EPCA ’22: Europe chemicals long-term fate to be decided by short-term pains

MADRID (ICIS)–The European chemicals industry is set to continue its trend towards specialisation as commodity-based materials are forced out of production due to high costs, but the current crisis also presents an opportunity.

The EU’s Green Deal is demanding from manufacturing harsher reductions in emissions globally, and this should speed up electrification of the energy-intensive chemicals sector, freeing it from national grids highly dependent on natural gas for the production of electricity.

However, the timeframe to be carbon neutral by 2050 is tight. For example, it is yet to be tested whether chemicals’ most energy-intensive activity, steam cracking, could be electrified, with majors BASF, SABIC, and Linde starting construction of a pilot plant in September.

European petrochemicals players are set to discuss the many challenges weighing on the sector this week in Berlin, in their first in-person European Petrochemicals Association (EPCA) annual meeting since 2019.

They were hoping this year would be celebratory, not least for having survived a pandemic. They could never have expected what reality had in store for them though: in recession or about to enter one, war economy-like national budgets being urgently passed, and inflation at the highest in most players’ careers.

UNROARING TWENTIES
When the pandemic hit in 2020, the hope was that after the health emergency receded a prosperous era would kick off, emulating the Roaring Twenties that followed the Spanish flu and the horrors of war during the 1920s.

It did not go according to plan. The effects of the Ukraine war in Europe, with hundreds of state billions already committed to lessen the impact of multi-decade high inflation, is likely to linger at least until the middle of the decade.

A recession in many EU countries this winter is a given – its depth and the decisions by policymakers to deal with it will mark the 27-country bloc’s citizens living standards for the rest of the decade.

Chemicals will be in the eye of the storm. Sky-rocketing high production costs via the electricity bill this winter could be a make-or-break moment for some chemicals subsectors, according to the global chemicals lead at consultancy Accenture, Bernd Elser.

“The current crisis will speed up the electrification of the chemicals industry as well as the migration to net zero. Many business cases [for electrification] that were not attractive when natural gas prices were lower, suddenly become attractive because energy costs are so high,” said Elser in an interview with ICIS on 27 September.

“The restructuring and the investments in alternative products – specialties versus energy-intensive commodities – is set to continue. Recycling will play a part [in decades to come] as well, and the necessary electrification of steam crackers clearly needs to be accelerated.”

That restructuring, shifting away from commodity chemicals, has been happening for the past two decades. Highly polluting production of some chemicals has increasingly shifted to other jurisdictions where environmental standards are lower.

In May, Accenture published a report arguing the cost to decarbonise the chemicals industry in the EU could come to the tune of €1tr – a tall order for a sector which already suffers high costs on most fronts compared with competitors such the US and China.

In the report, Accenture specified eight chemicals which are responsible for 75% of the industry’s greenhouse gas (GHG) emissions:  ammonia, ethylene, propylene, nitric acid, carbon black, caprolactam, soda ash, and fluorochemicals.

WINTER OF DISCONTENT
In the short term, Elser said he is optimistic about the wider picture for Europe’s energy supply during the winter, with power cuts affecting the chemicals industry unlikely, he said.

“I don’t think the outlook’s entirely negative when it comes to natural gas in Europe. Undoubtedly, there will be individual plants which will be mothballed, but that will be a minor piece of the chemicals industry,” he said.

“The big, integrated facilities will continue to run, and they will be able to produce and ship their products – I am convinced of that. One thing is certain though: customers will have to absorb some of the increase in costs.”

His optimism is not shared by the industry’s representatives. Last week, Europe-wide trade group Cefic and another 12 trade groups – including Fertilizers Europe – said the EU must take “more immediate and efficient measures” to help energy-intensive manufacturing sectors with their “unbearable” production costs.

VCI, the chemicals trade group in the EU’s largest producer Germany, said last week it welcomed the withdrawal of a planned tax on natural gas which was set to kick off on 1 October and a planned cap on electricity prices.

The trade group added, however, the electricity price cap would only provide some “breathing space” which should be used to “create the structures that will get us through the difficult” next two winters.

Germany also passed a whopping €200bn spending package to lessen the impact of high prices for consumers and businesses.

SHIFTING PARADIGMS
In the interview with ICIS, Accenture’s Elser said several times that old paradigms are being recalibrated on the back of the pandemic and the war in Ukraine, both inside the chemicals industry and in the wider economy.

Only time will tell what the economic system emerging from these troubled years will look like, but the past months may be showing the beginning of a new era in economic policy.

The EU’s complicated electricity price calculation system, where the most expensive feedstock last entering the system sets the final price, benefited no-one but utility companies. The rule was an immobile truth.

Until it was not. Spain and Portugal, due to their peninsular nature and lack of connections to northwest Europe’s electricity grid, won a hard-fought exemption in June.

Now, the EU itself is mulling to decouple natural gas prices from electricity production as Russia’s disconnection from Europe is set to keep prices high.

Intervention in the markets is back in fashion; unsuspecting players are demanding price caps.

Within chemicals, Cefic has asked the EU to implement a cap on natural gas prices.

In the UK, with an electricity price system similar that of the EU, calls for a change are also on the rise.

Another potential shift in paradigm could be the announcement by the European Commission – the EU’s executive body – to implement a €140bn windfall tax on utility companies that are enjoying high profits.

The Commission’s president, German conservative politician Ursula Von der Leyen, said it was wrong that companies were making record profits “benefiting from war”, something the EU’s “social market economy” had to tackle.

A BENIGN RECESSION?
Another shifting paradigm, and a positive development amid the predominant doom and gloom, would be the type of recession itself, according to Accenture’s Elser.

Recessions have always caused unemployment to spike, feeding the downturn cycle as consumers’ purchasing power falls.

This recession looks set to be different, with labour shortages still reported by many companies in the EU. Even now, unemployment has not risen in most sectors, albeit the pace of hiring has slowed down.

“In discussions we are having with [Accenture’s] clients, they stress that this recession is not the typical recession as employment levels remain high, for example,” said Elser.

“The usual paradigms are being recalibrated. Some of Europe’s economies are already in recession, yet employment rates are very high, which means there is more purchasing power, compared with other recessions in the past.”

The EPCA annual meeting runs on 4-6 October.

Focus article by Jonathan Lopez