Understanding Europe’s Chemical Industry (Without a Nobel in Chemistry)


​The scientific community - as well as betting agencies - had a frenzied week. The identity of the new Nobel Prize laureates is always a cause for an excited guessing game. Odds were calculated. Big names were thrown around. Interestingly, when it came to the chemistry award, a list of researchers tipped to win the award did not include any Europeans. The annual prediction published by Thomson-Reuters included scientists from the US, Hong-Kong, and Japan. 

Eventually, Frenchman Jean-Pierre Sauvage, Dutch scientist Bernard Feringa, and Scottish-born Fraser Stoddart won the accolade “for the design and synthesis of molecular machines”.

Admiteddly, drawing a direct link from the award to the European industry itself will be based on conjecture. The world where companies win and lose operates by its own rules. But still, this week we published a new report about Europe’s chemical sector.


Its main findings:  the industry is in overall good shape. A 10% operating margin rate is expected in 2016. This explains the“low” sector risk rating attributed by Euler Hermes across Europe, despite uneven trends in production volumes

However, performance relies on cheap feedstock prices. The -60% plunge in the naphtha price since 2013 helped counterbalance flat revenues. It is nice, even crucial sometimes, to purchase an important source material at a much lower cost. But a short-term reliance on low energy prices to offset Brexit-related uncertainties and weak international trade which hamper production growth rate (2016 forecast +1.3%) could spell trouble in the long run. 

Where from? Asia and the US. By the next decade, upstream US players are poised to reap the benefits of important investments in new plants.

For the time being, the game is all about feedstock costs. But even on this front American upstream chemical companies have enjoyed a leading command. Fueled by the shale gas windfall and low energy prices US firms benefitted from low production costs of the all-important ethylene. 

Ethylene is utilized as the basic building block in the production of a wide range of plastics, solvents, and cosmetics. The olefin accounts for 46% of chemical sales worldwide. Global production reached 140 million tons in 2015, up 3.5% compared to 2014 due to new Chinese capacities. Important indeed.

As ethylene’s manufacturing process requires the use of fossil fuels as raw materials, its production price is highly dependent on fluctuations in feedstock prices. 

A critical divergence comes into play here: European companies tend to utilize naphtha, which is manufactured out of crude oil, as their primary feedstock. American production is mostly ethane-based and thus impacted by the price of natural gas.

Since the beginning of the decade, the US shale revolution ushered in a tectonic shift in North American gas prices. These were twice as low as in Europe and three times lower than in Asia. Feedstock costs in the US have plummeted and American (petro)chemical companies enjoyed a significant advantage and growing market share gains. 

On the other side of the ocean, European petrochemical players suffered. Things changed with the collapse in the price of oil, and consequently naphtha, providing the Europeans with a much-needed reprieve. 

And what should European players do, then? Focus on investment in innovative chemical activities downstream. This is where they can generate higher added value and set themselves apart from the competition.

The European future, therefore, lies in smart and pinpointed investments in innovation. Perhaps the business world and Nobel universe are not set so far apart after all.

Ludovic Subran 

Chief Economist 

Euler Hermes 

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