The European chemical industry is grappling with severe market headwinds as well as structural changes driven by net-zero demands.
These market and regulatory pressures are disrupting chemical companies' production footprint and business models, but also creating opportunities for growth and differentiation.
In this article, we look at the challenges the chemical industry must overcome in 2024 and beyond to secure their competitiveness in this new environment.
Global pressures hit industry hard
Chemical companies across Europe have been hit hard in recent years by shifting global dynamics:
- A significant oversupply as China aggressively increased its
production capacity in recent years. In fact, amid weakening
domestic demand, China has become a net exporter of many chemical
products, with Europe emerging as one of the key importers of that
supply given high import duties in the U.S.;
- A decrease in competitiveness of European producers due to a
sharp rise in energy costs. While natural gas costs have come down
from their peaks in 2021-2022, they are still about double their
historical average, making the region less competitive compared to
energy-rich countries;
- A slowdown in key end-use sectors, including Automotive, which
is facing its own challenges with the electric vehicle (EV)
transition, and Construction, particularly in China;
- An aging asset base, with existing plants lacking the scale,
cost efficiency, feedstock flexibility and access of newer
production sites. This is causing the closure of several
unprofitable European units (e.g. crackers, methanol plants, and
downstream units);
- A U.S. economy that is starting to benefit from the financial
support provided by the Inflation Reduction Act (IRA), stimulating
investments in renewable energy and other low-carbon solutions in
the U.S.;
- An aging global population leading to lower growth and different consumption patterns, which is in turn affecting long-term supply and demand balances.
Against this backdrop, the EU27's share of the global chemical market has declined from 27% to 14% over the last 20 years, according to the European Chemical Industry Council (Cefic). China is now the largest chemical producer worldwide, with 2.39 trillion euros in sales in 2022, more than three times that of Europe.
Integrated value chains
Chemical plants are highly interdependent, deriving much of their cost efficiencies from internal integration (seen in large, integrated sites such as BASF's Ludwigshaven "Verbund") and coordination between downstream and upstream operations. Many chemical plants in the European Union (EU), for instance, rely on other European facilities for critical raw materials, often supplied via pipelines.
Disruptions to this ecosystem caused by market forces can have a domino effect in the value chain. This effect was identified in other industries during the Covid-19 period when a shortage of microprocessors and Active Pharmaceutical Ingredients (API) caused major downstream supply chain issues in Europe's automotive and pharmaceutical industries. The need to source rare earths and other critical raw materials for EVs also represents a risk for Europe from an industrial security perspective.
This raises critical questions regarding the industry' future: Can downstream units survive an upstream shutdown? Could they source equivalent product grades from international sources? Could the loss of key chemical assets create geopolitical risks for Europe?
"Double twin transition"
The sustainability challenge – with the EU at the forefront of global climate action – is adding to the industry's woes. As Marco Mensink, former director general of Cefic, puts it, the chemical sector is facing a "double twin transition" as it needs to become climate neutral, circular, digital and move to sustainable products, all while remaining globally competitive.
The European Green Deal, a package of policy initiatives aimed at achieving climate neutrality in 2050, will demand companies to act in several areas – from greenhouse gas emissions reduction and waste management to developing products fit for a circular economy.
It includes a 55% net emission reduction target by 2030, 55 billion euros in subsidies for the transition to a low-carbon economy, and support for the development of clean energy sources (such as offshore energy, hydrogen, and the associated infrastructure).
Europe's leadership on climate action poses risks to the industry's competitiveness. Other economies may implement similar policies over a longer timescale, placing a heavier regulatory burden on European companies compared to their global peers. A potential shift in climate policy in the U.S. after the next presidential election could also put European players in further disadvantage.
On the other hand, the Green Deal and related regulations can foster significant innovation opportunities and drive investments into clean technologies , creating new avenues for growth. One example is how specialty chemical company Evonik is planning to generate at least 1 billion euros in additional sales a year from circular products and technologies.1
This transformation mirrors the radical shift happening in the automotive sector. EU-mandated emissions targets, bans on internal combustion engine (ICE) vehicles and other regulatory demands have driven substantial investment in energy infrastructure (electricity/hydrogen) and access to raw materials for battery production, often supported by EU incentives.
Similarly for chemical companies, energy infrastructure and a conducive market structure are the key enablers for the rapid and successful adoption of new technologies that will support a sustainable ecosystem. Without these foundational elements and EU support, global pressures could threaten the region's chemical-industry independence and result in more job losses across the sector.
This is not to say that all chemicals can and will be made economically in Europe, as the Middle East and the U.S. will continue to enjoy their energy cost advantages. However, the EU must ensure that the right infrastructure, policies, incentives and business environment are in place to support the future of the European chemical industry (and the Green Deal).
A pathway to competitiveness
Over 1,000 European companies have recently called for a bolder plan to revitalize Europe's industry in light of the Green Deal and the market challenges highlighted above.
The Antwerp Declaration, presented in February to EU policymakers and governments, outlines 10 actionable measures, including a streamlining of legislation, strong public funding for cleantech deployment, demand-side incentives for low-carbon and circular products, among others.
These initiatives are inherently long-term though, so chemical companies in Europe must take immediate steps to review and improve the competitiveness of their assets. This can be done through the following:
- Footprint optimization: Assess the viability
of assets (now and in the future) applying a broader cost
assessment that includes regulatory compliance from both a product
(e.g. EU's REACH) and production (e.g. CO2 costs) standpoints.
The impact of suppliers' and customers' own footprint
decisions should also be considered;
- Yield and energy efficiency optimization:
Optimize operating conditions and/or implement smart, targeted
CAPEX;
- Product portfolio optimization and margin
management: Prioritize profitability over volume, and
drive supply-chain simplification through SKU
rationalization;
- Operational excellence and cost optimization:
Maximize asset utilization and reduce cost with improved
maintenance strategies and practices, use zero-based budgeting
approaches to optimize operating costs and reinforce procurement
efforts to benefit from industry oversupply;
- Carve-out and separation of under-performing assets: Find the best owner for undervalued assets, for the benefit of all stakeholders, and separate them for a sale.
Such interventions should be done in parallel with the development of a 2050 roadmap which entails a European-level review of the chemical industry landscape and footprint, assessment of global economic and geopolitical issues and their implications for EU policies and industry support.
Footnote
1. https://corporate.evonik.com/en/circular-economy-at-least-1-billion-in-additional-sales-by-2030-226625.html
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