No recovery in sight in 2024 for Europe's crisis-ridden chemical industry

Europe's chemical industry enters 2024 mired in one of the deepest crises it has ever faced. The industry struggled with weak demand throughout 2023, which caused chemical prices to drop at a time of historically high costs, particularly for energy and feedstocks and exacerbated by heavy labor and regulatory expenses. The impact on Europe-based companies' financial results has been harsh and they see no significant upturn until mid-2024 at the earliest.

The trough coincides with overcapacity in many petrochemical value chains. This has exposed Europe's lack of competitiveness, most notably in petrochemicals, and prompted a number of companies to mothball or permanently close plants in the region, which is expected to continue in 2024. The EU remains the second-biggest producer of chemicals after China, with the region's chemical industry generating annual sales of more than €760 billion, according to the European Chemical Industry Council (Cefic). But the EU's share of global chemical sales dropped from 17% to 14% between 2012 and 2022, and there are growing concerns about how much further it will fall in the current climate.

Action plans are starting to take shape in certain European countries to shore up the industry, and many of the region's chemical producers are pinning their hopes on success through innovation as new products and technologies are needed to address the energy transition, but this may not be enough to ensure Europe's long-term survival as a major force in global chemical markets.

BASF announced in February 2023 that by the end of 2024 it would close plants making ammonia, caprolactam, toluene diisocyanate and other key products at the company's Ludwigshafen, Germany, complex in an effort to address higher costs in Europe, including natural gas prices.

Chemical production volumes in Europe have dropped by 6.6% in 2023, a sharp reverse from 5.1% growth in 2022, and output is forecast to make only a fragile recovery in 2024, according to the American Chemistry Council (ACC). Output of chemicals in Europe will grow 1.9% in 2024, ACC said.

Cefic noted in its latest monthly report that the EU is losing competitiveness on global markets due to high energy and feedstock costs. Cefic estimates the EU's 2023 fall in chemical output at 8%. Confidence in the industry remains low and there is "no sign of a strong recovery," the Cefic report said.

The impact of high costs, weak demand and falling prices has been particularly acute in Germany, home to Europe's biggest chemical industry, where producers are being forced to take drastic measures.

"High energy and raw material prices as well as the lack of orders will continue to weigh on business. Therefore, our companies are forced to cut their costs — whether by shutting down production plants, giving up some individual business segments or shifting investments abroad," said Markus Steilemann, president of German chemical industry association VCI and CEO of polyurethane raw materials producer Covestro. Steilemann also confirmed VCI's assumption that Germany's chemical production has fallen 8% in 2023.

BASF said its announced closures represent a "rightsizing" of its cost structure in the region, "to reflect the changed framework conditions," it said. BASF also announced 2,600 job cuts in Europe, about 65% of which are in Germany. Roughly half of the €500 million in annualized non-production cost savings that the company is seeking will be realized at Ludwigshafen.

Gas costs have come down since the announcement, but BASF chairman Martin Brudermueller noted in a November call with equity analysts that in the third quarter of 2023, the company paid about 40% more for gas in Europe than it paid on average between 2019 and 2021.

Meanwhile, BASF is investing €10 billion to build a giant production complex at Zhanjiang, China, which has prompted comments from analysts that the company is effectively relocating production overseas. "We are continuing to broaden the foundation for BASF's future profitable growth," Brudermuller said during the November call.

Several other companies have announced plans to close chemical capacity in Europe during 2024, citing weak demand, high costs and falling prices and, in some cases, competition from cheaper imports.

Two large polyethylene terephthalate (PTA) plants are scheduled to be mothballed in the region. Indorama Ventures is idling a 700,000 metric tons per year PTA unit at Sines, Portugal, and Ineos is mothballing a 442,000 metric tons per year plant at Geel, Belgium.

High energy and operating costs "have put European PTA production at a major disadvantage relative to exporters from Asia, who benefit from access to discounted Russian hydrocarbons," said Steve Dossett, CEO of the Ineos Aromatics subsidiary.

The European Commission acted recently to counter cheap imports in the polyester value chain — including PTA and polyethylene terephthalate (PET) — by announcing antidumping duties on imports of PET from China ranging from 6.6% to 24.2%. The commission also has antidumping investigations under way in polyvinyl chloride and titanium dioxide as it seeks to safeguard European producers against the material damage that dumping can cause.

Dossett said the PET duties are "a step in the right direction, but that the European industry urgently needs more help. At the EU level, further action is still required against other artificially low-cost PTA and PET resin importers."

Mothballing the two PTA units follows commodity chemical and plastics capacity closures in Europe during 2023 by Trinseo, Kem One and LyondellBasell.

There are nevertheless areas where Europe's chemical industry can compete globally, even in petrochemicals. In November, S&P Global Commodity Insights estimated that the average cost of ethylene production at those European steam crackers that have converted to consuming competitively priced ethane imported from the US was among the world's lowest, at under $400 per metric ton. However, the vast majority of Europe's crackers still consume naphtha, resulting in average costs of ethylene production among the world's highest, at more than $600 per metric ton.

Innovation remains one of the strengths of Europe's chemical sector, with the EU chemical industry spending about €11 billion per year on research and development, or 17% of the global total, according to Cefic.

Innovation will be especially important and possibly advantageous for the EU in the years to come with new recycling, renewables, electrification and high-tech plastics technologies being developed to meet the demands of the European Green Deal and all its related regulations. However, the industry complains that Europe's regulatory cost burden is excessively high and that relief is urgently needed.

Germany's federal government has noted the complaints and started discussions with industry and other stakeholders on the possible development of a national "chemical pact" to support the country's status as a chemical industry location. In November, the government announced a package of energy tax subsidies for Germany's industrial sector worth up to €28 billion through 2028, with €12 billion guaranteed for 2024 as well as for 2025.

However, according to VCI managing director Wolfgang Große Entrup the electricity price package will not solve most of the chemical industry's challenges. "The measures adopted only maintain the status quo," he said. "They do not bring any additional relief that would improve the international competitiveness of our companies. The measures will not noticeably reduce the competitive disadvantage to regions such as China or the USA. That is why politicians must continue to work on the future of Germany as a business location. The planned chemicals pact offers further opportunities for this."