The European chemicals industry must feel rather like John Cleese as the batsman in the Monty Python sketch who describes how he is hit repeatedly on the head by bouncers from a ferociously fast and aggressive bowler. Asked how he is feeling after sustaining yet another wincing blow straight between the eyes, he replies: ‘I’m rather getting used to it now.’
Expectations of recovery in Europe in 2012, after some encouraging signs in the first two quarters, were dashed by a raft of depressing economic and industrial output statistics in the second half. The picture in America is more comfortable and the outlook a little brighter, with economic stimulus packages coupled with the substantially lower cost of natural gas helping to boost confidence if not overall output.
Official industry estimates released in December 2012 confirmed that chemical industry output in both the US and Europe contracted last year. European chemicals output fell by 2% compared with 2011, according to the European Chemicals Industry Council (Cefic). It blamed the fall on the general EU economic downturn and, in particular, continuing decline in demand from the automotive and construction sectors. ‘The current EU economic downturn is weighing down on the chemical industry in Europe at a time when other world regions also face challenges,’ said Cefic president Kurt Bock.
US chemicals production was down 0.5%, according to a year-end analysis from the American Chemistry Council (ACC).
Both industry bodies are forecasting a return to output growth in 2013. Cefic sees a tentative and hesitant recovery to 0.5% growth in Europe, while the ACC expects US output to expand by 1.9%. Although a much more rapid turnaround than expected in Europe, it is still lacklustre growth when set against the pre-recession and long-term trend levels.
Even if chemicals output in Europe does meet the marginal growth rate forecast by Cefic, or manages to expand by the 0.9% forecast for Western Europe by the ACC, it will still be around 7% below pre-recession levels.
Of equal concern is that these modest growth forecasts are hedged with caveats about economic growth, political uncertainties and fiscal challenges. Worries over economic and banking stability in the Eurozone, generally slow industrial demand, high unemployment and cutbacks in state spending continue to overshadow the outlook for European chemicals and the industries it supports.
Many of these fears are also reflected in the ACC’s outlook for US chemicals this year. In addition, both Cefic and the ACC have highlighted the imminent ‘fiscal cliff’ in America as a potential danger point.
The likelihood, according to ACC chief economist and managing director Kevin Swift, is that a compromise will be reached in Congress before or soon after legislative clauses triggering an end to federal economic stimulus measures take effect.
However, he said that this first quarter deadline had already led to some deferment in planned investment.
With so many uncertainties clouding the future, the ACC’s forecast of a 3.6% rise in global chemicals output volume this year, rising to 4.6% in 2014, must be treated with circumspection. Although the 2013 forecast is more than double the 1.2% that the ACC calculates the world’s chemicals production grew last year, it is heavily dependent on both avoidance of the fiscal cliff and continuing recovery in Asia.
It is on this assumption that the ACC expects US chemical exports to grow by 4.7% to $200bn this year, rising by 6.6% to $213bn in 2014. Imports are forecast to expand by 4.1% to $197bn this year and by 6.2% to just under $210bn in 2014.
If these forecasts prove correct, the US trade deficit in chemicals will widen to $2.4bn in 2013 and $3.3bn in 2014 on higher export growth.
‘Trade deficits will continue in pharmaceuticals and agricultural chemicals but will be offset by large, and growing, surpluses in basic and specialty chemicals,’ said the ACC outlook report. The report added that renewed competitiveness from shale gas would boost US exports in the years ahead.
‘The large surpluses in basic chemicals will continue to expand as will surpluses in specialities and consumer chemistry,’ the report said.
Once again, emerging markets offer the only real expectation of substantial growth in chemicals production this year, with the BRIC (Brazil, Russia, India and China) nations leading the way. Output in Brazil will expand by 4.8% in 2013, more than double the pace of 2012, according to the ACC forecast. Russian production is expected to grow by 5.8%, a massive improvement on 2012 when the ACC estimated that output slumped by 7.3%. China and India will retain comfortably their Asian expansion leadership with forecast chemicals output growth rates of 9.8% and 8.7%, respectively.
Although China’s expected output growth rate is little changed on 2012, India’s will, if achieved, represent a near tripling in production expansion, compared with 2012 on a forecast rise of 6.5% in real GDP. China’s predicted 8.1% rise in GDP this year takes into account expected subdued demand from Europe and Beijing’s efforts to boost domestic spending.
On a global chemicals sector basis, pharmaceuticals and specialties – apart from coatings – are expected to head the production growth table this year with rises of 4.2%. If pharmaceuticals are excluded, however, total global chemicals output growth falls from 3.6% to 3.4%.
The ACC expects overall world chemicals production capacity to grow by 4% in 2013, rising to 5% in 2016. It sees little change, however, in capacity utilisation. In 2012, it was 85.3%; this year it is expected to fall marginally to 85% and remain around this level for the following three years.
