Blog 08 Oct 2014

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