Europe highlights 2016: The year no-one predicted (part 1)

Jonathan Lopez

29-Dec-2016

BBC Brexit electric signThe UK’s EU referendum results being projected onto BBC’s Broadcasting House on 24 June
Source: REX/Shutterstock

LONDON (ICIS)–Europe was shaken in 2016 by social and political earthquakes for which we will only realise the full effects in years, perhaps decades, as the European chemical industry braced for a “different world” following Donald Trump’s victory in the US presidential election.

2016 started with economic predictions saying the UK vote on EU membership planned for June was a geopolitical risk but neither the country’s government or its corporates had made contingency plans in the event of UK citizens voting to leave the 28-country bloc.

Equally, the idea of Donald Trump becoming President of the US was a distant reality for which the country’s media – and opinion pollsters – were caught off-balance.

But December closes with the UK government scrambling around to find a negotiation strategy on how to leave the EU as it plans its departure for 2019 and Donald Trump planning his arrival to the White House on 20 January, promising that all Americans will enjoy the effects of a new industrial renaissance based on patents and products.

This unforgettable year also saw more than 200 countries agree on bringing targets to reduce their CO2 emissions as global warming continues to threaten agriculture and lifestyles across the planet.

In a year in which “post-truth” politics also become a recurrent term, the new US president has publicly questioned the reality of climate change and has promised to “eliminate all barriers to responsible energy production” to tap into the country’s fossil fuels reserves.

2016 had started, however, with market jitters in China as it seemed at the time the country’s debt was unrepayable. China’s economic woes, however, were quickly put aside as its central bank continued printing money.

JANUARY
Crude oil markets started 2016 the same way they finished it – oversupplied. Moreover, following the agreement between Iran and world powers to curb its military nuclear ambitions, sanctions on the country started to be lifted allowing it to pump from its wells enormous amounts of crude, enlarging the global oversupply.

European stock markets reeled from the crude oil market crisis and jitters from China, where even stock trading was suspended at some point due to heavy losses, a key market which had been so far resilient in supporting European chemicals’ companies’ prospects.

The EU’s chemical trade group Cefic’s director general, however, said at the time that China would continue providing them with growth, although his words were among his last as the group’s president had already told ICIS it badly needed “a stronger voice” to lobby for its interests in Brussels, the EU capital. That chosen voice was Marco Mensink, former director general of the Confederation of European Pulp and Paper Industries (CEPI).

By mid-January, the woes from China had greatly affected German chemical major BASF’s share price as the company had made that market a key battleground for its expansion projects. With production plants ramping up while demand slowed, analysts worried the company may not go into a supply/demand balance until 2020.

Another sign showing the Chinese “El Dorado” was not proving as buoyant as expected came from French chemical major Arkema, announcing it would not exercise an option to increase its stake at the Chinese acrylic acid and butyl acrylate joint venture Taixing Sunke Chemicals.

Inflation in the 19-country eurozone started the year at 0.3%, far from the European Central Bank’s (ECB) target of close to, but below, 2%.

However, the enormous amounts of money pumped into the euro system since the bank’s quantitate easing (QE) programme was launched in 2015 started to cause rising prices, with the latest figures showing inflation at 0.6%.

FEBRUARY
Annual results for European chemicals companies released in February and thereafter showed an improvement in 2015, compared to 2014, but petrochemicals continued posting contracting output volumes.

Following the diesel scandal involving Germany’s major producer Volkswagen in 2015, which uncovered software manipulation in order to pass laboratory tests on CO2 emissions, the European chemical-intensive automobile industry said it welcomed new real-conditions tests.

In eastern Europe, fertilizers and chemical company Grupa Azoty got embroiled in a management crisis after the new far-right government in the country dismissed without notice the CEO and appointed a party faithful on the post.

The dismissed CEO had entered just a few months earlier, for the first time, the ICIS Top 40 Power Players 2015 list for the way he had placed Azoty at the vanguard of chemicals in eastern Europe and had embarked in an international expansion.

However, like in the best soap operas, not even before 2016 had ended the government – which controls 33% of the company through the Polish Treasury – felt yet a new CEO was needed and, without much fuss, again appointed a new head for the company.

Although operational performance has been holding during 2016, Azoty’s share price has not, as investors don’t normally like political interference.

February also unveiled the $43bn offer from ChemChina to acquire the Switzerland-headquartered agrochemicals major Syngenta, in a move which could facilitate food supply to the non-arable China for decades to come and left western analysts amused at how state-printed money can do so much.

MARCH
As the effects of the ECB’s QE struggled to filter to the real economy, the bank presided over by Mario Draghi unleashed in March an extension of the programme, as well as a move in interest rates to encourage banks to lend to households and businesses.

However, “the real problem” of growth in the eurozone is unlikely to be fixed by printing money – the eurozone needs capital investment to spur growth and project it into the future, said at the time analysts but also a bunch of German industrialists who think the state needs to spend more in infrastructure and education to keep Germany at the forefront of the world economy.

March was also the month when petrochemical major INEOS received at its Norwegian complex of Rafnes the first US ethane shipment, which the company hopes will keep competitive as the shale gas revolution on the other side of the pond continues pumping inexpensive natural gas.

On the morning of 22 March, a terrorist attack struck Brussels’ airport, in the first of a series which would shake Europe in 2016, killing 32 and leaving hundreds injured. 

The attack caused a reduction in air travel which was reflected on April’s imports of jet kerosene into the EU. 

