Market intelligence: Europe must focus on costs as a priority

28 March 2014 09:44 Source:ICIS Chemical Business

Chemical producers in Germany’s Bavaria region in the southeast warn that high energy costs and too much of a focus on environmental concerns are hurting competitiveness

However, the EC has started to probe the exemptions

Companies based in Bavaria’s “chemical triangle” in southern Germany warn that high energy costs could make the chemicals industry in Europe uncompetitive. They are urging policymakers to follow the US and China’s impetus in supporting the chemical industry and stop playing, as one company director put it, the “good guys” role when it comes to environmental issues.

From major chemical groups like INEOS or Borealis to smaller companies like AlzChem or Vinnolit, producers in Europe are demanding that politicians take a long-term view to fix energy costs they consider excessive.

But the devil is in the detail. Politicians play up to a European public that is weary of environmental degradation. Many chemical producers would like to see the EU pay less attention to the environment as long as their main competitors, China and the US, keep putting industry’s interests before the environment’s.

Chem sites in Burghausen, Germany, face high energy costs

Copyright: Rex Features

A hydroelectric station was the reason behind the chemical triangle in southeastern Bavaria coming into existence. But long gone are the times when water could provide sufficient power.

Wacker Chemie was the pioneer. By 1922 its hydroelectric plant in Burghausen was able to provide energy for both the chemical site and the town itself. Today, that plant accounts for only 10% of the energy consumed at the site.

“A real concern for us is how the European Commission is talking about competitiveness [while] increasing regulation and environmental standards,” said Wolfram Proessdorf, commercial director at PVC producer Vinnolit, a former Wacker division, also based at the Burghausen site.

“The [German chemical trade group] VCI has shown how the number of regulations [affecting the chemical industry] in Europe almost doubled from 2004 to 2012. Environment and sustainability are important but there must be an end to this.”

Germany’s energy costs are among Europe’s highest, although that has not been an obstacle for chemical companies based in the country maintaining profits and thriving over the past five years.

From 2008–2011, the 17 chemical companies in the triangle invested €3bn in expansions and overhauls at their Bavarian sites.

Vinnolit is one of the 25 companies in the ChemDelta Bavaria initiative which, with 25,000 employees and €8bn in sales per year, was founded to lobby for the economic development.

Unless the region wants a “services mentality” to dominate its economy, Bavaria cannot put the environment too far ahead of manufacturing, said Georg Weichselbaumer, vice president of chemicals and building blocks at Trostberg-based AlzChem.

“We have to do something about [the] environment, but in a way that keeps us being competitive,” he said. “We need to maintain the manufacturing sector: countries like the UK lost its manufacturing and now suffers for it. You can’t survive just with a services sector mentality. Wealth has to be generated in more areas. We always want to be the good guys, while they [US and China] do what’s best for their industry.”

The tenor of the debate has been raised as the EU discusses its future energy strategy. Policy makers have been urged to seek energy solutions which avoid further deterioration of the European chemical industry.

INEOS chairman, Jim Ratcliffe, sent a letter to the European Commission (EC) on 7 March warning that the EU’s chemical industry could be “extinct” within 10 years if action were not taken.

Dow Chemical also sent a letter to Germany’s economics minister saying that proposed changes to its system of subsidising the build-up of renewable energies, EEG-Umlage, could harm the chemical industry.

Currently, industrial producers such as Dow and BASF, which generate electricity on their own production sites, are exempt from the EEG-Umlage. However, the EC has started to probe the exemptions for compatibility with EU competition law, and Berlin has proposed to reduce the exemptions.

Borealis CEO Mark Garrett claims that if Europe decides not to pursue shale gas, it will have to pay the price in high energy costs for the foreseeable future.

The European Chemical Industry Council (Cefic) has been lobbying for a push in shale gas extraction. It believes environmental issues should play a role, but without damaging chemical sector competitiveness.

Perhaps looking for positives in a rather bleak panorama, executives do say that they have other cards to play. Both AlzChem and Vinnolit’s directors give a hint on those other options: quality of products and services, as well as the adherence to safety that is driven in part by the EU regulations in place.

AlzChem’s Weichselbaumer cited as an example cyanamide, a hazardous chemical widely used in agriculture and pharmaceuticals.

“We know how to handle cyanamide,” he said. After a leak from a Chinese company at a Japanese harbour in August 2013, the import of the material into the country was completely stopped. “We explained to the Japanese authorities how we handle the chemicals, the controls we have in place to avoid those accidents, and as a consequence Germany is the only country clear to export cyanamide into Japan.”

Wolfram Proessdorf, commercial director at Vinnolit, says Europe’s chemical companies can play other cards such as product quality and “problem-solving for customers”, although he stresses that shouldn’t be an excuse not to tackle energy costs. They may not have much chance to compete on cost and price, but could do so on safe handling and product knowhow.

That approach may not prove sufficient. Companies are expanding production in Asia and cutting back in Europe to help better manage costs and become more local in fast growing markets.

Wacker Chemie, for example, expects Asia to account for most of its production by 2017.

Its Burghausen site, in Bavaria, still employs 10,000 people but on 18 March CEO, Rudolf Staudigl, admitted employment in Europe would steadily decrease while that in Asia would grow. Another Wacker’s executive, responsible for Asia, Tobias Ohler, also said the company expects most of its growth to come from Asia in the coming years. Production will increase in Asia while Europe remains mostly flat, he said.

By Jonathan Lopez