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Shell CEO says Europe needs to leverage chemicals clusters

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By Paul Hodges on 22-Oct-2014

EU C2 OR Oct14

There are 2 ways to improve operating rates in an industry.  One is to increase volumes, the other is to reduce capacity.   The latest APPE data covering H1 2014 for European olefin capacity highlights how the European petrochemical industry has successfully used both mechanisms over the past year to improve its position:

  • Ethylene volume increased to 9.8MT, versus 9.3MT in 2013
  • Ethylene capacity reduced by 490KT, following Versalis’ decision to close at Porto Marghera
  • As a result, operating rates increased to 84% versus 78% last year

However, this success cannot hide the fact that an 84% operating rate is still too low to be sustained forever.

EU C2, C3 Oct14Equally, as the second chart shows, it seems that the industry’s efforts to increase the ratio of propylene production to ethylene output may have peaked at around 75%.

The increase from the 60% level seen 20 years ago has added valuable income to the bottom line, as propylene demand has grown.  It has also enabled the industry to benefit from the global propylene shortages created in recent years by the increased use of ethane feedstock in the US (which reduced the region’s propylene output).

But the data confirms there has been no real improvement in the ratio since 2008.

These two developments would be challenging enough in themselves.  But as ICIS’ Nigel Davis noted in an Insight analysis this week, the external environment is set to become much more difficult:

“Ultra-low growth prospects in the EU give its producers no cause for comfort. The weakened chemicals demand growth prospects for China are the cause of further concern.”

Yet as Shell Chemicals CEO Graham van’t Hoff highlighted at the European Petrochemical Association’s meeting earlier this month in Vienna, the industry is enormously important to the European economy:

European chemicals are a $558bn industry providing over 1 million direct and nearly 5 million indirect jobs,… based on a vast, differentiated product portfolio”.

Encouragingly, van’t Hoff clearly shares the blog’s view (as highlighted in its recent article ‘Time to look forwards, not back’), that Europe now needs to become much more pro-active if it wants to survive and prosper in the future.  He argued that it particularly needed to focus on the potential for its clusters:

First, we should continue to leverage our clusters, which we have quite a few here in the region, such as the Antwerp-Rotterdam and Rhine-Ruhr clusters down to Ludwigshafen and Marl. We all know that competitive clusters are more robust, as they are well-integrated in terms of logistics, ownership and derivative units; and they have low cost to serve”

And he then went on to highlight other key areas for focus:

  • Integration.  van’t Hoff argued there were opportunities to build on the existing integration between refineries and chemicals – perhaps even utilising surplus gasoline streams to produce added value aromatics output
  • Feedstock flexibility.  There was clear potential to use more natural gas liquids, particularly ethane and propane, in coastal sites
  • Government partnerships.  These need to be formed on a national and regional basis to promote ‘joined-up policies’ and competitiveness versus other regions

The conclusion is clear.  There is growing agreement that Europe needs to take radical action to secure its position for the future.  There can be no ‘business as usual’ strategy, given the range and scale of the challenges that it faces.

The need now is to establish national and European initiatives within the appropriate legal boundaries.  The blog has obtained expert legal advice to confirm that there are no regulatory “no-no’s” to stop the industry from developing the creative collective solutions that are required.

If we work together, we can create win-win solutions for the European economy, companies themselves and their major stakeholders.  This will enable us to build a sustainable future for our industry, and a better result for all of us individually.