European Chemicals – The Saber Rattling Starts – At Last

  • INEOS CEO sees the European chemical industry at risk of failure within 10 years
  • The issue is relative energy costs – something we have written about and a conclusion that we share
  • Non-US companies are investing in the US to get access to cheap US feedstocks, but only INEOS itself in Europe
  • Risk for Europeans if they ignore the cost difference
  • Risk for US producers if too many people build in the US and there is not enough ethane/propane

Echoing our comments in research we published late last year, INOES chairman Jim Ratcliffe, in an open letter to the president of the European Commission has questioned whether much of the European chemical industry will be around in 10 years’ time.

As you would expect the central issue is energy and Ratcliffe is making the same point that we have made, which is that Europe cannot compete with the energy advantages in the US and the Middle East.  Moreover, many of the “green” policies in Europe are making matters worse by inflating electricity prices to justify solar and wind investment and restricting local E&P initiatives such as exploiting significant shale opportunities in Europe, both in the UK and on the continent.  In his letter, Ratcliffe suggests that electricity prices in Europe are 50% higher than they are in the US for industrial users – we actually think that in many locations the difference is higher.

Increasing European natural gas production through pursuit of shale base opportunities would not necessarily have an immediate impact on European natural gas prices as the region is very deficit, currently importing significant volumes from Russia and significant amounts of LNG from the international markets. However, it might make available some stranded ethane, which would help European production economics.

Our fear for Europe is that significant investment in lower cost chemicals in other parts of the world will ultimately lead to meaningful exports to Europe and a consequent fall in European pricing, squeezing the life out of many European producers.  The knock on effects for Europe would be more than just the direct jobs lost in the chemical industry as large consumers of derivatives of basic chemicals might be persuaded to relocate off-shore to get access to cheaper materials, cheaper power and possibly cheaper labor.

We have seen a couple of Asian chemical producers recently announce investments in basic chemicals in the US, Lotte and Shin-Etsu.  These companies are looking for lower cost ethylene based on cheap shale gas and these would be new business for each company – Shin-Etsu has existing PVC operations in the US, but also has assets in Europe – which could be supplied from the US – Lotte is building in joint venture with Axiall and will build ethylene glycol capacity to ship the product out of the US.   As yet the only European company looking to exploit the US cost advantage is INEOS itself.  The company has a large existing business in the US, but is investing to move US ethane to Europe, has just commissioned a new ethylene import terminal in Antwerp possibly to bring US ethylene to Europe and is looking at adding a new ethylene unit to its US complex at Chocolate Bayou.

The real risk for US ethylene producers is that everyone comes to the US for feedstock and that we get more ethylene units built than there is ethane feedstock for them – ethane prices rise because of scarcity and the US advantage is gone.

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