Special report: Players wait for clouds to clear

17 April 2014 09:37  [Source: ICB]

During a presentation to journalists at BASF’s Ludwigshafen complex in February, chief executive Kurt Bock outlined his view for 2014.

“In Europe, we do not anticipate a significant upturn,” he said, adding US and Asia growth is likely to be slightly slower than in 2013.

Despite an improvement in results and outlook for many firms in the fourth quarter of the year – which would have been more pronounced if it were not for currency effects from an overweight euro – German chemical company CEOs have largely struck a subdued tone despite a perceived rally in Europe’s recovery.

Grass euro Rex Features 

Rex Features

Demand growth has dried up in recent years but producers believe they are seeing the green shoots of an upturn

Their caution underlines how battle-weary companies have become through the economic doldrums of the last half-decade and how careful directors have been not to over-promise earnings growth in the face of so many false dawns and what is likely to be, at best, a painfully slow road to demand growth.

Germany’s economy beat forecasts to expand by 0.4% in the third quarter of last year, and is expected to expand by 0.7% in the first quarter of 2014. The country’s strong industrial and manufacturing base fuelled a 2.6% rise in export trade in the fourth quarter 2013, predominantly to other EU member states, according to the country’s Federal Statistics Institute.

The economic boost from strong exports contrasted with a modest 0.6% increase in export levels the statistics agency added, and investment into the country also increased for the third consecutive quarter, adding an additional fillip to GDP figures, according to VCI.

Germany benefits from a strong industrial base, cutting-edge research and development facilities, strong trade and transportation infrastructure and numerous extensive, vertically integrated chemicals production hubs, which has left it in one of the strongest positions of any European nation for maintaining competitiveness over the last few years.

“Germany’s traditionally robust domestic demand is particularly beneficial for the chemical industry and proved to be an anchor during the global economic crisis which Germany overcame very quickly and with lower impact than its European neighbours,” says Richard Northcote, Bayer MaterialScience (BMS) executive committee member responsible for sustainability.

“On the other hand the country suffers from high energy costs, and there is a tendency that infrastructure projects lack public acceptance and meet sluggish administrative processes,” he adds.

Despite a drive to diversify into emerging markets and weight sales more evenly between home markets, the Americas and Asia, German producers still derive a significant proportion of their earnings from Europe, which their local clients also depend on as an export market.

“[We] saw a very moderate decline in our business in Europe last year,” says Matthias Wolfgruber, CEO of Altana. “Our German customers are primarily export-oriented to France and southern Europe so they were impacted, and the whole climate was difficult.

“What was encouraging was that we saw strengthening in the second half of the year. It’s also what we expect for this year.”

A RESILIENT REGION

The demand surge noted by Wolfgruber led to more resilient European chemicals output for the year than originally forecast by industry body Cefic, with the final year figure indicating flat growth instead of an outright contraction.

The momentum from the quarter continued into 2014, albeit at a slower pace, with January output up 2.6% year on year, indicating there may be organic momentum to the recovery at this point, says VCI head Utz Tillmann.

CHEMICAL PARK CONCEPT PROVIDES RESILIENCE

Although the attraction of lower-cost regions such as the US and Middle East present a threat to the competitiveness of chemicals production in heavily-regulated, high-cost European countries, the maturity and integration of chemical sites in Germany can confer some advantages, says Christof Gunther, managing director of chemicals park operator InfraLeuna and speaker for the Central European Chemical Network (CeChemNet).

Gunther says the CeChemNet sites remained resilient during the downturn.

“If one of the international investors [at one of the sites] had to deal with overcapacities during the downturn, they decided to shut down facilities elsewhere,” he says.

The competitiveness is strengthened by the infrastructure modernisation, and tight integration between different client companies at the parks.

“In Leuna there are more than 20 international chemical companies working together... and the whole thing works very efficiently due to the common infrastructure and the chemical park management.”

The parks benefit from clustering and integration between bulk and specialty chemicals but tightly-meshed hub networks can quickly lose competitiveness in the event of closures.

“Our feeling is that policymakers at least in Germany now understand that we need to see this picture from a global perspective and to keep policies with regard to energy prices and with regards to C02 reduction in the context of international competition,” he adds.

