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European chemical industry struggles to compete in the face of soaring costs | Company

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For the first time ever, the EU imports more chemicals than it exports, both in volume and value, resulting in a trade deficit of €5.6 billion for the first half of 2022, according to the European Chemical Industry Council (Cefic). The chemical industry, one of the most energy-intensive in Europe, is struggling to compete on the world market with companies from regions where energy prices are more favorable.

“We are approaching the point of no return: if no emergency solution to the price of energy is provided to our sector, we are not far from the breaking point”, declares Marco Mensink, CEO of Cefic. “Hundreds of chemical companies are already in survival mode and we have started to see the first closures. We must act now. Cefic wants the European Commission and Member States to agree on a pan-European plan to limit the impact of energy prices, increase energy supply and encourage reductions in energy consumption.

European companies have been hit hard by the continued reduction in natural gas flows from Russia. The International Energy Agency’s latest quarterly gas market report shows Russian gas supplies to Europe have fallen by 50% since the start of the year, pushing international prices higher. new heights. The IEA expects the market tightening to continue through 2023 and may well get worse.

It may take 2-5 years before the internationalization of gas prices reaches the point where Europe is truly competitive on energy prices

Cefic’s warning comes after BASF, the world’s largest chemicals company by earnings, reported ahead of its official third-quarter results that its net profit would be down significantly from the same period last year at €909 million, compared to €1,253 million in 2021. BASF must absorb €740 million in losses related to its stake in Wintershall Dea, an oil and gas company with shares in the Nord Stream 1 gas pipeline; it lost €1.1 billion when the Nord Stream 2 project was canceled after Russia invaded Ukraine.

But even excluding those losses, quarterly profits were down 28% from 2021, despite an overall quarterly revenue increase of 12% to nearly 22 billion euros. Sales volumes were down compared to 2021, but this was offset by the company’s price increase and some positive currency effects.

BASF attributes the drop in profits to “deteriorating framework conditions” in Europe, which means higher energy and raw material prices. Its answer is to quickly and sustainably reduce costs in the region, especially in Germany. Upon completion at the end of 2024, BASF expects to achieve ongoing savings of €500 million per year in “non-production areas”. The company’s Ludwigshafen site will bear more than half of these savings as the company streamlines operations, service and R&D divisions, as well as its corporate headquarters.

These results are reasonably close to expectations once losses associated with Nord Stream pipelines are discounted, says Sebastian Bray, analyst at Berenberg in London, UK. Natural gas prices are high across Europe and are a problem for all chemical companies, but prices are particularly high in Germany, which was previously heavily dependent on Russian gas. That means BASF is particularly at risk because it runs the world’s largest chemical site in Ludwigshafen, Bray points out. “It may take 2 to 5 years before the internationalization of gas prices reaches the point where Europe will be truly competitive on energy prices,” he adds.

Bray says BASF’s plans to cut costs aren’t surprising, but he’s not overly worried because the company, like many other multinationals, typically has an active cost-savings program underway. The main focus seems to be fixed costs at Ludwigshafen, but he thinks BASF is unlikely to cut R&D spending. “BASF spent 2.2 billion euros on R&D in 2021 and I don’t expect that to drop much. BASF’s CEO is a chemist and aware of the success and importance of R&D for the “business, especially in agrochemicals which is a very important part of BASF’s business. There might be small savings here, but it won’t be a main driver.”

If chemical companies have to stop production because of astronomical energy costs, that is a disaster for Germany. Without chemistry, our country stands still.

Looking more broadly, Bray says he feels no appetite to cut R&D in the sector. “Most companies are focused on expanding their specialty chemical business models, and this sector tends to rely more on R&D.” Instead, businesses are more likely to look for other ways to save money. For example, Bray thinks that the “additional structural measures” announced by BASF likely refer to the reduction of its European production of gas-intensive base chemicals, in particular ammonia. “I believe BASF is considering importing gas-intensive commodity chemicals from outside of Europe for use in processing at its European sites. Since ammonia is a very gas-intensive operation, switching to importing rather than manufacturing it yourself could save money.

While all European companies are grappling with rising energy and material prices, German chemical companies are facing a particularly worrying time. The situation is deteriorating dramatically, confirms the German Chemical Industry Association (VCI). Business expectations are as low as during the financial crisis, but this time with no prospect of rapid improvement. “If chemical companies have to reduce or even stop production due to astronomical energy costs, that is a disaster for Germany,” says Wolfgang Große Entrup, managing director of VCI. “Without chemistry, our country stands still.”

But that’s what’s happening. Some German chemical companies are drastically reducing their production. A recent VCI regional survey showed, for example, in the important chemical area of ​​North Rhine-Westphalia, 34% of companies have reduced production while 13% have moved production abroad and 56% have reduced their investments planned for the coming year. This has resulted in bottlenecks for the supply of important raw materials, with considerable effects on downstream production.

“There are indeed production cuts and, for example, imports of ammonia (from the Middle East) to replace the energy-intensive production of ammonia in Germany and Europe,” confirms Reid Morrison, world leader in consulting in energy at PwC. “All energy-intensive industries based in Europe (chemicals, cement, glass, paper, etc.) are cutting costs as much as possible, while hoping for taxpayers’ money-based relief from high gas prices.”

Natural gas prices are regional. As a result, U.S. producers have a competitive advantage

Energy costs are six to seven times higher in Europe than in the United States, which seriously affects European competitiveness, continues Morrison. “There is no shortage of gas or energy in the United States, while at the same time the United States sells liquefied natural gas (LNG) to Europe at high prices. Global chemical companies in Europe are being hit hard and are focusing on energy efficiency, substitution and the redistribution of production within them to less expensive continents (like the US). The same is happening with chemical companies in the Asia-Pacific region, where energy costs are between US and European levels, but they are also affected by reduced demand from China.

Chemical producers remain globally competitive in the United States, confirms Martha Moore, managing director of economics and statistics at the American Chemistry Council (ACC). This is partly explained by the fact that more than two-thirds of the total energy consumed by the American chemical industry comes from the production of natural gas. “The prospects for abundant and affordable natural gas and natural gas liquids (NGLs) are good, thanks in large part to abundant and affordable domestic supplies,” she says. “Natural gas prices are regional. Therefore, U.S. producers have a competitive advantage when U.S. natural gas and NGL prices are [relatively] down.’

However, the chemical industry is global. The past few months have seen profit warnings from various companies, many of which are headquartered in the United States, and all blame rising energy prices in Europe and falling demand in Europe and South America. North. Eastman, Dow, Chemours, Olin – all expressed concern that global economic conditions were deteriorating faster than expected.

Looking ahead, Morrison predicts that the U.S. chemical industry is likely to attract investment from global players based in Europe, and perhaps also Asia, thanks to relatively low energy costs and aggressive tax incentives. “The European chemical industry will lose ground, especially if there is no political will to increase energy supply from European resources.”