The past few years have been tough for the European chemicals industry, to say the least. What two decades ago was the most productive and technologically advanced chemicals complex in the world has been steadily losing ground to more competitive U.S. production and the growing demand juggernaut that is China. The events of the last few years have had major chemicals companies, most noticeably BASF, downsizing their commitment to the region and seeking to move production elsewhere. Those that have stayed have faced significant headwinds: INEOS was recently forced to suspend its major “Project One” ethane cracker after it ran afoul of nitrogen pollution regulations. I’ve been thinking a lot about this issue in preparation for my talk at the Lux Forum Amsterdam, “Beyond Decarbonization: Rethinking Sustainable Innovation Strategies for Europe.” I want to examine the structural factors that are holding back the European chemicals industry and make the case that, despite the grim headlines, chemicals firms in the EU are probably due for a rebound rather than a long slide into the dustbin.
What are the structural factors that have held back the EU chemicals industry? There are three that I think have been most important — and particularly painful — in the last few years:
- Energy and feedstocks: The biggest structural factor is the EU’s disadvantage in fossil fuel feedstocks. This is not news to anyone, but in the last decade or so, the shale revolution in the U.S. has made very cheap natural gas feedstocks available to chemicals companies there, making U.S. chemicals production extremely competitive, on par with the oil-rich Middle East. The EU has responded to this by attempting to get oil and natural gas from its nearest neighbor: Russia. The Nord Stream pipeline was a co-investment by BASF — until it was destroyed following Russia’s invasion of Ukraine. The energy crisis of last year was really the perfect culmination of a decade of disadvantaged feedstocks, which has made it extremely difficult to justify any further investment in the region by many chemicals companies.
- Investment and underinvestment: The biggest economic story in the past year has been the U.S.’ recommitment to industrial policy, with the government spending hundreds of billions of dollars to invest in areas like hydrogen, decarbonization, and the energy transition. Incentives have drawn investment from around the globe to the U.S., especially for advanced technologies like carbon capture and hydrogen electrolysis. The response it has generated in the EU has been heavier on complaints about how industrial policy is not playing by free market rules than it has on putting similar fiscal muscle behind the European transitions. This comes on top of a decades-long austerity trend in the EU, where the continent that was a leader in solar development, and deployment fell behind for lack of investment, even during a time of low interest rates.
- Demand: Much of what I said about energy and feedstock disadvantage applies to China as well. Despite that, China has risen to prominence as a chemicals production hub, while the EU has lagged. What explains this difference? Of course, it’s that China’s economy has experienced meteoric growth over the past four decades, while the EU’s economic growth has been tepid. Slow growth has made it tough to justify continued investment in the EU, contributing to the further stagnation of its chemicals sector. Plus, the demand from China is heavily tilted toward basic chemicals and polymers to support its construction sector (for example), which further exacerbates the EU’s fundamental feedstock weakness.
So why am I optimistic? It’s not that these factors are going to change but rather that they’re going to matter less in the future. The chemicals industry in the EU is going to embrace new production approaches, including fermentation, mechanical recycling, and chemical recycling like depolymerization, as well as the development and export of technologies to other regions. There are a few things that will help: First, the EU is going to learn from the lessons of the U.S. The EU chemicals and energy industries are very involved in the energy transition in the U.S., with many EU companies like Air Liquide and Evonik playing major roles in U.S. hydrogen hubs, and they will bring lessons from those projects back to the EU. I also think European governments will lean into more aggressive direct funding of technology scale-up, spurred on by their global counterparts. Third, growth for the overall chemicals industry is likely to shift more toward consumer chemicals and specialty chemicals as pressure on plastics grows and China’s growth engine slows — these products are really well aligned with the EU’s existing strengths and new technologies.
The EU will never match Houston or the Middle East as a pure petrochemical hub. There’s simply not enough density of energy resources or biomass in the EU to match that of these regions. There will be companies that can succeed at defending the traditional refinery in the EU, but there can only be a few winners; there will be far more losers. EU chemicals players need to get on board with these new production approaches or get ready for an extremely rough ride.