Page 123 - CW E-Magazine (24-9-2024)

Point of View

Europe’s chemical industry facing several headwinds,

but reports of its demise are exaggerated

Europe’s chemical industry is facing several headwinds that have forced a rethink on growth and investment strategies at some of the
marquee companies, including in Germany which has the biggest chemical industry. A perfect storm of low (and even declining) demand,
high energy costs, poor access to feedstock and stifling regulations threaten the profitability of petrochemical companies, leading some to
observe that the survival of the industry is at stake.
Over the last few several efforts have been undertaken to address these challenges. These include rationalisation of capacities, which more
often than not means shutdowns, and please to governmental agencies for urgent measures to help the industry cope with the new realities.

While none these developments are new, recent events have precipitated a crisis. At first, Covid saw widespread global destruction of
demand, from which Europe has yet to fully recover. In some value chains, present demand is as much as 25% lower than pre-pandemic
levels. More recently, the war in Ukraine sent energy prices soaring and fully exposed the region’s energy vulnerabilities to Russia, which
turned off pipeline gas supplies flowing through Ukraine. While quick action resulted in mopping up of gas from alternate sources (mainly in
the form of LNG) to meet energy needs, there seems no getting away from the fact that cheap Russian gas is no longer a feedstock option
for petrochemicals manufacture.

The European Chemical Industry Council (CEFIC), a lobby group for the industry, has recently stated that the travails of the industry are
not just the results to business cyclicality, but is much more structural and far more intense than in any other part of the world.

Olefin capacity rationalisation
Naphtha crackers that dominate ethylene manufacture in Europe, like those in Northeast Asia, have always been a higher cost route to
ethylene, vis-à-vis the gas crackers that dominate in North America and the Middle East. Furthermore, most European crackers are aged and
with capacities much lower than the newer builds in much of the world, raising their maintenance costs and making for poor economies of
scale. None of these mattered much in the good times, but the downturn in the petrochemical cycle has exposed all these handicaps. Many
crackers have been running at break-even or even negative margins for much of the last two years, and a turnaround is not expected any
time soon. No surprise then that there have been several closures.

According to estimates by S&P Commodity Insights, a consultancy, about 7.5-mtpa of capacity for olefins, aromatics and polymers have
been permanently closed or announced for closure between the first quarter of 2023 and the first half of 2025. This figure rises to 9-mtpa if
plants mothballed indefinitely are included, and further to 9.5-mtpa if ammonia and chlorine plants are added up. Products wherein rationalisation
has taken place (or announced) include adipic acid, ammonia, caprolactam, chlorine/caustic soda, cumene, ethylbenzene, ethylene, methyl
methacrylate (MMA), polycarbonate (PC) resin, polyethylene (PE), polypropylene (PP), polyvinyl chloride (PVC), propylene, purified
terephthalic acid (PTA), styrene monomer (SM), toluene, toluene diisocyanate (TDI), and synthetic rubbers. In all, 2.78-mtpa of aromatics
capacity, 1.82-mtpa for polymers, and 1.1-mtpa for olefins are to go off market. In 2024 alone, about 2.82-mtpa of capacity is expected to
be shut in Western Europe, only second to the 3.1-mtpa of capacity that came to be shuttered in the region in 2014.

While these closures seem large, they are only half the story. New capacities – adding roughly to the same amount for the products
mentioned – are expected to come up between 2026 and 2029. For example, the two cracker closures by Sabic and ExxonMobil will take
out about 1.1-mtpa of olefins capacity (about 4% of the total), but the new Project ONE cracker of Ineos being built in Antwerp, Belgium,
will add about 1.45-mtpa of ethylene capacity when completed later this decade. In addition, Orlen’s new cracker in Plock, Poland will add
another 0.60-mtpa to the region’s ethylene capacity when readied in 2027/28.

In short, what has been seen so far is cracker capacity rationalisation – old, high-cost, sub-optimally sized crackers being replaced by
larger more efficient ones running, not on expensive naphtha, but on cheaper natural gas liquids (NGLs) or imported ethane (from the US,
in the case of Ineos).

But more closures will be needed if the region’s cracker economics are to improve. Average cracker operating rates in Western Europe
now hover around 80% and margins are now down to five-year lows. For operating rates to firm up to the high-80% range will need another
1-mtpa of capacity to be off the market by 2026. And there are several candidates for this. BASF, for one, is conducting a. review of its

Chemical Weekly September 24, 2024 123

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