APRIL
By April, the manufacturing sectors in the eurozone started seeing a revival in activity which would only grow as the year went by on the back of recoveries in ‘periphery countries’ like Spain or Italy. Although the recoveries are nowhere near to provide enough jobs for the youth and the long-term unemployed, the chemical industry has benefited from the bonanza as it is in the front line of the upturn.

The EU came up with yet another plan to stir the green sector within the 28-country bloc with a package about the “circular economy” although some chemical trade groups showed fears that the measures would only “overregulate”.

However, by the end of the month, the European Commission – the EU’s executive body – was promising the industry at an event in Brussels ‘Better Regulation’ by scrapping duplications and rationalising the laws which rule the bloc.

At his first public event since being appointed director general, Cefic’s Mensink said he was actually feeling how EU lawmakers were coming to understand better the needs of the chemical industry, adding the current Commission was listening more carefully to their demands.

However, the relationship between EU bureaucrats and the chemical industry has always been complicated. In October, the executive director at the European Chemical Agency (ECHA) told industry delegates “to stop complaining” and get on with the job of registering their chemical products within the Reach regulatory framework.

As a premonitory sign of the mess the country would be left in after the EU referendum, the global head of chemical at auditor KPMG told ICIS in April that UK companies should be making contingency plans in case voters chose to leave the EU. If only they had listened.

In April we also heard the UK’s chemical industry was overwhelmingly in favour of staying within the EU. They were only two months away from finding out the country they operate in was not of the same opinion.

Poland’s government continued publishing sudden dismissals – April also saw the CEO at refiner Lotos made redundant, without much explanation.

MAY
German chemical major Bayer in May unveiled a $62bn offer to acquire US agrochemicals major Monsanto. Farmers around the globe were therefore wondering if their prospects to have some kind of leverage with their suppliers would be valid any longer – was Bayer to succeed, three large companies would practically control the market – ChemChina/Syngenta, DowDuPont and their resulting agrochems business and now Bayer/Monsanto.

Bayer, weary that its shareholders had bought stock thinking more about a pharmaceutical company than an agrochemicals major, tried to convince them with the narrative that due to the simple human need of eating, agrochems will always be a profitable business to be in and would offset risks at pharma.

Investors are not buying the story, at least yet. From more than €110/share in May, Bayer’s stock traded in December around €98.

The EU said later in August that it would review the DowDuPont deal very closely, citing concerns about the agrochemicals division.

Although a smaller deal, Germany’s Evonik also went US-bound in May when it announced the $3.8bn acquisition of Air Products’ specialty & coatings additives business, a move viewed as expensive by analysts.

While in May most of the European chemical industry supported a free trade deal between the US and the EU, the Transatlantic Trade and Investment Partnership (TTIP), a crack started to appear as social pressure mounted – the “new generation of free trade deals” as defined by the EU Commission was not popular among large swaths of public opinion.

Within chemicals, Austria’s major Borealis’ CEO broke the ice saying the Commission was working “against the will of the people” while Spanish energy major CEPSA said TTIP would be a challenge for Spanish and European chemicals as their competitive disadvantages would only increase in a free trade area with US peers.

The European chemical trade group Cefic was always a strong supporter of TTIP, although the complexity of representing more than 30 countries and hundreds of companies will always cause dissent – Cefic was accused by players in the industry in May of representing mostly the interests of large global chemical players – European and from overseas – which would naturally favour a free trade deal like TTIP.

By July, anyway, TTIP was already considered dead by the German chemical trade group VCI and Cefic’s director general confirmed in September “optimism” would not be the right word to use when talking about its survival prospects.

JUNE
On 23 June the stock and currency markets, the UK political establishment and the country’s pollsters were all betting voters would follow the expected path of events and vote, albeit tightly, to stay in the EU. Bourses were up and the pound sterling was trading at a healthy £1:$1.47.

By 09:00 GMT on Friday 24 June, markets were in free fall and the UK Prime Minister David Cameron had addressed the nation to announce his resignation – the mess he had helped to create would be left to a successor.

For the first time in decades, the UK was not following the free market-focused, liberal economics it helped establish in the 80s. From immigration to “big corporates” dominating the world, the referendum campaign gave wings to those who did not approve of developments in the last 30 years – but had never been asked about them.

The country woke up suddenly to a reality it had dismissed, or at least failed to recognise: the north of England, the birthplace of the industrial revolution but now a post-industrial region where jobs are scarce and in many cases too badly paid, had voted massively to leave the EU, as recognised by UK’s chemical trade group CIA at the time.

A committed supporter of free markets and globalisation, the UK – and the US later in November – were, 30 years after Ronald Reagan and Margaret Thatcher started their economic revolution, suffering a backlash against the system which was meant to create wealth at the top that would later on trickle down to the rest of society.

It did not trickle down as expected and talk of “those left behind by globalisation” became commonplace after Brexit.

Although overshadowed by Brexit, there was other news in June, such as BASF announcing its intention to acquire specialty chemicals and surface treatment producer Chemetall, part of US Albemarle, for $3.2bn, which was ultimately completed in December.

Italy’s energy major Eni said it would keep under its umbrella the petrochemical arm Versalis, after talks for a potential divestment with investment fund SK Capital collapsed in June.

Additional reporting by Matt Tudball, Pavle Popovic and Nel Weddle

A second part of ‘HIGHLIGHTS 2016: The year no one predicted’ will be published on 30 December


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