Chemical Week • November 4/11 • EPCA 2024: Rethinking industry

Speakers call for structural change, collaboration, investment to cut costs, decarbonize

The 58th European Petrochemical Association (EPCA) Annual Meeting, which took place in October at Berlin, featured somber messages from speakers, given the huge challenges facing Europe’s chemical industry, but there was also optimism that solutions can be found.

Richard Roudeix, president of EPCA and president/ventures, EMEAI at LyondellBasell NV, called for greater cooperation to address the challenges. “The industry is transitioning very rapidly,” Roudeix said. “We know that the challenges are so strong, so big and so global that one company cannot solve them. We need to collaborate and cooperate across value chains in a new way.”

Roudeix noted “the risk of de-industrialization and missed investment” in Europe under the weight of legislation but recognized that the EU’s recently released Draghi report on European competitiveness offers some grounds for optimism.

Per Klevnäs, partner at sustainability consulting firm Material Economics, part of McKinsey & Co., set the scene for a CEO forum and leadership panel session, noting that Europe’s chemical sector is “an industry that needs to know where it’s headed.” The industry has performed well in the past despite structural disadvantages, but today it is in a “poly crisis” and at an “inflection point” caused by shrinking demand, high energy costs and overcapacity, he said.

Chemical demand in Europe has dropped 10%-25% in the last five years, Klevnäs said. Meanwhile, energy costs have doubled and are set to be triple their former levels when the cost of decarbonization is factored in, and they will likely remain high “for years to come,” Klevnäs said. Overcapacity is expected to cause a further drop in plant utilization in key value chains, he said.

The way out of the crisis lies in structural change, investment to restore competitiveness and a long-term vision to guide and coordinate the industry as it navigates the energy transition, according to Klevnäs.

The chemical sector’s 160 million metric tons per year (MMt/y) of emissions are large, but Klevnäs sees “a growing determination” to shift to circular and bio-based feedstocks. “It is in this space that we have to find a source of renewal,” he said. “We must develop the technologies that we need.”

To establish 20% sustainable carbon across the European chemical industry’s range of products would require about 50 MMt/y of new feedstock to be “mobilized,” of which about 12 MMt/y would be waste pyrolysis oil, he said. Despite the magnitude of the challenge, “a recarbonized petrochemical future is possible, using technologies that are now ready to scale and using feedstocks that have not already been claimed,” Klevnäs said. “We’re more and more confident that this is feasible, but it needs regulatory change and lots of investment,” he said.

Specific requirements listed by Klevnäs are a waste system, from disposal to feedstock aggregation and supply; a regulatory playing field for sustainable feedstocks compared to their other uses; new energy infrastructure to power the production facilities that will be built; significant investment in new technologies and capacity, “with the business case to underwrite it”; and “intense value-chain orchestration” starting with waste.

Participating in the panel session, Lauren Kjeldsen, president/smart materials at Evonik Industries AG, said that the uncertainty surrounding the European chemical industry’s future is “intimidating,” but it can be seen as an opportunity or an “impulse” for positive change. “At Evonik, we look at sustainability as an enabler,” she said.

Christian Kohlpaintner, CEO of Brenntag SE, said during the panel session that the industry cannot afford to wait for EU politicians and regulators to provide a supportive legislative environment for the transition. “We have it in our own hands,” Kohlpaintner said. “This industry has always responded to tremendous pressure from other regions, and it has always responded with a higher degree of specialization.”

However, rationalization and consolidation are a key part of the switch to a more circular and sustainable business model, Kohlpaintner said. “The EU chemical industry is overdue a massive restructuring,” he said. “We need to think as an industry and find a good way for rationalization and taking out capacity.”

The industry needs a new overall business model to achieve the transformation, said Ib Jensen, CEO of Perstorp AB, during the panel discussion. “The top-down structure doesn’t work anymore, if we are to enable people,” he said. “It’s a new mindset and culture.” This includes a company’s approach to innovation. “It needs a new way of thinking,” Jensen said.

A change of business model also involves building resilience so that companies can withstand the pressures of the next 15-20 years, Kohlpaintner said. “You have to set up a company to address all eventualities,” he said.

Kjeldsen highlighted the importance of collaboration in changing the industry’s overall model. “We need to get the ‘village’ together to manage the transformation,” she said. “Fragmentation in European markets makes it hard to get cohesion.”

The European chemical industry’s historical export-oriented business model must also change due to high energy costs, Kohlpaintner said. “Uncomfortable discussions are needed,” he said. “Every change starts with recognizing that what worked in the past doesn’t work anymore.”

Panel participants agreed that despite the challenges, Europe’s chemical industry has fundamental strengths it can build on. “There’s a lot to work with,” Kjeldsen said. “We have a lot of innovation, a lot of competence.”

Kohlpaintner said that the European chemical sector has “tremendous strengths,” including a stable operating environment, a strong education system and the availability of money to finance projects.

