Global economy shifts to regional production

Source: ECN

2018/06/21

Given the pressure to reduce ­climate change, we may see the world move towards the ­regional production of consumer goods and ­intermediates – looking to satisfy a local ­market without the need for global ­distribution. But what will be the effect on the cost of production and will it be supported by the market and consumer? Who will be the first to force production back onto home turf? And what impact will it have on the ­European chemical industry as a whole?

Whatever one may think about the cause of climate change, it is undeniable that ­global warming has ­become a political topic. ­Almost all countries signed the Paris Agreement, which promised to adopt measures to keep the rise in temperature below 2°C.

In this article, we look at various ­factors in this discussion; the energy at hand, the ­multimodal logistics and the effect a move ­to ­regional production will have on the ­chemical industry.

Governments worldwide are encouraging a ­reduction in the use of coal, oil, and gas as a base for energy production. Alternative sources, which are mostly concentrated on wind, solar, tidal, nuclear and the energy derived from biomass, are being explored across the world. Turbines have become a regular feature on almost every skyline, with each generation larger and more powerful, ­especially those at sea. ­Multiple roofs and land areas are covered with solar panels which have become more efficient over time. In addition, several ­research labs are experimenting with larger and smarter batteries. Hydrogen – not an energy source – is promoted as a car fuel. Hydrogen can be ­produced by using the power of ­turbines during times when energy ­production exceeds ­energy demand.

Finally, biomass is an exceptional form of alternative energy. Either it is processed to ­produce energy directly, or components are used to make chemical base products while the residue is processed into energy. ­Although the use of biomass sounds promising, it has a parallel downside. As green as it may sound, carbon dioxide emissions are significant and add substantially to ­overall process emissions. This rate of ­emission far outstrips the absorption of ­carbon dioxide by the replacement of trees. As much as wood can be considered a raw ­material for the chemical industry, the most optimistic prediction is that it will ­comprise only 10% of the required volume.

These developments together sound ­amazing and suggest that we could soon be leaving the era of fossil fuels. However, one of the big oil companies recently revealed that in a worst case scenario, its consumption of oil as a fuel will be a ­dominant contributor to ­energy production in the next decade. The ­energy transition is ­certainly not just a matter of flicking a switch.

Shipping

And yes, we must look at alternative energy sources, knowing that coal, oil and gas are not infinitely available, and yes, we must be ­careful to use all the available energy sources efficiently to save as much as possible for ­future generations.

But no, despite all the promising headlines and tantalising views of a future without coal, oil and gas, we will be largely dependent on fossil fuels for a long time yet. What is promising, is the fact that the less coal, oil and gas that is used for transportation, the more these raw ­materials will be available for the chemical industry. As is widely known, no more then 5-10% of the current usage of coal, oil and gas is used by the chemical industry, and thus lower ­demand will result in more ­competitive raw material prices in the chemical market. And as no one is expecting lower demand for products – despite the call for a circular ­economy – for everyday life, the ­future looks bright for the chemical industry.

WORLDWIDE LOGISTICS

For years, the trend has been to build bigger ships to accommodate trade between ­continents and, looking at the volume of ­mutual trade, one could say the bigger the ­better – and probably more efficient too. There are, however, two trends that could change the way the chain of supply is now handled.

First, there is the trend to promote the ­regional production of consumer goods. This will not have a major impact on the flow of raw ­materials, but it will effect the flow of ­intermediary and end ­products. Moreover, if ­governments decide to discourage overseas mass transportation ­because of carbon dioxide emissions by ­taxing them, then the ­balance ­between the cost of production and the cost of transportation in different markets could reach an equilibrium. It could even tip in favour of more expensive local ­production of chemical products.

The second trend is the growth of railway transportation. The Chinese are working on a new “Silk Route” from China via Russia to ­Europe. The first trains became operational last year in Europe, taking only three weeks to arrive at their destination, and are a real threat to transportation by ship. It also lessens the emissions caused by sea transport. Both modes of transportation have their risks. By sea there is still the threat of piracy and delays due to weather conditions. And by rail, the procedures and regulations at different ­borders are time-consuming.

