Market outlook: Europe chemicals can prosper, says Cefic

16 May 2014 09:54 Source:ICIS Chemical Business

The leader of Europe’s chemicals trade body acknowledges challenges but insists that the industry is versatile enough to turn them into opportunities

For Cefic’s director general, Hubert Mandery, any concerns about the short-term impact of US shale gas on European chemicals is far outweighed by long-term opportunities presented by global population growth and the sector’s ability to adapt and innovate. However, he does single out European Union policies on energy as potentially damaging for energy-intensive sectors.


 EU chemicals can overcome challenges, insists Cefic

Copyright: Rex Features

In an interview to coincide with the publication of Cefic’s Chemical Trends Report in April, Mandery said that falling chemicals prices (down 2.8% in January) could be a sign that cheaper feedstocks from other regions are having an impact on imports into Europe and on the European market as well.

“We expect to experience the impact of shale gas in a couple of years but already we see some changes in trade patterns. If we analyse 2013 we see for the first time a reduction in our trade surplus into the US of €2bn mainly in petrochemicals, polymers and basic inorganics – the more energy-intensive sectors. There were slight improvements in specialties and consumer chemicals.”

To put this into context, EU chemicals enjoyed a €6.4bn chemicals trade surplus to the US in 2013.

Mandery believes this change is probably due to the so-called chemical “Renaissance” in the US. “It’s the first signs of what’s coming from the shale gas boom for the rest of the world.”

There are signs of improved confidence in Europe chemicals, he says, highlighting the Cefic members’ survey which has been positive for four months. Confidence indicators have been positive for a couple of months. This includes an assessment of inventories and order books. Cefic has no plans to revise its chemicals production 2014 growth forecast of 1.5% for Europe.

Asked how long it will take for Europe chemicals to return to pre-crisis levels of production, Mandery points out that Belgium and Germany have already passed this point. However: “The rest are behind. With the current challenges in Europe and the shale gas boom in the US it might take some years to return to pre-crisis levels.”

Mandery is concerned about the potential impact of the Ukraine crisis: “I don’t want to over-emphasise what’s currently happening in Ukraine but it has the potential to dampen economic optimism in Europe and globally. It has to be carefully watched and we hope it doesn’t escalate.”

He “wouldn’t rule out” Ukraine and the deteriorating relationship between the West and Russia having an impact on western chemicals investment strategies into Russia.

Asked to sum up the most important challenge to Europe, Mandery said: “Competitiveness is the key challenge for Europe’s industry: from energy and feedstocks to market growth to regulation, to acceptance of innovations. The growth is in Asia and emerging economies, the feedstock advantage is in the Middle East and US (even China is diversifying in feedstocks). Also our region pays high salaries compared to other regions. So the only way we can differentiate ourselves from the competition is through innovation.”He is concerned about a lack of public and political support for new technologies and believes legislators should be more supportive.

“What worries me more than some temporary US shale advantage is the attitude of continental Europe to new technologies such as nanotechnology and green biotechnology. If we agree that the only comparative advantage are our brains and the sophistication of the way we work together and innovate then we shouldn’t block innovation. If I had one wish it would be more openness to develop new technologies and minimise the risks.”

A major challenge for Europe chemicals are energy and feedstock costs, and Mandery acknowledges this. “On the energy side it’s fair to say that continental Europe has messed it up over the last couple of years. The policy on feedstock costs and electricity is self-inflicted and is quite a challenge for energy-intensive segments of our industry. When you talk about energy-intensive, basic chemicals industries, we have a locational disadvantage.”

However, he is not as pessimistic as INEOS chairman, Jim Ratcliffe, who wrote in March about the extinction of Europe’s chemical industry within a decade.

“Jim was pretty outspoken. Our industry has faced lots of challenges over the last decades and has adapted to have one of the most globalised value chains as well as investing across the continents to take advantage of market growth in other regions.”

He added: “Our challenge is in petrochemicals, basic inorganics and basic polymers. [But] we are a market of 500m people and if you take the periphery we are a market of roughly 1bn people to be served with chemical products – a it’s a huge market – more than double the size of the US.”

He points out that players in Europe are taking advantage of shale gas by investing in the US and by importing shale gas. “The history of our industry is that it is very adaptive and can cope with change.”

However, he concedes that some of the CEOs of his member companies have said it is very difficult to invest in energy-intensive production in Europe. Feedstock advantages mean investment is being directed towards the US. However, in specialty and fine chemicals – which are not very energy-intensive – there is no direct impact.

“Overall we do see investment hesitation in this climate of uncertainty and high energy prices,” he said.

He urges politicians to take account of the disadvantage EU manufacturers have compared with other regions and to take steps to avoid “carbon leakage” where production is offshored to cheaper locations with no overall climate change benefit.

Mandery still sees the Emissions Trading System (ETS) as the tool of choice to reduce CO2 emissions at the lowest possible cost.

ICIS has published numerous articles about impending overcapacity in many chemicals products in Asia as large volumes of new capacity come on stream in 2014 and beyond in China. Add to that the potential for up to 11 new ethane crackers coming on stream in the US from 2016 and, to many observers, Europe may find its export and domestic markets under threat. Mandery agrees there will be an impact but that, longer term, global population growth will absorb the excess.

“I was in China and public officials were talking about over-capacity. The country is growing as is demand but there is a surplus looking for export markets. Assuming more self-sufficiency in the US thanks to shale gas, there will be consequences for exports from Europe to the US.”

European capacity utilisation is under 80% and falling, according to Cefic’s latest figures, and further falls will threaten profitability.

But Mandery is thinking longer term: “Asian production is an issue, announced US expansions are an issue, and these will cause adjustments in their respective markets. However we have a global population forecast to grow from 7bn to over 9bn by 2050 leading to a surge in demand for chemicals over the next 20-30 years. Forecast chemical growth rates are 4-6% annually to meet this population growth.”

He dismisses arguments that the aging population will consume less chemicals, arguing that demand patterns will just change as the elderly consume more sophisticated and differentiated products.

He added: “We won’t necessarily [see Europe plant closures linked to global overcapacity] where plants are well maintained. For us the biggest issue is energy and feedstocks. Europe has a good record of adapting to changing market requirements.”

And, he says, we should not underestimate the European asset base which is well-maintained and depreciated and is able to serve its complex market very effectively.

“It’s too easy to look at the macro figures and say things need to happen. That will boil down into individual segments and aging or ailing assets might be adapted.”

Mandery says that for the past 20 years, industry has not invested enough to maintain levels of employment in Europe chemicals. “Capex is flat, R&D spending is flat. We don’t have the money for R&D because we spend a lot in other areas. We are not known for underpaying our workers and have the highest complexity costs for regulation. All the schemes around energy are about getting money from companies for other purposes.”

He remains upbeat about shale gas, describing it an opportunity, not a catastrophe. “It is a wake-up call for Europe. In the UK you will have the same or comparable feedstocks and there are opportunities in continental Europe. Also we’re calling for unrestricted exports of shale gas from the US and that will create opportunities for Europe.”

Mandery believes the industry should be able to benefit from markets like Europe which are demanding more growth with less resources, arguing that this should present opportunities to make money. Providing goods and services sustainably should be a huge opportunity for chemicals.

He adds: “All I am sure about is change. Today it is shale gas but tomorrow it could be another form of energy such as new ways to store renewable energy. I’m a notorious optimist, and the best is still to come. We’ve had only 150 years of the industrial chemistry – compare that to the history of literature. In global terms, chemistry is in its infancy.”

By Will Beacham