Market outlook: Emissions reductions, challenge or opportunity for chemicals?

With the right support, Europe’s chemical industry can be at the forefront of developing new technologies to solve the world’s ecological challenges

Our world, society and the chemical industry are living in historic times, finding themselves in the midst of one of the most important transformations in modern times.

With an innovative approach, Europe chemicals could benefit from climate targets Copyright: Rex Features

Already large “tectonic shifts”, such as the shale gas revolution in North America, the emergence of China as the largest chemical market in the world, or the consolidation of the Middle East as the single largest petrochemical hub, might appear minor to what is currently unfolding.

Emissions and energy reduction and information technology will have the potential to trigger the third industrial revolution, the “sustainable” one.

New companies and industries will flourish, while others will disappear. The imperative for our world to emit just 4,000 grams/day of CO2 per person by 2050 from 14,000 grams in 2010 and the projected 28,000 grams of CO2 (assuming a business-as-usual scenario) will create massive technological challenges as well as the single largest business opportunity in human history (up to $80 trillion).

SUSTAINABLE GROWTH DEBATE
On 22 January 2014 the European Commission, in a consistent and well-anticipated policy movement, announced its ambitious long-term Energy and Climate Policy Framework by 2030. This announcement sparked the long-term debate about “growth and sustainability”, as well as the first real opportunity to open a constructive debate on how to ensure that Europe and its industry succeed in the context of these challenges.

European Commission President José Manuel Barroso said: “Climate action is central for the future of our planet, while a truly European energy policy is key for our competitiveness. An ambitious 40% greenhouse reduction target for 2030 is the most cost-effective milestone in our path towards a low-carbon economy.”

Energy Commissioner Günther Oettinger said: “The 2030 framework is the EU’s drive for progress towards a competitive low-carbon economy, investment stability and security of energy supply.”

European Commission vice president Antonio Tajani, responsible for industry and entrepreneurship said: “Europe is still far from the 20% target of industry’s share in Europe’s GDP by 2020. We need a strong commitment at the EU and national level to ensure coherence and prioritisation of all instruments at our disposal.”

Meanwhile, the general director of the European Chemistry Industry Council (Cefic) Hubert Mandery noted: “The sector has already achieved a 50% reduction, and could do even more. But the Commission’s proposals, as they stand, are asking too much – and would imply exporting jobs and importing goods.

The European Commission is certainly right to keep pushing our society and industry to go beyond its comfort zone, establishing world-class, ambitious energy and emissions targets. These will enable the creation of the most competitive industry in the world, even at the risk that some parts of the industry will disappear. The Commission is also right to aim for a strong and growing industry. Indeed, Europe needs its chemical industry, as its chemical industry needs Europe. Cefic is also right, pointing out that these ambitious actions cannot be taken in isolation, especially when Europe is still leading, mainly “alone”, in this global race. So if all stakeholders are right and well intentioned, have the results been positive for Europe and its chemical industry?

European leadership in emissions reductions has already enabled one of the most efficient economies in the world. In 2010 Europe already had the lowest emissions of all the advanced economies, with just 22,605 grams of CO2 per capita and day, well below the 54,475 from the US, and even the 28,126 from Japan. Europeans should feel proud of the EU’s leadership and remarkable progress on this critical area, but also they should be aware of the trade-offs and consequences.

European citizens should also feel very proud of its chemical industry. Europe is not only the cradle of the chemical industry but also the base of the most efficient and technologically advanced chemical industry in the world. During the last two decades the chemical industry has managed to decouple its production from emissions and energy demand, increasing production by 60% while decreasing emissions by 50% and energy consumption by 30%.

Unfortunately, this remarkable performance in emissions reductions and energy efficiency did not translate into higher growth, returns or market share for the European chemical industry.

During the period from 2000 to 2012 the global chemical industry grew with a compound annual growth ratio (CAGR) of just 4% annually, moving from 1.1bn tonnes in 2000 to 1.7bn tonnes in 2012.

Meanwhile, the European chemical industry grew by a modest 0.5%, adding just 14 million tonnes, and seeing its global market share reduced from 21% to 14%. These poor results are even more unexpected when considering that the European economy, the largest economy in the world, managed to preserve its global leading market share at 25%.

So what went wrong?

WHY HAS EUROPE LOST OUT?
How can the sophisticated and technologically advanced European chemical industry, despite its outstanding performance in emissions and energy efficiency, not manage to capitalise on all that growth?

As always, a multiple combination of factors could explain such a poor performance, but let’s review some of the most obvious ones: cost (feedstocks/utilities), emissions differentials and strategic governmental support.

As Europe and its chemical industry embarked on the fight against emissions reductions and energy efficiency, European electricity and natural gas prices increased to become the most expensive in the world, a devastating outcome for an industry grounded on the cost-competitiveness of its feedstock and utilities.

Electricity prices went from being among the most competitive in the world in 2000 to among the most expensive by 2012. At the same time, European natural gas prices not only experienced a similar price escalation, but the European cost position was eroded with the discovery of shale gas in North America. Indeed Europe currently grapples with gas prices that are among the most expensive in the world.

Meanwhile, China and the Middle East not only benefited from cheap feedstocks (China with coal and the Middle East with gas) and fast-growing market demand, but also from strong governmental support. Long-term strategic plans and supporting policies were implemented to ensure the fast growth of their chemical industry, and these delivered. So what about Europe?

FUTURE OPPORTUNITIES
Europe needs its chemical industry and the chemical industry needs Europe. During the next decades large population and economic growth will trigger an enormous global demand for basic chemicals, while the need to reduce emissions and energy use will also accelerate demand for specialty products and solutions that solve our sustainability concerns. This can trigger sustainable growth.

The European chemical industry is uniquely positioned to solve and capitalise on the huge business opportunity that emissions and energy reductions will bring for our industry. However, to ensure the desired outcomes for Europe and its chemical industry, Europe needs decisive and coordinated policy actions to protect and strengthen its industry, avoiding the danger that its technological supremacy gets diluted by an uncompetitive cost position or unilateral and aggressive emissions reductions.

European governments should take strategic actions to accelerate innovation and technological collaboration, while enabling, empowering and strengthening the competitive position of its chemical industry. After all, Europe’s economic and social success is based on its industry.

Access to more competitive energy and feedstock sources across Europe (for gas and electricity production) including the sustainable development of shale gas and the avoidance of “carbon leakage” should become a top priority. In parallel, Europe should develop a comprehensive emissions framework where the right behaviour gets rewarded and wrong ones penalised.

The world needs the leadership of Europe, and Europe needs the leadership of its chemical industry. Europe should work together to ensure that it leads the 3rd Industrial Revolution with its chemical industry at the forefront of the solution. The chemical industry has always been a key strategic sector; in future that fact will become even more valid. Formidable technological challenges, changing feedstock, markets and competition – with the leading role of China and the Middle East, and the emergence of India – require strategic, coordinated and decisive actions.

Massive emissions reductions and energy efficiencies are not only a huge technological challenge, as well as a moral obligation for this generation, but they are also the single largest business opportunity in human history. Let’s ensure Europe manages to lead this revolution, while its chemical industry capitalizes on the full potential of the upcoming sustainable growth.

“We just had 150 years of industrial chemistry laying the foundations for the quality of life we experience in Europe. The best of chemistry is yet to come,” Mandery said.

Rafael Cayuela is the author of the book “The Future of the Chemical Industry” and is ethylene, benzene and styrene commercial director for Styron Europe, based in Horgen, Switzerland. He is writing in a personal capacity and these views do not represent any official Styron viewpoint.