INSIGHT: Europe chemicals revive in 2017, despite structural clouds

29 December 2017 15:00 Source:ICIS News

LONDON (ICIS)--European chemical companies have enjoyed a better-than-expected 2017 on the back of the strong economic recovery in the eurozone, reversing a story that was thought to be one of inexorable decline.

During 2017, successive announcements for capacity expansions or new plants continued coming in from European companies, in a move many board members could not have foreseen just five years ago.

Prospects for 2018 are equally bright, although some markets are bracing for a turbulent second part of the year as the US and India start up massive polymers capacities that are set to disrupt the European stage.

For instance, take German chemical major Covestro’s production of methyl di-p-phenylene isocyanate (MDI) in Spain.

The company announced in December 2015 it was to close its 170,000 tonne/year plant in Tarragona in northeast Catalonia, citing trouble in obtaining “competitive” feedstocks.

“[The plant] can no longer remain competitive as an MDI production facility in Europe,” said the company at the time.

However, as the manufacturing sectors in the eurozone started to post robust growth in 2016, the company announced in March 2017 its intention to “suspend” the closure for the time being, according to Covestro Spain’s general manager in an interview with ICIS.

By May, it was saying that it could extend MDI production at the site beyond 2020.

Despite political unrest in Catalonia during 2017, the company said in December it was to invest €200m at the Tarragona site. Moreover, it announced that it intended to “build its own chlorine supply”, securing a key raw material for MDI, although it did not give more details.

This was not what most chemical analysts were expecting by the beginning of this decade.

In 2012, the eurozone economy was in the midst of a sovereign debt crisis that had seen four countries receiving full or partial bailouts. The 19-country currency union’s unemployment rate closed the year at nearly 12%, a level reached in 2013.

Crude oil started 2012 over $106/bbl, and hovered over the $80s/bbl for the full year.

The traditional European reliance on overseas-sourced energy was acting, more than ever, as a Sword of Damocles over an already tottering economy.

Within the eurozone, only Germany was powering ahead, while the second, third and fourth-largest economies – France, Italy and Spain – were described by many financiers and investors as fundamentally, structurally damaged.

The European chemical trade group Cefic closed 2012 with a sombre statement alluding to weak domestic demand, overseas competition and uncompetitive disadvantages.

“The EU chemicals sector faces increasing uncertainty as the domestic market continues to struggle and overseas competition remains relentless,” said Cefic’s president at the time, Kurt Bock, also the CEO of German chemical major BASF.

“The current EU economic downturn is weighing down on the chemical industry in Europe at a time when other world regions also face challenges [weighing down overall demand].”

But then, a mixture of factors played on the eurozone’s favour. In mid-2014, crude oil prices halved on the back of global market fundamentals, associated to lower demand from China and a build-up in inventories. Despite repeated efforts from crude oil producing countries, prices never recovered to the 2012 levels.

Despite reticence in some German quarters, the European Central Bank (ECB) governing the monetary policy of the 19 countries started in 2015 implementing a programme of quantitative easing (QE) which watered the banking system with cash, increasing lending levels to businesses and households.

The increase in inflation, reaching 1.5% in November 2017, has also been attributed to the QE programme, although prices remain well below the ECB’s target of close to, but below, 2%.

“The mainland European economy has come back pretty strongly. Germany is now knocking consistent quarter-after-quarter growth and France is coming back to growth. In Italy, Ireland, Spain and other places around the continent, the demand side is starting to come back much stronger than it has been at any point in the last 10 years,” said Paul Harnick, global head of chemicals and performance materials at KPMG, earlier this month in an interview with ICIS.

The once-doomed European manufacturing industry has been at the forefront of the recovery. Incoming orders and employment have risen strongly during 2017, and Germany’s industry is facing the prospects of not producing more due to the lack of capacity, according to IHS Markit, which compiles the manufacturing index PMI.

Consistently, the PMI in 2017 has beaten records time and again, and the latest flash estimate for December placed it at an all-time high.

Unemployment in the eurozone closes 2017 just below 9%, showing job creating still has a long way to go. Right before the 2008 financial crisis, the unemployment rate was 7.5%. In countries like Spain or Greece, unemployment remains at painful levels of over 15%.

Prospects for young people in those countries continue to be bleak, with around 40% of them unemployed.

The European petrochemical industry, however, has kept employment practically unchanged from the pre-crisis levels, and is currently growing slightly as companies expand capacities or start up plants.

In many petrochemical markets, 2017 might be remembered as the year in which the traditional year-end destocking did not take place: inventories are low or non-existent as industrial activity continued relentlessly to December, and companies are preparing for a healthy first half of 2018.

“Clearly, on the petrochemical side, given where the oil price has risen to [around the $60s/bbl], that has brought some of the naphtha-cracking based companies in Europe back into competitive zone, whereas if we go back two years they were vastly uncompetitive compared to Middle Eastern or US ethane-based producers. That has clearly brought European petrochemicals back into the game,” said KPMG’s Harnick.

The eurozone’s recovery presents all symptoms to be sustained. Further job creation will strengthen the economy, boosting confidence, and highly indebted countries, companies and households will be able to continue deleveraging.

Even beleaguered Greece shows signs of a sustained recovery, although the country will take years to recover from the social hardship imposed by as many as three bailouts.

Another positive note has come from the energy sector. For the first time, renewables have offered Europe the option to start building its own energy infrastructure, and several major countries have been able to source their electricity only from renewables for entire days in the last three years.

2017 also left the intention from several European governments to ban combustion engines within three decades. The prospect of an automobile industry powered by electricity has admittedly put oil majors in the defensive.

Major investment funds – oil-producing Norway’s KLP, among them – are starting to exit fossil fuel-related investments, and the big crude oil producing companies, like UK’s BP, are returning to the renewable industry even after leaving it earlier in the decade.

Optimists promise a revolution in the way we power our cars, heat our homes and feed the industry’s energy needs.

While the economic recovery seems sustainable, some economists are concerned the ECB’s tapering of its QE programme, which could start as soon as 2018, will bring back woes to a banking system which still holds large amounts of bad performing loans.

Record-low interest rates have also been a key factor to sustain the recovery. While there are no plans to increase them anytime soon, a return to normal monetary policy will also show whether the recovery’s strength was sustainable.

Finally, Brexit will consume politicians’ energy in the third largest economy in the wider 28-country EU, the UK, where fundamentals have weakened on the back of uncertainty and a weaker sterling pound.

Chemicals remain ignorant of what regulatory environment they will face post-Brexit, but the pressure to remain within the EU’s REACH framework and its regulator, the European Chemicals Agency (ECHA), has been a constant from industry and politicians left and right alike.

Pictured: ECB headquarters in Frankfurt, Germany
Source: ECB 

ICIS will be publishing in January an infographic on the European petrochemical expansions announced or completed during 2017 as the economic recovery took hold

By Jonathan Lopez