01 November 2013 16:46 [Source: ICIS news]
By Tom Brown
LONDON (ICIS)--A coherent energy policy across the EU is as important to the survival of the chemicals industry in the region as the development of a European shale gas industry, the director of a Dutch industry body said on Friday.
“Shale gas exploration is one possible contribution, not a solution to the difficult situation the industry is in. But it is not the only possible way out, and it is not a silver bullet, said Colette Alma, director general for Vereniging van de Nederlandse Chemische Industrie (VNCI).
The association has stated in a new report that the shale gas boom in the US is impacting on the competitiveness of chemicals producers in Europe and the Netherlands, with lower North American gas costs and significant ramp-ups in capacity in the region, as well as Asia and the Middle East, eroding European producer margins.
The Netherlands government recently decided to postpone test shale drilling for 18 months while environmental impact studies are carried out, but this was not unexpected, Alma added, as the case for shale gas resources needs to be made to the public.
“We need the commitment or approval of the general public. I think that the postponement was necessary to ensure we have the right stakeholder discussions... but we haven’t given up [on shale exploration],” she added.
While US natural gas prices remain at historic lows – with wellhead spot prices remaining below $4/MBTU (million British thermal units) – energy regulation also represents a significant proportion of the pressure on chemical industry margins, according to the VNCI.
“The root cause of our disadvantage is the energy and raw materials price, which is due to market conditions, and indeed the European platform [has the power] to deal with this,” Alma said.
“We need to get more clarity. ETS [the Emissions Trading Scheme], for instance, has been under discussion for 10 years. There are certain features in it which need to be updated, some repair that is needed ,” said Werner Fuhrmann, chairman of VNCI and member of AkzoNobel’s executive committee with responsibility for specialty chemicals and supply chain.
“We need to get more cross-connectors across countries and see that we don’t burden the industry with too many taxes on energy, regardless of what form,” he added.
VNCI has also called for the Dutch government to use policy to help the industry maintain its competitiveness in the short term, with suggested policy measures including subsidies and additional tax write-offs for investments in cluster integration and bio-based plants.
“We support a market economy. We don’t believe in the longer term that subsidy regimes work. But we are facing a very specific issue: a disparity triggered by shale gas and by activities in the Middle East, which put us into a more vulnerable position in Europe,” Fuhrmann said.
“There is little Europe can do at short notice when it comes to raw materials. But where Europe can act on short notice is on energy,” he added.
The Dutch chemical industry’s strength is in its vertically-integrated clusters - both in the Netherlands itself and across neighbouring regions such as Belgium, Flanders and Germany – and investment to tighten the links of those clusters and run them more efficiently is crucial.
“We [need to] try to strengthen this cluster so that we can operate even more cost- and resource-efficiently. We see options in heat integration where we can make more use of waste heat” Alma said.
“There is a lot of integration already, but there is still some opportunity to connect various plants with each other to integrate the heat and energy structure, so there is less waste heat and water energy,” she added.
VNCI has warned that under-investment in the Dutch chemical sector during this depressed economic period could lead to a loss of cluster competitiveness, leading to shutdowns and the gradual disintegration of those networks.
However, regulators have stated that Europe's future may lie in specialty chemicals as opposed to commodities. According to VNCI, this could be true for some commodity chemicals that may be energy-intensive or lacking many steps on value chains.
The ethylene, ammonia and caustic soda value chains are particularly vulnerable, Alma added, but dismissed the notion that there is no future for bulk chemicals in Europe.
“It is not our view that base chemicals production in Europe [will disappear]. To provide the rest of the European chemical industry with chemical building blocks, we will keep seeing these activities in Europe, but they will have a disadvantaged position, and we will not see them grow,” she said.
Fuhrmann said, “As long as you have the manufacturing industry, you need also chemicals. In this regard we are quite relaxed that there will be a future for the chemical industry in Europe, despite the disparities we have now.
“The difference in disparities in energy and some raw materials will effect certain segments in Europe in an adverse way,” he added.
The trade body has also warned on the potential margin impact from the anticipated ramp-up of cracker capacity in the US, adding that European producer prices could stay firm in the event of “restrained” expansion in the Middle East and China.
The future in the event of significant installed capacity growth in those regions is murkier, and could lead to further consolidation, VNCI conceded.
“The chemicals sector... is growing faster than GDP, so in principle it can absorb expansion of capacity globally, but it depends on the rate of the growth of the global economy as compared to growth of the rate of investment, and if indeed its capacity expansions are quicker than the global growth then we will see some big difficulties,” Alma said.
“Then we will see consolidation in the industry, and the higher cost units will have a difficult life or not survive,” added Fuhrmann.
VNCI has also stressed the importance of encouraging international players with operations in the Netherlands to continue investing in facilities in the country and avoid the loss of competitiveness that could lead to cluster dissolution.
However, there remain compelling reasons for companies to stay active in Europe, according to Fuhrmann.
He said, “[International players] will be persuaded [to stay] as long as they see potential for making money, if this perspective vanishes then you see the consequences. The positive note [is that] it remains a huge market for chemicals because of the downstream manufacturing industry.
“ Major global companies want to be positioned in all regions. The assets which are here in Europe are pretty efficient, and the exit barriers are high, so they can absorb also some difficult times at least for a while,” he added.
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