Commentary: Question Cefic's view

16 May 2014 09:54 Source:ICIS Chemical Business

According to Europe’s chemicals trade group, the region faces challenges but can look forward to a prosperous future driven by its sophistication and proven ability to adapt to change

In an interview we publish today, the head of Europe’s chemicals trade body, Cefic, insists that the longer term outlook for Europe’s chemical industry is positive. Business growth will be driven by its ability to adapt, innovate, and also by rising demand as the global population increases from 7bn to 9bn by 2050.

Although director general Hubert Mandery also acknowledges some more near-term challenges, especially over EU energy policy and feedstock developments, he does not concede that the Europe’s industry is likely to see any major contraction based on new capacities and competition from Asia and the US during the next decade.

This seems to fly in the face of the facts as many others see them. Commentators and analysts believe the US shale gas boom, for starters, is likely to have a significant impact on Europe. There are 10 crackers at planning stage and one under construction which, from 2016/2017 could add over 50% to US ethylene capacity if all were realised. Even if some are delayed – as seems likely – EU chemical exports to the US are likely to be hit. Mandery acknowledges that, according to Cefic analysis, cheaper feedstocks are already impacting trans-Atlantic trade with a reduction in 2013 of around €2bn in the EU’s chemicals trade surplus with the US to €6.4bn. Petrochemicals, polymers and basic inorganics were most impacted.

Then there is Asia, particularly China, where huge amounts of new capacity are coming onstream during this decade in many product area. Key European export markets in Asia and the Middle East will become more self-sufficient and there are concerns that Europe may become a target from Asia. The example of polyethylene terephthalate (PET) highlights the problem where estimates suggest that during 2014 alone, global demand will increase by 6% and supply – driven by additions in China – by 20%, leaving the market 50% over-supplied.

Analysts are also concerned. In a note published on 15 May, JP Morgan Cazenove suggested that there have been several quarters of negative pricing trends led by new competitor activity in China and North America. Chemical prices fell by 1.8% in the first quarter and the company expects 1-2% price declines for the full year, though volmues are forecast up by 3-4% driven by a better macro environment. The analysts are worried about new supply, especially in Asia and forecasts 6-7% global capacity growth annually over the next three years in key monomers.

Europe’s move up the cost curve also worries JP Morgan Cazenove. Although the full impact of easily exportable US ethane-based products such as polyvinyl chloride (PVC) and polyethylene (PE) will not be felt until 2016, China’s willingness to manufacture at close to marginal cost could take cost advantages away from Europe. “Increasingly we believe Europe is a challenging place to produce commoditised chemicals,” they say.

Cefic’s Mandery acknowledges that energy-intensive commodities are under pressure in Europe, and that overall capacity utilisation rates are under 80% and falling. But for him, we should not underestimate the ability of Europe’s well-maintained and depreciated asset base to serve its complex market very effectively. He points out that Europe is a market of 500m people and including the periphery, roughly 1bn people. This is a huge market – more than double the US – which requires sophisticated chemical products. For him, energy and feedstocks are more of a challenge than global overcapacity.

Asked if assets will need to close in Europe he said: “It’s all too easy to look at the macro figures and say things need to happen. That will boil down into individual segments and aging or ailing assets might be adapted.”

Mandery is an optimist and highlights the fact that industrial chemistry – at 150 years old – is in its infancy relative to other disciplines and has a lot to offer in terms of solving global megatrends such as population growth, urbanisation and energy efficiency. Whether this future potential – plus other industry adjustments – can be realised quickly enough to save Europe’s bacon over the next few years remains to be seen.

By Will Beacham