EPCA ’24: Fundamental change still potentially ahead for chemicals industry

LONDON (ICIS)–Massive overcapacity along some value chains is likely to drive further fundamental shifts in the global chemicals landscape, with differentiation and innovation key to remaining competitive.

Slow demand in lengthy trough cycle conditions and the massive ramp-ups in production capacity seen in China since the start of the 2020s have left economics ”almost unsustainable” in some cases, according to Ketan Joshi, president for intermediates at BASF and member of the European Petrochemicals Association (EPCA)’s board of directors.

“In several value chains, the overcapacities built up in China make the situation in China almost unsustainable when it comes to economics, which I assume will trigger some fundamental changes in the markets globally,” he said. “Differentiation and competitive offerings will be imperative for survival.”

The radically changed competitive conditions for heavy industry in Europe relative to elsewhere in the world has highlighted the sluggishness of some industrial players to adapt to the new conditions.

“I do believe that manufacturing industry in Europe became complacent to a certain extent in the past decade, so it is now really about trying to get back that innovation spirit,” he said.

“If you talk about what the industry can do, then this is what the industry has in its own hand to drive, to differentiate and create a compelling value proposition for customers,” he added.

BASF has taken a detailed look at its operations, particularly those in its Verbund site in Ludwigshafen, over the course of this year.

Following the announcement in August of the closure of its Ludwigshafen adipic acid plant and several units, in the wake of a complete evaluation of the prospects for all units at the complex, further measures could yet be taken.

The results of that deep dive were fairly promising, with 78% of Ludwigshafen production plants deemed competitive, while 16% were evaluated as facing short- to mid-term competitive risks and 6% seen as less competitive in the future, according to site director Katja Scharpwinkel.

While the bulk of the company’s assets at its home based have been judged to be competitive, the current global market remains a challenging one, with manufacturing productivity continuing bearish and demand upticks still fairly minor.

The most recent purchasing managers’ index (PMI) data for the eurozone shows manufacturing hitting a seven-month low in September, with conditions in Germany especially challenging, and the service sector also showing more marked signs of a slowdown.

Chemicals demand slightly outpaced the general industrial market in the first half of the year, according to data from industry body Cefic, but remains substantially below recovery levels.

BASF itself has guided for a slow recovery, with no big step changes in the subdued upward demand curve, and conditions remain challenging for intermediates.

“From an intermediates perspective, it’s been a challenging year, with demand developments remaining uncertain until the end of 2024, and no clear sign of any broad recovery. Customers continue to buy very cautiously, mainly keeping inventories very low, and competitive pressure stays high,” Joshi said.

“Geopolitical uncertainties are driving large fluctuations in basic commodities, which I think is a major driver in markets at present, and that poses a major challenge for capex-heavy industries to really make decisions,” he added.

While the macroeconomic picture is crucial to allow for a stronger rebound, companies need to adapt and innovate to meet the current challenges, he added.

“To galvanize a broad recovery, several factors are necessary:  stable economic conditions play a crucial role in boosting investment, and increasing consumer confidence is necessary to drive consumption and spending,” he said.

“But also continued innovation is vital to meet the evolving customer needs, and that is really what is required to stay competitive in the market.”

“Traditionally, Europe led the industry in innovation, so it is important to get back the focus,” he added.

Decarbonising production and offering a wider range of sustainable solutions will be core differentiators for the manufacturing sector, particularly as consumer tastes continue to evolve, according to Joshi.

Strong pushes on research and scaling up production capacities for new markets and new products are difficult when producers are moving to aggressively cut costs and financing costs remain high.

Many European countries, including Germany, have slipped down the international rankings of research and development spending and innovation, and the prospect of making big financial bets when markets are still forming remains a daunting prospect.

“Without a doubt, moving towards more sustainability requires additional effort across the board. As I said, it cannot be an individual thing,” Joshi said.

The European Parliament seems at present to be attempting to adapt to that challenge, without committing to the kinds of green subsidy frameworks seen in the US.

Re-elected president of the European Commission, Ursula von der Leyen, has promised a clean industrial deal, and to cut red tape around permitting, although the pushback faced by BASF for its proposed cathode active materials plant in Finland and INEOS’ new cracker in Antwerp shows the continuing difficulty of building new production in the EU.

While the policy specifics are still to be unveiled, the pronouncements by the new parliament are promising, according to Joshi, but permitting remains a real issue in Europe.

“Right now, over 80 gigawatt of forthcoming wind capacity is stuck in lengthy permitting process in Europe, and eight times more that of solar energy capacity is in the permitting process compared to what is under construction,” he said.

The ambition of the Commission’s targets, both for carbon reduction and for the use of non-fossil fuels and feedstocks, has been stymied to an extent by the continual revision of those goals, making it difficult for companies to commit to specific plans.

The chemicals sector has one investment cycle left before the 2030 decarbonisation targets of a 55% reduction in carbon emissions compared to 1990 come into effect. The fact that new large-scale revisions to green industrial policy are still being drafted makes deploying that capital a challenge.

“When ambitious targets regarding plastic recycling and accepted recycling technologies are reviewed again and again by governments, parliaments and regulatory authorities, it creates huge uncertainty in the chemical industry and delays investments,” he said.

“We need a consistent policy, and we need those policies to stick to what the industry has already embarked into, so that the investments can happen,” he added.

The roadmap for the evolution of the circular economy is also yet to be written for the chemicals sector. Companies looking at new markets often use acquisitions as a way in, but owning waste recycling infrastructure does not necessarily make sense for a chemical producer.

Greater collaboration along these new value chains is necessary, and not all early steps may prove in hindsight to have been the best-optimised choices. The important thing is to start to make those steps, according to Joshi.

“We cannot just aim for perfect solutions from the outset. We need to start implementing things and then improve as we go forward,” he said.

“Partnership with waste suppliers, brand owners, technology leaders, will be required, because not everything can be done by a single player in the industry,” he added.

The EPCA assembly runs until 10 October.

Interview article by Tom Brown

Thumbnail image source: Shutterstock