Adapting to change Strongest growth in years but will it last?

adapting to change

The European chemicals sector has been seeing its strongest growth for several years – but will it last? Sean Milmo reports on how the sector is responding to the demands of a changing market.

The European chemical industry has been growing at its fastest rate for years in the wake of a global economic recovery which has boosted demand for chemicals across the world.

But the revival in the sector, which has been experiencing sluggish growth in recent years, has still not been strong enough to bring it back to the production levels before the 2008 financial crisis.

Nor is it likely to last long. In fact, the output growth of last year is expected to slow to 2 per cent this year compared to 3 per cent in 2017, according to forecasts by the European Chemical Industry Council (Cefic), the Brussels-based main European chemicals trade association.

This has been partly a reflection of a slowdown in the growth of the overall European economy. With a wide range of customer sectors ranging from construction, automotive and aerospace to agriculture and healthcare products, the European chemicals industry is vulnerable to changes in GDP growth rates.

Growth in the euro area, comprising most of western Europe, is forecast to slow from a 2.4 per cent rate in 2017 to 2.1 per cent in 2018 and 1.9 per cent next year, according to figures earlier this year from the Parisbased think-tank Organisation for Economic Cooperation and Development (OECD).

Germany is predicted to grow 2.3 per cent in 2018, and 1.9 per cent in 2019, after a rise of 2.5 per cent in 2017. A downturn in growth is also expected in both France and Italy, while in the UK a growth decline is predicted to continue through 2018, says the OECD.

long-term prospects

However growth in the European chemical industry is also being hampered by long-term underlying factors. These have been making parts of the sector – particularly in commodity products – globally uncompetitive since the turn of the century. They include high energy, raw material and capital investment costs compared with competitors in North America, the Middle East and parts of Asia.

As a result, in some key segments of the European chemicals market a rising proportion of sales are taken by lower-cost imports. In some product categories the majority of chemicals are supplied by Asian producers.

Europe’s share of the total global production of chemicals has been rapidly shrinking from around a third in the mid-1990s to 15 per cent in 2016.

This decrease will almost certainly continue in the next decade as world chemicals output expands while that of Europe continues to stagnate. In the period 2006–2016 average chemicals production growth in the European Union was minus 0.04 per cent while that of China was 12 per cent, according to Cefic figures.

On the other hand the industry has been gradually building a platform for long-term international competitiveness derived from high value and margin speciality chemicals, which have a relatively big R&D input. It is already a world leader in the development of technologies and processes for a low-carbon economy in which chemicals will no longer be predominantly sourced from fossil fuels as they have been since the 19th century.

The need to restructure

Currently the industry is going through a transition period which is bringing tough challenges, presenting companies with the need to radically reorganise their businesses.

Petrochemicals is currently the part of the industry threatened with major restructuring. Its output provides the building blocks and derivatives for the majority of the tens of thousands of chemicals on the European

market, giving it a vital role not only in the chemicals industry itself but the European economy as well.

It is being starved of investment mainly because it relies on oil refineries for its feedstocks. But these are by- or co-products to refineries’ main output of vehicle fuels – predominantly petrol and diesel – demand for which has been declining in Europe because of factors like greater fuel efficiencies, worries about urban air pollution and accelerated sales of electric powered transport.

Analysts reckon that demand for automobile fossil fuels has already peaked in Europe – ahead of other regions in the world. The only sources of demand growth in fuels will be those for heavy-duty trucks and passenger aircraft.

Refinery capacity in Europe has already been steadily declining – by as much as two-thirds over the last 30 years. In 2005–2015, France’s refining capacity was cut by a third, the UK’s and Italy’s by a quarter each and Germany by around 15 per cent.

These reductions have resulted in cuts in availability of petrochemical feedstocks so that petrochemical facilities have themselves had to be closed.

The survivors have tended to be refineries closely integrated with petrochemical plants. The owners of these complexes, many of them international oil companies, have been adopting strategies restricting investment to repair and maintenance and small capacity additions.

Since demand for petrochemicals not only in Europe but across the world is far outstripping that for vehicle fuels, European oil producers like Shell, BP and Total have been reversing previous policies of reducing their involvement in chemicals by increasing their chemicals investment. But the vast majority of these new funds are going into projects outside Europe.

Shell, for example, is investing in schemes in the US to exploit the low-cost feedstocks from shale. The company is constructing a $6 billion ethylene cracker near Pittsburg, Pennsylvania, whose feedstocks will come from shale ethane from the large Marcellus and Utica formations.

Total signed a memorandum of understanding with the Saudi state-owned oil company Saudi Aramco in April (2018) for a jointly owned petrochemicals complex in Jubail, Saudi Arabia, with a 1.5 million tonnes-per-year capacity for ethylene and its derivatives. The output would be mainly destined for high-growth Asian markets.

One company adopting a different strategy has been the UK-owned INEOS, which is mainly a petrochemicals player but has recently been expanding upstream into oil and gas. It has been giving its European petrochemicals operations access to cheaper feedstocks by investing considerable sums in logistics infrastructures for transporting and receiving US shale ethane at its sites in the UK and on mainland Europe.

At its refinery and petrochemicals complex in Grangemouth, Scotland, which had been operating at below capacity because of declining feedstock supplies from the depleted North Sea gas fields, the site’s future has been transformed by shipments of US shale ethane across the Atlantic. move to renewables

Nonetheless, while overall investment in petrochemicals has become less of a priority in the chemicals sector it is putting money into preparations for a future which will be much more reliant on renewables and other lowcarbon sources of raw materials.

One feature of this new era will be a circular economy in which as many materials and chemicals as possible are recycled for reuse. To ease the introduction of the circular economy, the EU has already been amending existing legislation on recycling of waste while having new regulations in the pipeline.

Earlier this year a consortium of chemical companies was formed to set up a wasteto-chemistry facility at the Port of Rotterdam, the first of its kind in Europe.

Many other projects looking to a lowcarbon future are being planned in chemicals clusters like Rotterdam, Antwerp and Teesside in England, which traditionally have been integrated centres of fuels and petrochemicals production. It is apt that they should be providing the platform for the emergence of a new type of chemicals industry. n