Four years ago, the outlook was grim for Europe’s chemical industry. Industry representatives spoke darkly about new competitors from China and the Persian Gulf. In a further threat, the US fracking boom unearthed supplies of cheap shale gas, boosting American rivals.
The industry in Europe was in real danger of being wiped out, like the European textile industry before it. Karl-Ludwig Kley, then-CEO of Merck and president of the VCI, the German Chemicals Industry Association, warned that value chains for speciality chemicals were on the verge of disintegration.
But today the picture is transformed. The European chemical industry has undergone an unexpected and rapid renaissance; it is now in better health than ever, coping well with competition from across the Atlantic, and the rest of the globe. Individual company results and industry statistics all show a sector performing strongly. A couple of firms are still struggling, but they are exceptions in a remarkably robust landscape.
Handelsblatt’s research reveals that Europe’s leading chemical companies increased their revenues by around 10 percent in 2017, while their average tax-adjusted profits soared by 27 percent. As a whole, the European chemical sector grew at double the rate of American chemical companies, with returns now approaching American levels.
German giant BASF will post record operating profit this year, along with British rival Ineos. The same is true for Covestro and Lanxess, both of which were spun off from Bayer. Covestro managed to double profits in 2017, while BASF and Lanxess increased theirs by one-third each.
These rates of growth are unlikely to be sustained this year, but already BASF, DSM, Solvay und Lanxess seem set to boost revenues despite negative currency effects. Production statistics show a similar trend. In the strongest set of figures for years, German companies boosted production by 2.8 percent, with the pharmaceuticals subsector growing 3.8 percent. Utz Tillmann, VCI managing director, compares the situation with the boom of 2004 to 2008.
The latest report from European industry association Cefic confirms that the trend is pan-European: the sector has recovered to levels last seen before the crisis, with continent-wide revenue growth at 3.6 percent. Figures from the American Chemistry Council (ACC), the American industry body, suggest European producers are outperforming American and Asian rivals for the first time in years.
The European industry was never really in a bad situation. Markus Steilemann, Covestro CEO
There are a number of factors underlying this European comeback. Restructuring and cost-efficiency measures undertaken in the lean years now seem to be paying off. The changes made by a company like the Dutch manufacturer DSM are typical: in the wake of the crisis, it focused its business on dietary supplements and high-performance materials.
Takeovers are another side to the story. In the last two years, BASF, Evonik, Lanxess and Solvay have all made major American acquisitions, now reflected in their operating earnings. Another key factor has been oil prices, which fell sharply over the last three years. This has helped European producers, whose processes rely more heavily on liquid petroleum, while American companies depend more on natural gas.
Strong economic growth in Europe has also provided a boost, with increasing industrial production driving demand for chemical products. Although the big European chemical firms have all globalized their operations in the last two decades, the European market still plays a key role. For both BASF and Evonik, it represents more than half their business.
The new environment has allowed the European industry’s traditional strengths to return to the fore, including innovation, technical know-how and a well-educated workforce. Covestro boss Markus Steilemann says these factors were briefly obscured by commodity price movements, but the industry is now back on track. “The European industry was never really in a bad situation. And it can remain competitive for a long time if it sticks to the right areas.”
Siegfried Hofmann is Handelsblatt's chemical and pharmaceutical industries correspondent. To contact the authors: [email protected]