European chemical industry endures recession

Recently, despite the sharp drop in European energy prices, people in the European petrochemical industry are still worried about many challenges facing the industry. Industry insiders said that 2022 was originally a year worth looking forward to, but the reality gave the European chemical industry a head start. The COVID-19 has just eased, and the conflict between Russia and Ukraine has exacerbated the high inflation in the European market. Under the influence of various factors, there is a great possibility of economic recession in EU countries this winter, and the depth of the recession depends on the measures taken by policy makers to deal with the recession. In this context, the European chemical industry is not only facing business problems, but also facing the imminent decarbonization transformation. Many European chemical enterprises and chemical associations have begun to lobby governments for more preferential policies.

Energy costs still have a profound impact on corporate profitability

At present, the possibility of European economy falling into recession this winter is still very high, which has a great impact on European petrochemical industry. Some market analysts said that due to the oversupply of key products in the global industrial supply chain, macroeconomic downturn, high energy costs and other factors, the European petrochemical industry may have to face more production plant closures. This summer, industry observers warned about the macroeconomic challenges and energy bills faced by the European petrochemical industry. Now, even though the energy price has dropped significantly, the supply chain problem has gradually eased, and the freight costs of importers have dropped significantly, this concern still exists.

Bernd Elser, head of global chemicals business of Accenture, a consulting company, said that this winter's soaring electricity charges led to soaring production costs, and some European chemical industry segments faced a critical moment. It should be noted that it is not the current energy price that affects the current electricity bill in Europe, but the energy price one to two months ago. That is to say, the situation of high energy prices in the early stage will have an impact on the cost and profit margin of petrochemical enterprises until the end of this year.

This can be observed from the profit margin of petrochemical products. S&P's global commodity insight data shows that, as a key raw material for a series of petrochemical products, the profit margin of ethylene in Northwest Europe has declined from about $1000/t in June to about $- 100/t in September. It is estimated that the profit margin of ethylene in the rest of this year is only slightly higher than zero. Ethylene derivatives will also face this problem. S&P global analysts predict that the profit margin of downstream high-density polyethylene (HDPE) will drop from about $600/t in October to about $400/t at the end of the year, and is expected to drop to less than $100/t by the end of 2023.

End products have been difficult to participate in global competition

The current low profit margin has directly affected the global competitiveness of European petrochemical enterprises.

Siaran Healy, oil and petrochemical analyst of the International Energy Agency (IEA), said: "Historically, ethylene cracking in Europe is not the highest, but not the lowest, in terms of production costs in the world. But this time, some of their advantages over East Asian competitors will be lost due to higher energy costs and downstream problems. This will make the situation more dangerous." He added that many ethylene cracking units in Europe have reached the lowest operating load level technically.

S&P global analysts pointed out that the reduction of polymer processing manufacturers will have a chain reaction on the petrochemical industry chain. Joshua Fauber, petrochemical analyst of S&P Global, said: "If European polymer processors cannot compete, they will have to reduce the operating load rate. This will lead to a decrease in the operating load of ethylene plants, while the minimum operating load rate of some cracking plants has been reduced to about 80%." In fact, it is most economical to keep the load rate of ethylene cracking unit in the range of 95%~100%. From the current point of view, this market weakness seems to continue. S&P Global said: "The purchase volume of polyethylene (PE) resin is expected to remain low, and some buyers may turn to imported materials." The actual output of some petrochemical products in Western Europe may be significantly lower than the production capacity. This is particularly true for linear low density polyethylene (LLDPE) and ethylene glycol (MEG).

Elser said that at present, the trend of European chemical industry from energy intensive bulk chemicals to high value-added specialty chemicals continues. In addition, the pressure of decarbonization in Europe is still huge. In May this year, Accenture released a report saying that the cost of decarbonizing the European chemical industry may reach 1 trillion euros. This is a big expense for European chemical industry.

Chemical enterprises and chemical industry associations strengthen government lobbying

As for the European winter energy issue, which has attracted much attention, Elser said that in the short term, he was optimistic about the overall outlook of European winter energy supply, and it is unlikely that power outages will affect the chemical industry. Elser said: "I don't think the prospect of natural gas in Europe is completely negative. There is no doubt that some factories will be forced to idle, but that will be a small part of the chemical industry. Large integrated production facilities will continue to operate. But one thing is certain, consumers will have to bear part of the cost growth."

However, although there is no problem in terms of security, European chemical enterprises and petrochemical industry organizations still lobbied European institutions. Recently, the European Chemical Industry Commission (Cefic) and 12 other trade organizations said that the European Union must take more direct and effective measures to help the energy intensive manufacturing industry, which cannot afford production costs, to tide over the difficulties.

The German Chemical Industry Association (VCI) said that the organization welcomed the cancellation of the natural gas tax originally scheduled to be levied on October 1 and the planned ceiling on electricity prices. However, the industry organization added that the price ceiling would only provide some "breathing space", and more targeted measures should be taken to help German Chemical overcome the "difficult period" of the next two winters.

In this case, the petrochemical industry organizations began to require the EU to intervene in the market. For example, in the chemical industry, Cefic has asked the EU to impose a ceiling on the price of natural gas. In the UK, where the electricity price calculation system is similar to that of the EU, the voice of chemical enterprises and industry organizations for reform is also rising.