From 1992 to 2012, the EU chemicals market share of global production dropped by half, down from 35.2 percent to 17.8 percent.3 The following factors are mainly responsible for this decline in growth and market share:
Feedstock costs: In Europe, the North American “shale gale” has dramatically lowered prices of ethane, the main petrochemical feedstock in the US, down to 25 cents/gal (USD185.50/mt) in 2013. Over the same time frame, the price of European petrochemical feedstocks, typically naphtha, remained at USD900-930/mt.4
Energy costs: The EU chemical industry clearly recognizes that high energy costs put them at a competitive disadvantage with overseas competitors, and European companies have made strenuous efforts over the years to improve energy efficiency. Nevertheless, energy policy in the EU continues to impede growth, according to many analysts and industry leaders.
Regulations: The European chemical industry has made an enormous effort to minimize the environmental impact of its production. At the same time, this improvement in emissions reductions and energy efficiency did not translate into higher growth, returns or market share for the European chemical industry.
Three strategies for success
To address current challenges and remain competitive, European chemical companies need to support growth with a combination of three basic strategies.
Continuous innovation: A significant proportion of intellectual property (IP) in the global chemical industry resides in Europe, and innovation remains a key competitive advantage for European chemical companies, especially in the area of high-end speciality products.
Geographical expansion: European chemical companies are increasingly focused on growth opportunities in emerging markets, using both joint ventures and acquisitions of local companies to increase their market presence.
Rigorous rationalization: European chemical companies are rationalizing their assets to sell, streamline or close underperforming assets. The same discipline required for layoffs and plant closures also applies to finance. European chemical firms collectively borrowed heavily in recent years to finance acquisitions, and refinancing will need to take place in the context of oversupply and asset rationalization.
Major challenges remain for the European chemical industry, including low growth, an aging asset base, the impact of US shale at the commodity end, increased IP investment by China at the speciality end, and the burden of rigorous labor and energy laws.
Before we write off the sector, however, we should keep in mind the magnitude, strength and traditional advantages of European chemical companies. The region is still home to many giants in the industry, all backed by a huge base of world class research and technology. European production plants are among the most efficient in the world, with outstanding levels of output and employee productivity. Europe is also a global industry leader in establishing overseas investments and accessing growth markets.
In short, the challenges are many but so are the opportunities. With renewed vigor and a focus on innate strengths, there is still plenty of life in the European chemical industry.
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1Outlook 2014, Looking Forward, IHS Chemical Week, April 14, 2014
4European Petrochemicals in 2014, Platts, January 10, 2014