By Nigel Davis
LONDON (ICIS)--Chemical producers have for years had to work to maintain the competitiveness of production plants and businesses in Europe but today the job is even harder.
The competitive landscape has changed markedly with the shale revolution underpinning a revival of the industry and of manufacturing in the US and Canada.
Players in Europe don’t have to sit on the sidelines and many are looking to secure investment and feedstock opportunities related to US shale. But a range of businesses in high-cost Europe are being squeezed. And capital is being allocated to lower cost, and higher growth, parts of the world.
Germany’s chemicals trade group, the VCI, on Monday said that Germany was becoming a less attractive location for the chemical industry, for instance, with stagnating investment and stagnating demand.
Germany is not alone in being a high-cost European chemicals manufacturing location. But its electricity prices currently are 2.5 times those in the US and the natural gas price three times higher.
Capital investment by German companies in North America were up 54% in 2012, with the region accounting for 41% of the German chemical industry’s foreign investment total, the VCI said. Investments by German chemical companies in Asia and Latin America in 2012 were up by 27%.
What Germany cannot afford is to let these developments, as VCI director general Utz Tillman calls them, turn into a trend.
BASF CEO Kurt Bock said in London last week that the fight is on for a better regulatory framework for industry in Germany. Raw material and energy costs have risen, mainly because of the country’s energy transition (towards renewables) policy, the Energiewende. The German chemical industry is paying about €800m ($1.08bn) to subsidise renewable energy, he said.
BASF’s largest production site is in its home town of Ludwigshafen on the River Main. “Ludwigshafen is competitive,” Bock says. Continued work on and investment in its competitiveness over the past 20 years has seen to that.
The company is pushing its capital spending budget (the budget for fixed assets) higher to try to capture more growth worldwide. And it is investing heavily in Europe to bolster its competitive position in key intermediates such as toluene diisocyanate (TDI). But low cost feedstock opportunities in the US beckon.
BASF and Norway-headquartered fertilizer producer Yara are well advanced with plans for a world scale or ‘super world scale’ ammonia plant on the US Gulf, the companies said in October. BASF has a need for ammonia in its chemical businesses. An investment decision on the new plant is expected in the second half of 2014.
BASF and its joint venture partner Total have converted their original liquids cracker in Port Arthur, Texas to take ethane and butane feed and are building a 10th furnace to add greater flexibility. But the company generally is not ethylene led and is believed to be assessing the viability of producing C3s and C4s in the US from shale gas liquids.
The shale advantage and the threat of low cost energy and petrochemical feedstock availability in North America have wide implications for Europe’s chemical producers.
Solvay CEO, Jean-Pierre Clamadieu, highlighted many of the issues when he spoke to financial analysts in London on Wednesday at a capital markets day.
"The continued divergence of regional macroeconomic drivers and shifts in industrial competitiveness linked to energy costs are tilting investment decisions mainly in favour of Asia and North America,” he said.
The distinct shift in competitiveness may be most apparent upstream but it affects ethylene derivative chemicals and other products as well as energy-intensive processes.
Solvay is already much changed under Clamadieu’s leadership and will change further as management works to reduce capital intensity. Investments outside Europe will also change the asset footprint.
The proposed polyvinyl chloride (PVC) joint venture with INEOS shows Solvay moving further away from ethylene chain and energy intensive chemicals. The company also is rationalising some of its European soda ash production as its costs rise.
In the first nine months of 2013, Solvay made 34% of its sales in Europe, 8% lower than the equivalent period in 2012, while the proportions of sales made in other parts of the world, particularly North America and Asia, were higher.
Solvay expects just 2% growth in chemicals output in Europe between 2012 and 2020 but a 40% increase in North America and a 48% increase in Asia Pacific.
Part of Solvay’s action plan to raise profitability to 2016 is to focus on energy and other production costs at its plants.
The company believes it has a unique opportunity to address the variable as well as the fixed costs base of its synthetic soda ash plants in Europe, for example.
Tackling energy and other costs across all its manufacturing plants could yield a further €300m in earnings before interest, tax, depreciation and amortisation (EBITDA) in the three years to the end of 2016, it says. The drive for improved manufacturing excellence is part of a €670m profits improvement programme.
Solvay wants to save 10% of its €1bn (2012) energy bill by 2016 (for the group excluding PVC) and has organised its energy reduction operations into a separate profit centre, Solvay Energy Services.
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