Adjustment to a new first world austerity order in Europe has seen many chemicals manufacturers retrench in the face of depressed regional demand. However, Steve Elliott, chief executive of the UK Chemicals Industries Association, sees some grounds for guarded optimism. ‘Things look better going forward than looking back,’ he said, citing some mildly encouraging signals from the UK government over tax incentives for investment in new gas-fired electricity generating capacity and the lifting of a temporary ban on shale gas exploration.
Although some analysts believe the UK could be heading for a triple dip recession, with the overall economy likely to have contracted during the fourth quarter of 2012, there was some good news just before Christmas when construction output figures showed a sharp increase for October. The UK government’s Office for Budget Responsibility said activity in this crucial sector for chemicals leapt 8.3%, compared with the previous month, although it was still just over 5% below the corresponding month last year.
If this trend is extended into the first and second quarters, Elliott’s cautious optimism may be justified, although he acknowledged that recent years have seen first half growth peter out. Chemical industries on both sides of the Atlantic have, however, another reason for optimism: shale gas produced by hydraulic fracturing (fracking).
‘There’s no doubt it [fracking] has been a complete game changer in the US,’ said the ACC ‘s Kevin Swift. ‘We are first movers, so we’ll have an advantage; some economists say for a decade long and not just on gas but on all oil too.’
Swift pointed out that the price of natural gas in the US had fallen to less than a third of its level before significant supplies of shale gas came onstream. In December, the wholesale price of natural gas in the US was around $3.30 per million British thermal units, well under half the $8 per mbtu cost in the UK.
‘As a favourable oil-to-gas price ratio continues in North America, this bodes well for American chemistry as the US emerges as a global low cost supplier of many petrochemical and plastic products,’ said the ACC.
The exploitation of huge shale reserves through fracking has not just changed radically the availability and price of key natural gas feedstocks for US chemical plants, Swift commented. It has also transformed the economics of investment in new industrial plants. The ACC has counted over 50 projects with a total capital investment value of more than $40bn to capitalise on the shale gas price advantage.
Applications for new and expanded chemicals plants had been submitted, and some justifications for this investment had been based on exports of both finished chemical products and intermediates to Europe, Swift said.
He pointed out that plans for new industrial infrastructure in the US also included liquefied natural gas (LNG) and liquefied petroleum gas (LPG) terminals which would facilitate exports of key chemical feedstocks to overseas markets like Europe.
As chemical market analysts at Zack’s pointed out: ‘Affordable natural gas and ethane [derived from shale gas] offer US producers a compelling cost advantage over their global counterparts who use a more expensive, oil-based feedstock.’
However, the prospect of increasing, and increasingly, competitively priced shale gas-based US chemicals being shipped into Europe has clearly worried Cefic. In its outlook for 2013, Cefic said US shale gas and the new chemical capacity being installed to exploit it, coupled with the associated reduction in US energy costs, pose a serious threat to EU chemicals production.
‘The EU chemicals sector faces increasing uncertainty as the domestic market continues to struggle and overseas competition remains relentless,’ said Bock. ‘EU policymakers need to continue to work towards putting Europe on [a] better economic footing to help us move out of this difficult period,’ he added.
There are signs in the UK, at least, that the chemical industry’s repeated pleas for a more favourable tax treatment of investment in additional energy capacity and special recognition of the needs of energy-intensive industries have at least been partly acknowledged in the government’s Energy Bill. Elliott said the Bill has bought some clarity to Britain’s energy needs and welcome recognition for energy intensive industries which are to be exempted from the additional costs of subsidising renewables and nuclear power generation. Nevertheless, he stressed that more needed to be done to secure increased investment in the UK chemical industry.
The UK‘s number one manufacturing exporter has also expressed its support for the government’s decision to allow the resumption of shale gas exploration in the UK. ‘The dual opportunity presented by shale gas can make an essential contribution to our energy and feedstock requirements within the next seven to 10 years and would offer valuable employment solutions and enable us to compete on the world stage with our products and solutions to drive UK economic recovery and growth,’ said Elliott in a CIA statement.
Shale gas development in the UK received a substantial boost with the British government’s decision in December to lift a temporary ban on fracking imposed in 2011 (see "Fracking news welcomed"). The ban had been introduced after fracking operations by Cuadrilla Resources had been linked to two small earthquakes near Blackpool in Lancashire. The momentum of shale gas development in Britain, where potential reserves sufficient to meet up to 20 years’ demand have been identified, may soon receive another boost when gas producer IGas auctions part of its stake in a shale gas exploration project to a major global oil company.
However, ACC’s Swift cautioned against the assumption that shale gas development would have a similarly transformative impact in the UK as in the US, pointing out fundamental differences in property ownership and mineral rights between the two countries.
Neil Sinclair is a freelance chemicals writer based in London, UK.