MOBILITY

When it comes to the use of electric cars (fully electric or hybrid) there has been a lot of ­development as well as a lot of hurdles. The percentage of electric cars has risen to 1-2% of the total global fleet. Surprisingly, most electric cars are found in China and not in the ­West. What does this say? China is the largest source of emissions due to its ever-growing number of power plants based on coal, and at the same time it is the only country in the world where the government can respond quickly and implement changes without a lengthy delay in process and procedure. China has high speed trains in operation, huge turbine and solar parks and, as previously mentioned, is building a new Silk Route to connect Asia to Europe.

At the same time, the mere fact that if the ­Chinese were to double their presence in ­international air transportation, from 1% ­to 2%, it would imply that the fleet of aircraft must double too. This will have an enormous impact across the whole transport infrastructure. So, in a way, China is leading development when it comes to ­mobility, and if they are ­successful the rest of the world is likely to ­follow.

CHEMICAL INDUSTRY

Oil-derived feedstocks are central to the chemical industry. Refineries produce, amongst fuels and other products, naphtha, which can be cracked into several intermediary base chemicals, such as ethane and ­propane. Crackers provide the chemical ­industry with the raw materials needed to make an endless number of consumer ­products. When South Africa was deprived of oil, Sasol revived the old German Fisher-Tropsch technique to convert coal and ­biomass into syngas. This can then be converted into hydrogen, naphtha and ­methanol. Later, Shell improved the technique. However, there is still a long way to go before it can compete with the production of oil derived naphtha. So, suppose there is a significant reduction in the availability of oil, will this have a negative effect on the chemical industry? First, refineries will try to modify the ­process in such a way that more naphtha is ­selectively produced. Secondly, the search for an efficient and competitive gasification ­process of coal, wood and biomass will accelerate. Following that development, gas-to-liquid (GTL) processes will become more mature and efficient. It may imply that the price of chemical products will rise, but if the demand for consumer goods ­remains at recent high levels and grow further through the development of countries like China and India, the consumers will absorb these higher prices.

Maybe the surge for a circular economy will somewhat temper the overall demand for new products, but it is unlikely that it can satisfy this ever-growing demand. This is particularly true in the developing areas of the world consumers, who, for all the normal reasons, want new products. Ongoing automatisation and process intensification will help to temper the cost ­increase of products due to more expensive feedstock or more expensive production ­processes. Moreover, the electrification of the chemical processes involved will lessen the demand for oil and gas even further. Because of this, one could say that a lower worldwide usage of oil will not hamper the chemical ­industry but stimulate chemical production.

At the same time cheaper oil, coal and gas as feedstocks for the chemical industry will ­hamper the development of green – as in “based on biomass” – chemical production. The only way green chemical production will grow is if there is a specific demand from customers to buy green products. These customers must also be willing to pay more for the same quality of product, justified through the additional knowledge that the product has a “green label”.

CONCLUSION

At first sight the call for regional production and the call for higher import tariffs for products – mainly from Asia – seems reasonable and in line with the politics of the battle against climate change. If, however, the call is based on protecting home-grown industries, those who promote such policy are becoming global bleeders instead of global leaders. Higher production costs and thus higher prices for end products result in the customer paying the price. If the call for regional production is based on climate issues it needs a worldwide agreement between all countries involved, to assure a level playing field and to let the market work as a tool to benefit all. In the latter case, production will shift gradually and ­divide the pain in such a way that it can be ­absorbed. In any case it is our firm belief that these developments will stimulate chemical production on a regional base and eventually will thus stimulate investments in the ­chemical industry in Europe.

Sietse Wiersma is president of the European Chemical Site Promotion Platform (ECSPP) and a strong ­believer in the future of the chemical industry in Europe. Email: sietse-wiersma@planet.nl Diana Taylor is a business transformation consultant specialising in chemical ­clustering, and managing director of Marketing Humber, which seeks to ­promote The Humber region in the UK. Email: dtaylor@opala-consultancy.co.uk