ICIS article: Challenges still lie ahead for Europe

In an interview published in ICIS magazine’s EPCA supplement October 2018, Dorothee Arns, Petrochemicals Europe Executive Director, explores how the economic situation of the European petrochemical industry has evolved since the 2008 financial crisis.

Please find below the full article: 

Europe’s chemical industry has made a long, slow recovery from the recession of 2008-2009, improving its competitiveness and shifting its focus to higher-value products

In economic growth terms, 2017 was the best year in a decade for Europe. Official statistics show that the eurozone beat expectations and grew by 2.4% – its most rapid rate of growth since 2007, when 3.4% was achieved.

But has the European petrochemical industry benefitted from this growth? Not overly, at least in terms of volumes, says Dorothee Arns, executive director of Cefic’s Petrochemicals Programme.

She comments: “The petrochemical industry has not benefitted from the recent economic recovery in the EU to the same extent as the rest of the European chemical industry. Production remained stable in 2017 but it fell by 2.3% between January and April 2018 compared to the same period last year.

“Data analysis also shows that petrochemical output declined by 4.1% in the first four months of 2018 compared to the last four months of 2017. Therefore, the start of the year could have been better for the petrochemical sector.”

The chemical industry in total fared better. Arns says that overall, the European chemical industry in total increased its output by nearly 2% in 2017 and by 1.2% between January and April 2018 year on year. She notes that there were significant increases in output in some sectors such as cosmetics and paints and coatings in the first four months of this year, but growth was less marked in specialty chemicals. Arns says the petrochemical industry has suffered more than other chemical sectors from the economic crisis that occurred in 2008, due to its competitive disadvantage versus the US and Middle East. Compared with the level before the 2008 financial crisis, the industry’s output has dropped by 20%.

Given the €2.5 trillion of stimulus spending from 2015 to end June 2018 and record low, even negative, interest rates in some cases, the surprise for the European petrochemical industry has been that demand has been so muted, says Paul Hodges, chairman of consultancy International eChem. “The conclusion has to be that the stimulus may have temporarily stabilised demand but it has not had very much impact on more sustainable growth,” he says.

Tom Crotty, president of the UK’s Chemical Industries Association (CIA), former EPCA president, now EPCA board member, and director of INEOS, believes the recession and subsequent long recovery has brought some benefits to the European petrochemicals industry, notably in terms of improved competitiveness and a shift to higher-value products. INEOS has taken big strides to improve its competitiveness over the years, from closing a small naphtha cracker in Grangemouth in 2014 and bringing in shale gas from the US to feed plants in the UK and Norway. Its improved competitive position has spurred the company to announce a flood of new investments, including plans to spend €2.7bn on a new cracker and propane dehydrogenation (PDH) plant in Europe. The investment is the biggest so far in INEOS’ history and the cracker will be the first to be built in Europe for more than 20 years. “The investments are all on the back of sourcing competitive feedstock and that has flowed downstream, raising the quality of downstream assets away from bulk plastics to specialty, engineering polymers,” says Crotty.

“Europe has to be at the cutting edge of technology with efforts directed to upgrading its products – selling high-tech materials into industries such as automotive and aerospace, where there is more growth from selling better plastics.”

INEOS has not been alone in making major investments in Europe. Borealis is planning the equivalent of a new polypropylene (PP) plant through a series of debottlenecking at its assets in Belgium. The capacity increases will use the additional 740,000 tonne/year propylene supply from the new PDH plant planned in Kallo, Belgium.

EXXONMOBIL EXPANSIONS

ExxonMobil too is expanding capacity at its specialties plant in Newport, UK, for Santoprene high-performance elastomers, which are used in automotive, industrial and consumer applications. The company is also in the midst of a $1bn expansion of its hydrocracker at its integrated refining and petrochemical complex in Rotterdam, the Netherlands. Scheduled for completion in late 2018, the project will allow the refinery to upgrade heavier by-products into higher-value finished products, including Group II lubricant base stocks and ultra-low sulphur diesel.

Dan Holton, global basic chemicals product executive at ExxonMobil, is positive in his outlook. “ExxonMobil estimates that global demand for chemicals will double within the next 20 years. That is more than the expected growth of energy demand and GDP over that same period,” he says.

