Growth and Competitiveness

EU27 chemicals output, 5.2% below the previous year’s level

EU27 chemical industry production

Chemical output in the EU27 from January-June 2020 dropped by 5.2% compared to the first half of 2019, following the COVID19 outbreak in Europe.

In all cases (with or without second wave of pandemic), many quarters of growth will be needed to reach the pre-COVID19 output levels.

While overall chemicals production has declined, some sectors of the chemical industry providing for essential supply chains during the COVID19 outbreak have remained stable or posted growth in the first half of 2020, particularly those producing essential supplies such as disinfectants, diagnostic tests, ventilators, protective masks, gloves and gowns, as well as Intensive Care Unit medicines.

EU27 capacity utilisation far below its long-term average

EU27 chemical capacity utilisation rate

According to Business Survey data of the European Commission, capacity utilisation in the EU chemical sector reached the value of 75.4% in the second quarter of 2020, down from 81.6% reached in the same quarter of last year.

Capacity utilisation was about 9% below the previous year’s level (Q2-2020 vs Q2-2019), and far below the long-term average (2005-2018).

The dramatic decline in capacity utilization at the beginning of 2020 stems from the spill-over effects of Covid-19 crisis, where both production and capacity utilization have dropped substantially during the first half of 2020.

Energy costs are the Achilles’ heel of European industry

Average ethylene cash costs in Europe vs North America

The chemical industry is energy intensive. Against a stiff global competition, increases in energy costs in Europe relative to our competitors might impact competitiveness.

Globally, ethylene is the highest volume building block in the chemical industry. It is the basic feedstock to produce plastics, detergents and coatings, amongst many other materials.

Energy costs are the Achilles’ heel of European industry, especially compared to the United States which is riding on a shale gas boom. Advantageous energy and feedstock prices are a clear enabler of competitiveness. The shale gas boom in the United States has greatly reduced energy and feedstock costs, and a clear indicator.

Europe at a competitive disadvantage compared to the USA and the Middle East

Ethylene cash cost of regional steam crackers

The cost difference between the USA and Europe diminished significantly from 2014 to 2017. Making ethylene in Europe was 2.7 times more expensive in 2014. Since then, the situation gradually improved until 2017 (2.2 times in 2015, 1.8 times in 2016, and 1.6 times in 2017).

In 2019, ethylene cash cost in Europe was 9.6% below the previous years’ level. 2019 shows a significant decrease of the ethylene cash cost in Europe compared to 2018. Less substantial decreases were observed in the USA and Middle East respectively during the same period (6.2%, 5.0%).

The global picture for 2019 carried a clear message: Europe still has a competitive disadvantage compared to the USA and the Middle East. Europe generated the highest ethylene cash cost in 2019.

Regulatory costs hamper European chemicals

EU27+UK regulatory cost of the chemicals sector

Existing EU legislation induces a wide variety of costs for the European chemical industry. Better regulation can help bring these costs down, improving the industry’s ability to compete on a global scale.

Under the REFIT Programme, the European Commission undertook a Cumulative Cost Assessment (CCA) to have a better understanding of how costs induced by EU legislation affect the sector’s international competitiveness, complementing the evidence-base for future policy-making decisions (Source: EU Commission Report, “Cumulative Cost Assessment, (CCA) for the EU Chemical Industry”, 11 July 2016).

According to final results of the CCA: the total cost of legislation that companies from the six subsectors had to bear amounts to €10 billion per year. When compared to value added, which represents the value generated by the industry, the share of regulatory costs increases to 12% of the value added. Compared to Gross Operational Surplus (GOS), which can be used as a proxy for profit, the cost reaches 30%, indicating that legislation cost is among the important factors shaping the profitability of the chemical industry. Among the legislation packages, the three main drivers of regulatory cost are industrial emissions (33%), chemicals (30%) and workers safety (24%) – amounting to 88% of total regulatory costs.

Emerging economies outpace industrial countries in chemicals production

Average chemicals production growth per annum

During the 11-year period from 2009 to 2019, the EU27 chemical industry had a weak growth rate (1.4%). Production in China grew from 2009 to 2019, attaining 9.3% average annual growth. China is outpacing other emerging economies such as Russia (5.5%), South Korea (3.0%), and India (2.5%).

Emerging economies are outperforming industrial countries in chemicals production. They pushed up the average growth rate of world chemicals production during the 2009-2019-time period. The European Union is lagging behind the main regions in Asia.

The shift of manufacturing to Asia and associated higher chemicals output growth, an ageing population in Europe and the shift of petrochemicals production to resource-rich countries are a few examples. They all point to a declining share of the Europe based chemical industry in global sales. In absolute terms, the industry may continue to grow, but only at a slower pace.

Growth in world chemical sales 2019-2030

The long-term analysis shows that overall growth of chemicals demands and production as well as faster growth in emerging regions is a trend that is expected to continue in the future. World chemical sales are expected to reach the level of €6.2 trillion in 2030.

The EU27 chemical industry is expected to rank third. With a world market share of more than 40%, China holds the top ranking in sales, a position once firmly held by Europe.

Although competition in China’s chemical market is currently intensifying and demand growth is weaker than in the past, China still offers a huge and attractive market, both for chemical suppliers and their customer industries. In the mid-term, European chemical producers – due to their high technological capabilities and innovative products – are expected to benefit from a robust growth trend in China, both in increased exports and via local investments. To what extent depends on the competitive situation in each market segment and the development of final customer markets that rely on the chemical industry – for example consumer chemicals, automotive, electronics, food and nutrition, etc.

Europe leads in specialty chemicals

EU27+UK production value

On a segment level, the chemical industry in Europe is characterised by high market share in specialty chemicals and pharma ingredients, which is expected to continue to grow in the future. Future growth will be driven by innovation and diversification in materials and components across the manufacturing and construction sectors, as well as consumer goods.

The speed of innovation and transformation is expected to pick up due to the introduction of Industry 4.0 technologies.