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European Demographics Challenge US Export Assumptions

Business, Company Strategy, Economics, Europe, European economy, Naphtha & other feedstocks, Oil & Gas, Olefins, Polyolefins
By John Richardson on 10-Oct-2013


By John Richardson

US feedstock advantages appear to provide an almost overwhelming case for a big wave of cracker and downstream investments, particularly in polyethylene (PE) and polypropylene (PP).

In contrast, Europe is struggling with much-higher feedstock costs and low economic growth, resulting in the possibility of many more capacity closures.

Only last week, for example, INEOS added to the gloom when it said that it had written down to zero its petrochemical assets at Grangemouth in Scotland. They were once valued at £400m ($645m).

The petrochemical site, with its two crackers, a 700,000 tonne/year gas cracker and 320,000 tonne/year liquids cracker, has lost £150m in the past four years, the company said. Gas liquids feedstock supply from the North Sea was running out and employee pension and other costs were high, it added.

INEOS plans to close the site by 2017 unless it can find a cheaper source of raw materials.

The prospect of further plant shutdowns could thus be seen as further bolstering the case for investments in the US. Europe’s petrochemicals demand will still likely grow, even if at a very slow pace, and whatever growth that does take place could increasingly be met by imports.

But the root of Europe’s economic crisis – demographics – offers a challenge to this assumption.

There is ever-more discussion of the demographic challenge. For example, Aaron M Renn, an independent writer on urban affairs, wrote in this article:

  • A society needs a total fertility rate – that is, the average number of children born to each woman – of 2.1 just to maintain its population without immigration. Some European countries like France (2.03) and the UK (1.98) are in reasonably good shape, but they are the exception. The total fertility rate in Greece is 1.43, in Germany 1.36, in Spain 1.36, in Portugal 1.30, and in Poland 1.30.  Much of southern and central Europe hovers near the so-called “lowest-low” rate of 1.3 in which the population is naturally being cut in half every 45 years [fertility rates are declining worldwide, as the chart above shows, as life expectancy also increases].
  • Not only are Europe’s young facing short term pain from economic crisis, they also face the long term prospect of being a small population cohort that has to spend their entire working lives (when they eventually find jobs) paying for previous generations’ lavish retirement benefits, which have never been properly funded. They will also likely bear the brunt of reduced pension payouts for themselves, whilst the current and nearly retired are fully protected from cuts.

If Europe invests more in education, innovation and science to make the products and services that will be needed by an ageing population, it can turn its economy around. But the first step has to be for policymakers to recognise publicly that demographics are the problem. They must then start the debate essential for working towards solutions.

What is really, really scary, though, is that this might not happen. We could instead end up a new era of rising nationalist politics and protectionism.

European petrochemicals complexes might therefore be kept open through government support, and “beggar thy neighbour” trade barriers could also be erected.

This would, obviously, make it a lot harder for US petrochemicals producers to place their additional export volumes in Europe.