Petrochemicals make things happen
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PETROCHEMICALS: THE MACROECONOMIC FACTORS SHAPING THE INDUSTRY
THE ECONOMIC AND SOCIETAL VALUE OF PETROCHEMICALS
Petrochemicals make things happen. This is not only the tagline of the European petrochemical producers’ association Petrochemicals Europe, this is a fact: 95% of all manufactured goods such as electronics, furniture, appliances, textiles and many more are based on petrochemicals. With 300,000 people directly employed in highly qualified jobs and in total 1.2 million along the entire value chain as well as an annual contribution of €155 billion to the overall European GDP petrochemicals represent an important economic factor. Additionally, they are also an enabler industry for sustainable solutions such as insulation material to save energy, durable and resistant composites for light-weight smartphones and tablet PCs, sophisticated fuel additives to save emissions from transportation, or renewable energy devices like windmill blades and solar panels for a low-carbon economy.
In the future these benefits will be needed even more than in the past to meet the upcoming societal mega-challenges.
In 2050, more than 9 billion people will live on earth.
With no major changes, mankind will need the resources of 3 planets to meet the demands of this growing population in terms of clean water, food, energy, housing, mobility and communication. The answer lies in smart solutions – another aspect underlining the crucial role of petrochemicals in driving innovation projects, together with their downstream value chain partners, universities and research laboratories.
CHEMICAL MARKETS GROW, BUT EUROPE LOSES SHARE
From that perspective it seems only logical for chemical markets to grow steadily, and in fact, the global market volume is expected to increase by 3 4% each year to €6.3 trillion by 2030 from the 2013 level of €3.2 trillion. Unfortunately, most of this growth will take place outside of Europe with China alone being forecasted to account for 44% of the chemical markets by 2030. In contrast, the EU share is likely to further decline from 17% in 2013 to 12% by 2030 due to mature markets and an ageing population.
In the current structure of Europe´s chemical industry petrochemicals account for approximately 27% of the total EU sales and are, hence, a very important industry segment. Since at the same time they mark the starting point of almost all chemical value chains, they also provide a secure raw material basis to all the subsequent segments such as specialties, fine chemicals or polymers, the more so as the majority of chemical plants in Europe is backwards integrated.
THE OIL PRICE HAS LOWERED, BUT EUROPE´S STRUCTURAL CHALLENGES REMAIN
Unlike specialty or fine chemicals, petrochemicals operate under classical commodity business conditions: customers buy exclusively on price and, therefore, managing cost is key to economic success. 80% of the production costs for petrochemicals are related to oil and gas as feedstock and to energy, and this is exactly where a major challenge for naphtha-based steam crackers in Europe lies.
They have to compete against Middle-East producers with advantaged oil and gas feedstock on one side and shale gas-based petrochemicals from the US on the other side. The lower oil price from end-2014 onwards has brought some welcome relief by narrowing down the competitiveness gap. However, the situation is far from being a global level playing field with European producers currently still paying twice as much as their American counterparts. This is, because two major structural challenges in Europe have remained: high energy prices and regulatory burden.
European energy prices are amongst the highest in the world and have doubled over the past ten years, mainly driven by policy support costs such as taxes, levies, and subsidies to renewables, whereas the actual market price for energy has even slightly declined. In this respect it comes as good news for all energy-intense industries that the European Commission has started working on establishing a so-called European Energy Union with the target to create a harmonized and secure energy market at competitive prices for its 28 member countries.
This development marks a first step in the right direction, although still a lot has to be done to achieve the final goal.
REGULATORY COSTS HAVE DOUBLED WITHIN A DECADE
The European Commission has meanwhile also taken a deeper look into the topic of regulatory burden: in 2015 they commissioned a study on regulatory costs for European chemical producers from EU legislation enacted between 2004 and 2014. The outcome of this survey, which is based on genuine company data, concluded that almost €10 billion per year of additional regulatory costs were imposed on Europe´s chemical companies during that period alone.
This equates a doubling in only one decade! Additionally, the study showed that more than 25% of the profits of European petrochemicals have been absorbed by regulatory costs, mainly due to air quality legislation. The corresponding figure for the entire chemical industry is 30% of profits eaten up by regulatory costs.
It is important to emphasize that talking about the lessons learned from the report does not mean lowering standards or eliminating regulation. All chemical companies in Europe are firmly committed to complying with legislation. However, the question is whether we can reach the same target with less costs and burden to safeguard the competitiveness of European producers and to (re-) attract more investments to Europe.
In this context it becomes obvious that all regions are expanding their petrochemical production bases – all except Europe, where the last steam cracker was built more than 15 years ago. Moreover, these investments are usually not intended as stand-alone plants, but as initial step to generate huge chemical and, subsequently, manufacturing hubs.
SUBSTANTIAL ENVIRONMENTAL IMPROVEMENTS
Is it then all “doom and gloom” for European petrochemicals? Certainly not, because Europe can always fall back on its strengths: large integrated sites, a huge domestic market with strong customer clusters nearby, the good infrastructure, a skilled and motivated workforce, sustained innovation efforts and substantial experience in adapting to ever new business conditions. Also in terms of environmental footprint European chemical producers count among the global leaders: against the background of a 78% production increase between 1990 and 2014 they succeeded to reduce their greenhouse gas emissions by 59% and the corresponding energy intensity by more than 50%.
Based on the above-mentioned aspects it is evident that European producers have a significant role to play. Now it is up to the regulators to establish a more balanced approach between their ambitious climate targets on one hand and economic framework conditions that allow the industry to thrive while demonstrating their living commitment to the environment on the other hand.
Source: Chemistry Today, March/April 2017