European chemical companies are navigating a complex landscape of challenges and opportunities as they position themselves for future success.
Three emerging trends highlight notable changes in Europe’s chemical markets. Firstly, elevated natural gas and electricity prices are driving up production costs for energy-intensive chemicals. Secondly, a global oversupply of petrochemicals, particularly from China, has resulted in reduced unit margins and lower volumes. Thirdly, the chemical sector is under pressure to decarbonize and continue to evolve to more sustainable production practices.
The Need for Change
Following the Russian invasion of Ukraine, European gas and electricity prices spiked, by 115% and 237% respectively. While energy costs have since gone down from their peak in 2022, EU countries continue to subsidise the production of energy-intensive chemicals such as fertilisers, while PVC and polyurethane also remain expensive in the bloc. Although prices have stabilised, costs are still more than they were pre-2021:
With high energy prices expected to stay static, profitable production of energy-intensive chemicals remains problematic. Indeed, recent reports suggest that Europe is in danger of ‘sleepwalking’ into dependence on Russian fertiliser, as previously occurred with natural gas. For less energy-intensive chemicals, whose costs are more closely tied to oil prices than to natural gas and electricity (such as polyethylene and polypropylene), European producers experience significant pressure from overseas competition and oversupply. For example, China has significantly increased capacity, which coupled with relatively lower demand has resulted in substantial overcapacity in many value chains.
Positioning for Success
As one of Europe's most energy-intensive industries, the chemical sector can play a pivotal role in restructuring the energy system and reducing CO2 emissions. In 2021, BASF signed a 25-year power purchase agreement (PPA) with Engie for renewable energy.
With an increased demand for lower-carbon products and green energy production, coupled with increased consumer awareness of recycling, regulatory pressure, and the EU Green Deal, it is clear that European chemical companies need to undergo an unprecedented transformation. This will include:
Sustainability and Circular Economy: With industrial chemicals providing the bulk of the materials behind manufacturing, products can be transformed into services to be used again, improving efficiency and even creating jobs.
Innovation in Green Chemistry: From waste disposal to industrial design, there is significant potential to revolutionise the chemicals sector by making it more sustainable with green products.
Digital Transformation: Adopting digital tools such as IoT, AI, and big data analytics to enhance efficiency, optimize operations, and improve decision-making in the chemicals industry.
The role of Private Capital
The pace of change has brought opportunities for private capital investors too. For example, ADNOC has locked down numerous partnerships in the industry, while WAVE invested millions in intelligent fluids’ sustainable cleaning agents last year. Private equity firms can play a crucial role in delivering the funding boost necessary for chemical companies to drive green innovation on the journey to a truly circular economy.
The way forward
European chemical companies must balance the need for innovation and sustainability with the demands of regulatory compliance and economic stability. By embracing digital transformation, investing in R&D, and focusing on sustainable practices, they can turn challenges into opportunities and maintain a competitive edge in the global market.
Professionals in the chemicals sector
Whether you work in the chemicals industry and would like to share your insights on what’s going on in your sector at present, or if you’re a professional considering your next move, I’d love to hear from you – please don’t hesitate to get in touch!