He adds that while the relative attractiveness of feedstocks changes over time, ExxonMobil’s feed flexibility along with its global supply capability and operational integration allows it to adapt to changing market conditions.

Hand in hand with competitiveness is energy pricing, and this is where Europe is at a disadvantage. As Arns explains, with 80% of petrochemicals’ manufacturing costs related to energy and to oil and gas as feedstock, managing cost is key to economic success.

“European producers still face some structural challenges, for example higher energy prices, as compared to petrochemical hubs on other continents, notably in the US and the Middle East,” she says.

The gap in energy prices between Europe and the US is partly down to the shale revolution across the Atlantic but the Oxford Institute for Energy Studies said it is also due to clean energy costs stemming from the EU’s pursuit of a climate policy that is more ambitious than its competitors.

While associations such as the CIA and Germany’s Verband der Chemischen Industrie (VCI) reported a good start to 2018 following a strong final quarter of 2017, and were fairly positive for this year overall, that early optimism has been tempered by rising caution and concern as the months – and geopolitical events – have marched onwards.

Steve Elliott, the CIA’s CEO, said the association is still forecasting 2% growth in 2018 for the UK chemical sector as a whole with petrochemicals a main part of this, which compares with 3% in 2017. He expects growth to be led by specialties and consumer chemicals while also anticipating a better performance from the pharmaceutical sector after a relatively poor 2017. However, he adds that for a variety of reasons 2019 will be somewhat challenging.

WEAKER SECOND HALF OF 2018?

VCI reported a healthy first half 2018 with sales up 5.5% year on year to well over €100bn and production growing by 5%. Output of specialty chemicals climbed by 4.5% and pharmaceuticals by over 11% but volumes for petrochemicals and polymers only grew 1.5%.

However, in July VCI said business conditions were less favourable and it was anticipating a weaker second half of 2018. Cefic too revised its opinion mid-year, saying it was now expecting modest chemical production growth of 1.5% in the EU in both 2018 and 2019, given the slowing global economic environment and weakening output in industries including construction, automotive, consumer goods and investment goods such as mechanical and electrical machinery.

The European economy is facing challenges on several fronts, including volatility in the price of oil, the fallout from the ongoing trade war between the US and China, the rise of populist policies in countries such as Germany, Italy, and Spain and, of course, Brexit.

Arns says Cefic is very concerned about developments regarding US unilateral trade measures and the retaliation they trigger. The tit-for-tat round of rhetoric between the US and China has been escalating, with both sides slapping tariffs on a variety of products.

“If this continues, our sector will be impacted by protectionist policies that will dampen demand and increase oil prices,” says Elliott.

He is positive about the “landmark” EU-Japan trade deal that was signed in Tokyo on 17 July.

Japan is the EU’s second biggest trading partner after China and together the EU and Japan account for almost one third of GDP. Looking ahead, Crotty expects to see a slight downturn in 2019-2020 as the $160bn of new capacity in the US, mostly for PE and far above its own domestic requirements, starts to hit export markets. “We are waiting and watching to see where the new capacities will be targeted. The primary issue for European producers will be competing with US material in Asian markets,” he says.

The other major threat to plastics lies closer to home. The European Commission has proposed drastic action, including bans, to reduce the use of the top 10 single-use plastic items found on EU beaches by 2021. More than 50% of PE demand and nearly a third of PP demand goes into single-use packaging, says Hodges.

The Commission has also adopted new rules that will require a minimum of 50% of all plastic packaging waste to be recycled by 2025. “The industry now has to face up to the challenge of sustainability. We are up against some pretty tight timescales and it is mission critical for a number of companies,” says Hodges, who warns that if the industry does not respond to the plastics issue, then it will start to disappear.

Holton adds: “A critical enabler of this future industry growth will be the way producers and customers work together to increase the sustainability of our products and services across the entire value chain.

Plastics provide significant benefits to society. We all have to do more to address the growing challenge of plastic waste.” The European, and global, petrochemicals industry, has undergone a transformation during the past 10 years. It can surely respond to the latest challenges and repeat its successes, no doubt being very profitable for those companies prepared to seize the opportunities available.