However, Europe’s current challenges remain acute and nowhere more so than in the ethylene industry. The sector is mired in weak profitability caused by overcapacity, high costs and fragile demand, said Andy Orszynski, director/ethylene and derivatives at S&P Global Commodity Insights, in a presentation at EPCA. More steam cracker closures and feedstock flexibility could support a recovery, he said.

“We’re in a prolonged period of global overcapacity,” Orszynski said. “Capacity growth is being delayed rather than canceled.” Any recovery is set to be slow and gradual, he said.

Average steam cracker operating rates have fallen in Europe to about 75% today from about 90% as recently as 2018, Orszynski noted. Meanwhile, regional demand growth for petrochemicals, at about 1% annually, is “well below” overall economic growth because the service sector, rather than industry, is driving regional GDP, he said. “Europe can’t grow its way out of this slump,” Orszynski said.

As a result, steam cracker margins are on course to stay low for the rest of the decade, with capacity closures key to a sustained market recovery, he said. However, the cracker closures that have been announced so far in Europe will only “partially offset” announced capacity expansions, he added.

Ineos Group Ltd. is scheduled to start up a 1.4 MMt/y ethane cracker at Antwerp, Belgium, toward the end of 2026, and Orlen SA is planning an ethylene expansion at Plock, Poland. The Orlen project is “under review but not canceled yet,” Orszynski said.

Because of the upcoming capacity additions, “any recovery will stall in about 2027–28,” he said. Meanwhile, cracker utilization is still only likely to be about 85% in 2034.

Most of Europe’s crackers still consume naphtha, placing the region at the high end of the global ethylene cost curve, according to Commodity Insights. Meanwhile, “global peak demand” is looming for gasoline, which will be accompanied by a peak in oil refinery runs, potentially limiting naphtha supply, Orszynski said.

Supplies of natural gas liquids (NGLs) — principally ethane, the most cost-competitive petchem feedstock — are also set to peak between 2030 and 2050, according to Commodity Insights. This will “renew the call” on refining and naphtha to provide sufficient petchem feedstock, Orszynski said.

There is currently a surplus of naphtha, but from 2027 a supply gap will appear, which can for now be alleviated by NGLs, Orszynski said. But this will not last. “So, feedstock security and flexibility are key to remaining viable in the coming years,” he said.

Europe is the only region to operate fewer crackers now than in the 1980s, Orszynski said. The region today accounts for less than 10% of global ethylene capacity, having in the past accounted for about 30%, he said.

Europe’s crackers are also generally smaller and older than in the rest of the world, making them even less competitive. The average European cracker size is now 25% below the global average, and Europe’s crackers are on average 40 years old, compared with the worldwide average of 25 years, Orszynski said. About half Europe’s ethylene plants are also in “isolated clusters” with relatively high logistics costs, he said.

Europe’s crackers nevertheless have a role to play, particularly if they have feedstock flexibility, Orszynski said. The regional ethylene industry has a diverse customer base with, on average, three derivative units per cracker, the same as the global average, he said.

One product defying the pessimism in the global petchem industry is methanol, because of steady demand growth, diverging trends in downstream applications and market tightness on the horizon. “Methanol has enjoyed better conditions than the rest of the industry,” said Olivier Maronneaud, executive director and head of research/methanol and derivatives at Commodity Insights, during a presentation at EPCA.

Commodity Insights forecasts that worldwide methanol demand will grow by 2.4% or 2.3 million metric tons annually between 2022 and 2032. “But the drivers differ significantly across segments,” Maronneaud said.

Chemical applications such as formaldehyde together account for about 50% of total methanol demand, with fuel applications accounting for about 30% and methanol-to-olefin (MTO) production accounting for 20%, according to Commodity Insights.

Demand for chemical applications is growing at about GDP rates, but overcapacity is looming for methanol derivatives such as acetic acid, methyl methacrylate, methyl tert-butyl ether and vinyl acetate monomer, caused by a wave of new capacity in China, Maronneaud said. As a result, global operating rates are set to decline for these products “in the near future,” he said.

Meanwhile, MTO capacity, which is exclusively in China, has “challenged economics with limited new capacity additions anticipated,” Maronneaud said.

However, tightness in methanol markets is coming. “Methanol now has a depleted pipeline of projects,” Maronneaud said. “In the medium-to long term, not a lot of capacity is being built.”

Also, “lots of methanol capacity in Iran and China does not have the capability to run at full rates,” and shipments from major producers such as Iran, Russia and Venezuela are limited by international sanctions, he said. “About 15% of global methanol capacity is in countries that are constrained in terms of exports,” Maronneaud said.

Global methanol plant operating rates are expected to bottom out in the low 60s in percentage terms in 2025 but are expected to recover to more than 65% by 2034, according to Commodity Insights. About 10 MMt/y of new methanol capacity is needed worldwide by 2033, Commodity Insights estimates. “Any trough is expected to be short lived with new projects needed by the end of the decade,” Maronneaud said.

Low-carbon methanol is a growing demand segment, Maronneaud said. “Methanol can be produced in many different ways including with renewable electricity and from biomass,” he said. “Driven by decarbonization targets, low-carbon methanol could find its way into new outlets with significant potential such as shipping, automotive and chemicals.”