INSIGHT: Jim Ratcliffe questions Europe's chemicals future

07 March 2014 15:22 Source:ICIS News

Some EU chemicals heading for extinctionLONDON (ICIS)--How dinosaur-like do you feel today? If you are an over-regulated and cost uncompetitive chemicals producer in the EU a little scaly or feathery perhaps?

Europe’s chemical industry is going the way of the dinosaur, INEOS chairman Jim Ratcliffe warned on Friday in an open letter to European Commission president, Jose Manuel Barroso.

Ratcliffe reflected the feeling of many who see Europe slipping further behind as the bloc’s green-tinged energy policies bite and costs rise.

Beware the coming flood of imports Ratcliffe says from gas rich North America, the cost competitive Middle East and a driven China. Just what does happen to the European chemical industry when the flow of chemicals into China reverses?

“I wish to express my deepest concerns about the future of the European chemical industry," the INEOS chairman says in his letter to head of the EU’s executive.

“Sadly, I predict that much of it will face closure within the next 10 years.”

Europe is suffering principally because energy and feedstock costs are the main drivers of chemical industry profitability. The EU has costs in abundance but not much else.

Here is an industry in Europe on a par with automobiles that, on the face of it, is given little political or public attention. Economically and strategically, chemicals are a jewel, the INEOS chairman suggests. They should not be abandoned.

Ratcliffe is right to ask who cares? Increasingly frustrated, chemical producers are spending their hard-won capital elsewhere. When the world’s largest chemical company, BASF, indicates that it will cut back its capital spending in Germany and spend proportionally more elsewhere, then politicians need to sit up and take notice. Other companies such as Belgium’s Solvay are set on a similar strategic path.

Ratcliffe once worked for the big British textiles and chemicals maker Courtaulds. That company, with a fine history, was forced to shut 100 factories because it could not compete with Asian labour costs. Europe’s textile industry was wiped out.

Chemicals is bigger than textiles, and the decimation of large-scale chemicals manufacturing in Europe would have significant consequences. Think solely, if you will, of some 1m direct and 5m indirect jobs.

There are no quick fixes, and some might argue that the decline in the sector has been apparent for decades. INEOS bucked a trend, certainly, as Ratcliffe and his co-owners bought up unwanted production units to create a $43bn turnover giant.

But the realities of shale gas feedstock and energy costs and availability are particularly apparent in the business now. The company’s profits in Europe have halved over the past three years while those in the US have tripled, Ratcliffe says.

He points to the fact that planned US investment in chemicals on the back of shale gas stands today at $71bn and is rising. Investment in the Middle East and particularly in China continues apace.

In Europe, almost the reverse is true. Since 2009 there have been 22 plant closures in the UK, for instance, and no new projects. According to the latest data from the European chemical industry trade group Cefic, investment in chemicals in Europe has declined since 1996.

Capital spending by sector companies, which was valued at €19.0bn in 2012, is down in real terms. The chemicals capital spending-to-sales ratio was just 3.4% in 2012 compared with a ratio of 5.7% in 1996. Europe’s chemicals output stagnated last year (2013). Petrochemicals output was down 7.9%.

The big questions about energy costs, about education and technical capabilities, and ultimately about imports and jobs, need proper considered debate but the EU does seem to be flying blind.

It is the potential for imports that is most worrying. The analogy with textiles is well made.

This is Ratcliffe’s view: “What defences do they [the European Commission in Brussels or EU member states] have in mind?

“I can see green taxes, I can see no shale gas, I can see closure of nuclear, I can see manufacturing being driven away. I can see the competition authorities in Brussels blissfully unaware of the tsunami of imported product heading this way and standing blindly in the way of sensible restructuring.”

From that standpoint, the future of the European chemical industry does indeed look bleak.

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By Nigel Davis