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Unequal opportunities

Hydrocarbon Engineering,

Rarely has there been such turmoil in the chemicals industry as in the past few years, predominantly a result of the shale gas boom in the US, where falling gas prices in North America have shifted the focus firmly onto the US chemicals sector. But we shouldn’t discount Europe just yet.

The chemicals and pharmaceuticals sector in Europe is still doing solid business. With turnover of almost EUR 1 billion it is holding on to a 24% share of global chemicals revenues, managing a surplus of around EUR 6 million in retail in North America. Nevertheless, some industry insiders are sounding the alarm for the medium term. It’s not just that we’re seeing a major shake up,; said Harald Schwager, Member of the Board of Executive Directors at BASF at an industry get together in Cologne in early June. ‘The game has changed completely.’

As it costs almost two thirds less in the US than in Europe, natural gas has become the industry’s wild card. Basic energy intensive products in particular can be produced at a much lower cost there, posing a threat to Europe’s chemicals industry. Ineos CEO Jim Ratcliffe, for example, believes that the sector is already heading down a similar path to that of the textiles industry, which has almost fully relocated over the past few decades. Andrew Liveris, Chairman and CEO of US chemicals giant Dow, issues a warning: ‘Europe either has to buy in cheap gas or say goodbye to certain markets and businesses.’ In the medium term this could affect more than just basic materials, potentially impacting downstream specialty chemical fields. ‘If you interrupt the value chains, that affects the whole industry,’ said Karl-Ludwig Kley, Chairman of the Executive Board at The Merck Group in Darmstadt, Germany.

In the middle of a chain reaction

First and foremost, this development has been brought about by the cost advantages of the basic chemical ethylene. Since the US chemicals industry mainly uses gas crackers, it can now produce ethylene around 60% cheaper than its European counterparts and their naphtha crackers can. This in turn has a direct impact on follow on products such as polyethylene, propylene oxide and numerous other chemical products that build on the ethylene value chain. Other energy intensive products, such as fertilisers and PVC, also benefit enormously. Meanwhile, there are signs of relatively strong expansion in the Middle East and China, which could lead to the industry facing over capacities of several million tons of ethylene and related products. Due to the higher cost of production, European manufacturers in particular will likely be forced to remove significant capacity from the market in the medium term.

A development of this kind would also have a notable impact on other parts of chemical production not reliant on ethylene. As the number of naphtha crackers falls, so too will the manufacture of coproducts such as propylene, benzene and butadiene. These longer chain hydrocarbon elements will become scarcer in Europe as well as more expensive, which could put more pressure on the industry’s competitive ability. The manufacture of follow on products such as butadiene rubber, polyurethane, polyamides and many other plastics could also become more expensive.

Seeking alternatives

All of these circumstances combined mean that companies need to carefully weigh up more than just their future product structure. They will also have to commit to finding alternative sources of raw materials. The European sector satisfies 68% of its demand for organic raw materials from crude oil, 21% from natural gas and almost 10% from renewable materials. Increased use of coal or methane as a basis for petrochemicals would be technically feasible, although still far too expensive from today’s perspective to compete against cheap ethylene production in the US. The same can be said of using carbon dioxide as chemical feedstock. There are several experimental projects underway in the industry, Bayer for example is building a plant to manufacture preliminary plastics products from CO2. However, the amount of energy required to split CO2 is still too high to allow for widespread use. Renewable materials, on the other hand, are slightly cheaper. Synthesizing basic chemicals from corn starch or sugar could be competitive, at least in a few application areas. Cellulose is one possible alternative.

One thing is clear: there can be no magic bullet for the European chemicals industry. Ultimately, the industry will have to face this brave new world with a range of measures and focus even more intensely on innovative products and solutions. It has, after all, proven its ability to adapt in the past. Hubert Mandery, General Director of the industry association Cefic, warns against being too pessimistic. Strong growth in global demand for chemicals products will continue and will be able to absorb any potential over capacity in the medium term. No one should underestimate the European asset basis for chemicals. ‘It is currently in a decent state and is fully capable of efficiently supplying complex markets.’

Written by Siedfried Hofmann, on behalf of T.A. Cook.

Edited by Claira Lloyd.

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