INSIGHT: EU chemicals and the pressure to close

03 February 2010 17:37  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Not that long ago, the now-defunct Lehman Brothers was suggesting that as much as 45% of the world’s ethylene capacity was at risk from rising sea levels brought about by global warming.

In a new sector report, business consultancy KPMG talks of the potential impact of a flood of a different sort, but one that is likely to be more threatening in the near term.

This is the flood of new low-cost cracker capacity expected in the Middle East. Low feedstock costs give the operators of these plants considerable competitive advantage.

By looking at the European cost curve, KPMG has determined that 14 of the region’s 43 crackers will, by 2015, be uneconomic to run and should be closed. This means that 26% of Europe’s total cracker capacity is under threat.

In an ideal world, perhaps, the plants would close and companies would replace those assets with something new – but not with new cracking capacity in Europe, where, as is increasingly the case, demand for the upstream ethylene derivatives and commodity polyolefins would be met by imports. Instead, those assets should be replaced with secure investments in competitive clusters of plants and businesses, and a much more ruthless focus in the portfolio on innovative businesses and customer relationships.

“Many European companies are already recognising the possible advantages – and the necessity – of repositioning themselves as solutions providers rather than just basics suppliers for their customers,” says KPMG.

“The European chemical industry must capitalise on its historic advantage in innovation to stay ahead of the competition.”

But to stay ahead of the competition companies not only have to be innovative, they also have to move, and move fast.

The initial wave of new olefins, first-line derivatives and polyolefins capacity is being commissioned in various Middle East countries. New plants with considerable economies of scale are coming on line, or are due in the not-too-distant future, in India and China.

There can be no doubt that the centre of gravity of the industry generally is shifting away from North America, Europe and Japan.

Each of those regions remains an important and increasingly sophisticated market for chemicals of all sorts. It is just that producing and selling commodities in these parts of the world are becoming a much changed game.

Most players recognise this and are making the decisions now that will change the face of the industry.

KPMG, interestingly, produces a chart in its report that shows which firms, in its view, will be the sector’s largest in 2015.

The top 10 are: SABIC, BASF, Reliance Industries, ExxonMobil, Sinopec, Sinochem, Dow Chemical, Saudi Aramco, DuPont and Adnoc/IPIC, in that order. Only one has its headquarters in Europe.

“Even before the current recession, the European chemical industry saw a gradual but steady decline in global market influence,” says KPMG.

It references that BASF estimates for an 8% increase in chemicals demand in the Asia-Pacific region between 2008 and 2020, but a 6% decline in western Europe.

By 2015, China is expected to be the world’s largest chemicals producer, ahead of the US, and it is likely still to be importing a wide range of commodities.

Already increasing their role in chemicals, Middle East players will come to dominate these export markets, putting further pressure on businesses located in Europe and North America.

US operators are widely felt to be more ruthless when it comes to plant closures, although some believe the easy cuts have already been made.

For various reasons, European players might be expected to have to proceed with closures more slowly.

It will not be a smooth progression. Political factors weigh heavily against closures at some chemical sites, which might be expected to limp along, although possibly under changed ownership.

It makes sense to focus on the more advantaged chemicals “clusters”: the sites and locations that benefit from logistics, feedstock access, customer proximity and other factors. But that will not necessarily always be the case.

“There should be a process to identify and rationalise chemical plant and clusters made uneconomic by the new world order (principally, likely to be small land-bound, non-integrated units). This should allow future investment to focus on those areas in which the European chemical industry remains competitive on the global stage,” says KPMG.

This is very much wishful thinking, although there can be no denying the dynamic that increasingly exists to bring change upon the sector. Growing confidence in the business environment across the sector and in financial circles suggests that the appetite for change – possibly through rationalisation, but certainly through increased merger and acquisition (M&A) activity – will increase.

That search for greater competitiveness is ongoing and, for each company in the sector with assets in Europe, the greatest challenge.

As KPMG says, “There is no doubt that the shape of the global chemical industry is changing, but the industry in Europe can continue to play a significant role in this new reality.”

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By: Nigel Davis
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