Global sourcing of chemicals altered by new capacity and markets

Shifting focus

22 May 2008 00:00  [Source: ICB]

The global sourcing of chemicals is changing, as new capacity springs up and consumption shifts

Do you agree that recent changes in purchasing trends could accelerate the long-term tendency for Europe and North America to lose share of worldwide trade? Why not discuss through ICIS connect?

Sean Milmo/London

Recent fluctuations in currencies - highlighted by the declining US dollar and strengthening euro - and steep increases in commodity prices are causing shifts in the global sourcing of chemicals.

To take advantage of the weak dollar, US chemical producers have been pushing up their exports. At the same time, European chemical companies have been exploiting the high-riding euro to buy raw materials and intermediates from outside Europe, which has enabled them to soften the effects of a general rise in raw material costs.

However, economists reckon that these latest changes in purchasing trends will not dramatically alter the overall short-term pattern of global trade in chemicals. Instead, it could accelerate a long-term tendency for the richer regions of Europe and North America to lose share of worldwide trade, while the emerging economies increase theirs.

Since the turn of the century, in the 27 member states of the European Union, the ratio of extra-EU imports to extra-EU exports has slowly risen, according to figures from the European Commission's Eurostat service.

Last year, extra-EU imports accounted for 42% of external trade in chemicals, against 38% in 2000. Over the eight years, exports have gone up by 27% but imports by 50%.

Due to the high proportion of extra-EU trade still taking place among the EU, North America and Japan, the growing trading power of the newly industrialized countries is not yet conspicuous in general trade statistics.

US exports and imports still account for almost half of Germany's extra-EU trade in chemicals, while China makes up less than 5%.

"The US share of our total exports is around 10% and imports 12%, while with China it is 2% and 4% respectively," adds Henrik Meinche, senior economist at the German Chemical Industry Association, known as VCI.

Nonetheless, the expanding presence of the emerging economies in global trade in chemicals is beginning to be exemplified by their domination of specific sectors. As a result, chemical companies in Europe, North America and Japan are finding that they now have little choice but to buy supplies of particular raw materials and substances from China, India, Southeast Asia and parts of Latin America like Brazil.

In broad chemical categories like petrochemicals, there is already evidence of Middle East producers making even bigger inroads into the European market as a result of new capacity coming on stream in Saudi Arabia and neighboring Gulf states.

SOURCING SEESAW

"The extra-EU chemical trade balance - excluding pharmaceuticals - shrank by 13% over the first 10 months of 2007 compared with the same period of 2006," says the European Chemical Industry Council (Cefic) in its latest report on chemical trends. "Petrochemicals were hit most as their trade surplus decreased by almost 50%."

In the US, the struggling dollar has boosted sales abroad of petrochemicals, which have been at the forefront of a revival in the country's chemical exports. The American Chemistry Council (ACC) was forecasting earlier this year a rise of around 10% in US chemical exports in 2008.

In February, both chemical exports and imports in the US rose by around 20% year on year. The gain in imports was driven by a rise in prices stemming from the weak dollar with import prices in March going up by 15%, while those for exports rose by 1.5%.

A trade surplus of $66m (€42.4m) in January became a trade deficit of $344m in February, mostly because of a big surge in imports of pharmaceuticals mainly from a rise in buying off-patent medicines, according to the ACC. Excluding all pharmaceuticals, there would have been a $1.6bn surplus.

Among the beneficiaries of the rising demand for foreign-made generic pharmaceuticals in the US have been German producers of off-patent medicines. They have been able to use the strong euro to buy intermediates and active ingredients from Asia for manufacture of dosage form products for sale outside the EU

"Our exports to the US, including pharmaceuticals, went down last year by 8%," says Meinche. "But in January and February they increased because of strong demand for pharmaceuticals in the country. For German producers, this is good business. The cost of intermediates from Asia is cheaper because of the high euro, while in the US, the economic slowdown does not influence the need for high-value products like pharmaceuticals."

The global sector for active pharmaceutical ingredients (APIs) and intermediates is among the first to be transformed by the new global trading structures, which are gradually becoming apparent.

"When I started my first job in the mid-1980s as a salesman of APIs in India, there was no production of active ingredients in the country," Guy Villax, CEO of the Portuguese API producer Hovione and a board member of the European Fine Chemicals Group (EFCG), observes.

Over the last three years, Indian and Chinese shares of the worldwide market for intermediates have grown rapidly, especially in the EU, where the strong euro is an extra attraction to API exporters. The European Medicines Agency, the EU's licensing authority, estimates that around 80% of APIs for the production of medicines in the Union are now imported, mainly from India and China.

"The major impetus behind this influx of APIs from India and China has been the explosion in demand for generic medicines," says Villax. Off-patent medicines already account for 60% of prescriptions by volume in the US, while by 2011, drugs worth over $60bn are due to come off patent.

Chinese chemical companies, in particular, have been reorganizing themselves to become major global players, not only in pharmaceutical ingredients, but also areas like food and feed additives and pigments. They have been upgrading plants while ensuring that they are backward-integrated into raw materials.

In the global citric acid market, Chinese producers are now estimated to have a 50-60% share, boosted by recent investment in state-of-the-art production facilities. They also have a similarly large share in the world market for ascorbic acid - vitamin C.

Helped by close links to domestic raw material suppliers, Chinese firms have been building up a strong position in the North American and European markets for bulk organic pigments. They have also begun to attack the market for high-performance pigments (HPPs), which is a stronghold of Switzerland's Ciba and Clariant, Germany's BASF, and Sun Chemicals - the US subsidiary of Japan's Dainippon Ink and Chemicals (DIC).

"Chinese producers now have over 50% of the European market for conventional organic pigments," says Fritz Brenzikofer, CEO of the Switzerland-based consultancy and pigment marketing company IQ Chem. "The quality of HPPs from China is becoming better and better," he adds.

The ascendency of Chinese and Indian firms in specific segments is seen to provide a platform for expansion in other markets.

"It seems inevitable that the trade in Chinese chemicals as a proportion of sales, which at the moment amount to only a few percentage points, will rise at least to the same level as that in the US," says David Thomas, chemical analyst at consultancy Oxford Economics, based in Oxford, UK. "That will mean that probably by 2020 it will have gone up to around 10-15%, which would be similar to that in the US, or even higher to 15-20%, as in the EU."

External trade in chemicals in the EU and the US will continue to be maintained at current levels proportionately, Thomas says. But the future position within the global market of European and North American chemical companies will depend on their ability to move up the value chain, using raw materials from the emerging economies.

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