“From our perspective, there won’t be huge investment in bulk chemicals, but there are a number of investments in the specialties area in our region,” he says. “We also see a trend towards bio-based production here in Leuna.”

However, the impact of weak demand and price pressure on more upstream chemicals has weighed on some companies. Cost-cutting and efficiency programmes were the order of the day for German chemicals majors, attempting to tighten their belts to drive growth in the face of falling prices, and increasing regulatory and energy costs.

Production has also been hit by rising energy costs on the back of domestic and EU ­energy policy. The heart of the rise in energy costs is Angela Merkel’s decision to transition away from nuclear power following the Fukushima disaster in Japan. The move to phase out nuclear power into more capital-intensive renewable energy capacity has resulted in energy cost increases in the country.

Although high energy intensity industries such as chemicals are insulated from a portion of the Energiewende price increases, the costs are still intensifying pressure on beleaguered production margins, and negating attempts to increase competitiveness through efficiencies, according to Axel Heitmann, former CEO of LANXESS.

“Because of major efforts in the last few years, our energy consumption in Germany has been reduced by 30%. This is not being rewarded because the investments necessary for this are contrasted with additional energy burdens,” he said at a press conference late last year.

At present, Germany’s electricity costs are 2.5 times US levels, and natural gas prices three times higher, according to VCI.

Even for more specialties-focused groups, the impact has been noticeable, adds Wolfgruber, and has been especially heavy for large-scale integrated producers, notes Northcote.

“However much of Germany is a fundamentally attractive place for the chemical sector, especially the rising energy costs and the uncertainties in connection with the transition of the energy system prove to be a heavy burden for the industry,” he notes.

The costs of Reach chemicals regulation is also weighing on bottom lines, and is argued to be speeding the closure of basic and precursor chemical production units in Europe.

There is also the issue of consumer demand – essential to many key end markets - which has been lacking in Europe for years.

Companies have taken a variety of tacks to increase earnings in the face of flat demand and falling prices by taking stock of their key strengths. Many CEOs have initiated programmes of divesting, spinning off or shutting down less core assets, as well as leveraging areas of expertise into higher-value products.

DOMINO EFFECT

The mix of energy and regulatory costs and faltering global competitiveness poses a threat to hub integration, one of Germany’s core strengths. There have already been a string of closures across the country in recent years, and the loss of upstream chemicals capacity and a greater need for imports can threaten competitiveness. Once hubs start to disintegrate it can be hard to arrest the trend, as rising costs threaten to create a domino effect.

Tightly-meshed sites such as Ludwigshafen are unlikely to fall apart in the near future, but Europe is no longer the natural spot to install new upstream capacity, according to Bock.

“Are we the natural spot to put a new commodity chemical plant into operation if you look at the global landscape? Probably not,” he said at Cefic’s general assembly in Munich late last year.

The loss of bulk and precursor chemical capacity has the potential to lead to increasingly volatile pricing of some materials due to an overwhelming dependence on imports.

The fourth quarter of 2013 saw the closure of two vinyl acetate monomer (VAM) units in the UK and Spain, representing half of the region’s 1m tonne/year production capacity of the material. European imports of VAM have spiked dramatically and costs in Europe have reached record highs since the closures.

Reliance on imports can leave European producers exposed to shocks, demand spikes and outages in the rest of the world. Speaking on the sidelines of an industry event in March, Tom Crotty of INEOS – one of the two firms who announced closures – told ICIS it was inevitable, stating there was little economic rationale for producing VAM in Europe anymore. He added that price volatility for some materials may become more of an issue for European players.

“It will be a fact of life,” concurs Wolfgruber, “but also it will impact other chemicals in the US because the feedstock mix will change with this as the output of crackers will change and the feedstock and the costs of certain materials will go up.

“Even so the overall energy cost and overall basic feedstock cost could go down. It depends on your specific material needs,” he adds.

However, Germany is in a strong position relative to the rest of Europe for chemicals production, if energy, cost and raw material supply issues can be overcome.


By: Tom Brown
+44 208 652 3214



AddThis Social Bookmark Button

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.

Printer Friendly