Energy: industrial fallout

By Richard North - October 28, 2022

Happy news comes from India, via Reuters, to the effect that Tata Chemicals, one of the top 10 chemical companies in India, have nearly tripled their second quarter profits, helped – we are told – by a strong performance in its basic chemical products segment.

Tata Chemicals are not alone in their good fortune. The Indian chemical industry generally is expected to post healthy earnings, making chemical manufacture the fastest growing industry in India.

What an interesting contrast this makes with the European scene, where the Financial Times has just reported that the chemical giant, BASF, is to downsize “permanently” in Europe. The world’s biggest chemicals company, the FT tells us, is complaining that “high energy costs make region increasingly uncompetitive”.

Moreover, this statement came after the company had opened the first part of its new €10 billion plastics engineering facility in China a month ago, which it said would support growing demand in the country.

Cited by the FT, Martin Brudermüller, the company CEO said: “The European chemical market has been growing only weakly for about a decade [and] the significant increase in natural gas and power prices over the course of this year is putting pressure on chemical value chains”.

BASF, which produces products from basic petrochemicals to fertilisers and glues, spent €2.2 billion more on natural gas at its European sites in the first nine months of 2022, compared with the same period last year.

Brudermüller says the European gas crisis, coupled with stricter industry regulations in the EU, was forcing the company to cut costs in the region “as quickly as possible and also permanently”.

One should note here, that it is not just the energy crisis that is challenging the chemical industry. The EU’s Chemicals Strategy for Sustainability – part of the legislative push to force the chemical industry’s “transition to climate neutrality” – is also having a substantial adverse effect, threatening to wipe €70 billion off the industry’s revenues.

In a longer piece, in Chemistry World, the BASF experience is put into the broader perspective, with the headline: “European chemicals industry struggling to compete as costs surge”.

Written by Maria Burke, she tells us that, for the first time ever, the EU [member states] import more chemicals than they export, both in volume and value, resulting in an EU-wide trade deficit of €5.6 billion for the first half of 2022.

This is according to the European Chemical Industry Council (Cefic) which says the industry – one of the most energy intensive in Europe – is struggling to compete on the global market with businesses from regions enjoying more favourable energy prices.

Says Marco Mensink, Cefic’s director general, “We are approaching the point of no-return: if no emergency solution to the energy prices is provided to our sector. We are not far off the breaking point”, adding: “Hundreds of businesses in the chemical sector are already in survival mode and we have started seeing the first closures”.

One of those is the Czech group Draslovka, the world’s largest maker of cyanide – a chemical essential for the extraction of precious metals from ore – forced to suspend production because of soaring energy prices.

As to BASF, it has signalled that its net income will be significantly down on the same period last year at €909 million, compared to €1253 million in 2021. The company attributes its decline in profits to “deteriorating framework conditions” in Europe, meaning higher prices for both energy and raw materials.

It is having to absorb €740 million in losses associated with its stake in Wintershall Dea, an oil and gas business with shares in the Nord Stream 1 pipeline; it lost €1.1 billion when the Nord Stream 2 project was cancelled after Russia invaded Ukraine.

But even excluding those losses, quarterly earnings were down 28 percent compared to 2021, despite overall quarterly sales revenue increasing by 12 percent to almost €22 billion.

Sebastian Bray, an analyst with Berenberg in London, thinks that BASF will probably reduce its European production of gas-intensive basic chemicals, particularly ammonia. His view is that BASF is considering importing these chemicals from outside Europe to use for processing in its European sites.

With energy costs six to seven times higher in Europe compared to the US, it is not only Asian countries, including China, which are getting the benefit of reduced European competitiveness. Reid Morrison, PwC global energy advisory leader – cited in Chemistry World – tells us that, “There is no gas or energy shortage in the US, while at the same time the US sells liquefied natural gas (LNG) to Europe at high prices”.

Chemical producers remain globally competitive in the US, not least because two thirds of the total energy consumed by the US chemicals industry is derived from natural gas. The outlook for abundant and affordable natural gas and natural gas liquids (NGL) is good, due largely to plentiful and affordable domestic supplies. And since prices are regional, US producers have a competitive advantage when US rates are relatively low.

However, we are told, the chemicals industry is global. The last few months have seen earnings warnings from a range of companies, many headquartered in the US, and all blaming higher energy prices in Europe and lower demand in both Europe and North America. Companies such as Eastman, Dow, Chemours, and Olin have all expressed concern that global economic conditions are worsening faster than expected.

Looking ahead, Reid Morrison predicts that the US chemicals industry will likely attract investment from European-based global players, and possibly from Asia as well, thanks to relatively low energy costs and aggressive tax incentives. “The European chemicals industry”, he says, “will lose ground, in particular, if there is no political willingness to increase energy supply from European resources”.

This is, therefore, exactly the right time for Sushi to abandon fracking once again, without making any provision for alternative energy sources, instead endorsing the push for “net zero”, having supported it at COP 26, stating: “We want to rewire the entire global financial system for net zero”.

However, since it is not just the chemical sector which is taking the hit, but all European-based energy-intensive industries, which include cement, glass and paper manufacture – to say nothing of steel-making – perhaps now is the time to remind ourselves of the coal reserves in the North Sea, where there are between 3 and 23 trillion tonnes under the seabed.

Using recently developed techniques to secure underground coal gasification, the exploitation of a fraction of this reserve would be enough to satisfy industrial energy needs in Europe for the foreseeable future.

Where Volkswagen is prolonging the generation of electricity using coal power at its Wolfsburg plant – some of it to be used to make electric vehicles – we need not be too squeamish about using an abundant source of fossil fuel on our doorstep, especially when the consequence of not doing so would be to speed up still further the progressive deindustrialisation of Europe.

The net effect of European deindustrialisation is simply to transfer important production processes abroad, with no underlying savings in emissions (for those who believe this matters), where much of Tata Chemicals success depends on the fleet of coal-fired power stations operated by its sister company, Tata Power.

It is delusional, therefore, to suppose that we can achieve anything constructive by driving our productive industries offshore, for want of cheaper and more reliable energy supplies obtained from indigenous sources. And yet, delusion seems to be the guiding ethos of our administration.