Preparing for the Upturn

There is general consensus that the chemicals industry should experience a pick up in 2010. The push to green technologies is likely to prompt growth in the sector, as Muriel Axford reports.


As 2009 draws to its close there are some reasons for optimism within the chemicals sector. But the outlook for 2010 in terms of how the industry will emerge from the economic downturn remains uncertain.

That said, there are many challenges that the chemical industry can embrace and use to cement its place at the forefront of providing solutions to many of today's pressing global issues.

Not least of these issues is the reduction of greenhouse gas emissions. While the producers of bulk chemicals such as polyolefins have been cast as one of the major contributors to global warming, the industry has long argued that many of the materials it produces are proving essential in the fight to reduce global warming.

"The industry has long argued that many of the materials it produces are proving essential in the fight to reduce global warming."

The world leaders' summit on global warming held in Copenhagen during December 2009 provided the perfect platform for the industry to set out its stall and explain what it can do to help.

UK-based consultant providing analysis of chemical and petrochemical markets International e-Chem chairman Paul Hodges says that low carbon technology is one area where the chemical industry and the wider public are able to meet and agree.

"While the industry is focusing on getting through the downturn, it must also keep sight of the opportunities that the area of low carbon technology provides. We are not just looking at insulation and construction materials but materials that can be used in the automotive sector, to produce lighter, more fuel efficient vehicles," Hodges says.

A report commissioned by the International Council of Chemical Associations (ICCA) puts the chemical sector at the heart of the solution process for reducing GHG emissions.

The "Innovations for Greenhouse Gas Emission Reductions: A new ICCA report on a life cycle quantification of carbon abatement solutions enabled by the chemical industry" report states that chemical products have a twofold effect on greenhouse gas emissions. "GHGs are emitted in the manufacturing of chemical products, whilst at the same time the use of many of these products enables significant reduction in global emissions. [The reduction] can be far in excess of the amount of GHG emitted during their production."

Along with the fight on global warming the coming year will see the chemical industry continue its push to provide solutions for a host of environmental issues. Indeed, the end of 2009 saw the chemical major BASF launch a biodegradable plastic. The plastic, called EcovioFS, is part of an existing product line and has been developed for coating paper and for manufacturing so-called shrink films, which are used to wrap packaged goods. It is set to reach the marketplace during the first quarter of 2010.

"The Reach law came into force during 2007 and impacts any chemical producer or user who wants to sell products in the EU."

Arguably, some of the most pressing short-term challenges for the industry centre on compliance with the EU's Reach legislation, the glut of new capacity set to come onstream and ultimately dealing with a prolonged recession as well as being prepared for the anticipated upturn.

The Reach law came into force during 2007 and impacts any chemical producer or downstream user who wants to sell products in the EU.

The legislation set out a series of deadlines by which certain data have to be submitted. These data submissions are a costly business and whatever the economic climate, it is mandatory to comply.

So it was, in the light of economic difficulties that Solvay CEO and European chemical industry association (CEFIC) President Christian Jourquin expressed the industry's "serious concern" about Reach.

Giving a mid-term speech at the beginning of October 2009, Jourquin said: "The chemical industry fully supports Reach. However its implementation is proving to be more complex than expected by all registrants. We are doing more that foreseen by the legislation, helping our companies and other industries with technical and legal support. We are backing the ECHA [European Chemicals Agency] as much as we can to sort out the difficult SEIF [Substance Information Exchange Forum] issue, but there are limitations to what can be achieved by private organisations."

Denting the upswing

Dealing with Reach may be proving problematic but the final two quarters of 2009 brought some much needed positive news for producers with improvements in sale volumes, if not pricing.

Much of the demand for commodity chemicals came from China in 2009 where manufacturing, spurred on by the Chinese government's stimulus package, has continued.

Hodges sounds a note of caution. "We are not sure what the impact will be when stimulus packages are eventually withdrawn," he says. "At the same time many of the goods produced in China are set to be sold in the West where we are still seeing rising unemployment."

"At the end of 2010, production levels for chemicals will still be 11% below the previous peak in the first quarter of 2008."

But it is the new capacity, mainly in China and the Middle East, coming on stream now, and predicted to last through to 2013, that could cut the upswing short. Hodges is concerned about the impact of this new capacity. "There will be many producers for whom the new capacity will prove too much. Running plants at unsustainably low utilisation rates will leave many producers with no option but to close their plants." "We are likely to see intense competition for market share in the coming year and this too could have a negative impact on many businesses," Hodges says.

The pressure that the chemical industry in Europe could expect during 2010 from the falling away of economic stimulus packages and new production capacity was spelt out by CEFIC. While projecting positive year-on-year growth in 2010 Cefic cautioned that recovery would be fragile.

"At the end of 2010, production levels for chemicals will still be 11% below the previous peak in the first quarter of 2008. This implies that the industry is operating far below its optimal capacity utilisation level, which in turn means lower production efficiency and reduced margins," it said in November.

Cefic also conceded that the road to recovery was likely to be a long one. "Industry is well placed to respond to higher demand once confidence returns and downstream customers start to rebuild inventories. Everything considered, it is likely to be several years before previous peak output levels are regained."

Period of adjustment

There is a consensus that for the chemical sector 2010 will be a year of major adjustment. "Consumer demand isn't expected to pick up substantially during 2010, indeed unemployment looks likely to rise, although at a slower pace," Hodges says. "Once packages such as the UK's car scrappage scheme are with drawn then demand could fall back and hit the chemical sector hard."

"Once packages such as the UK's car scrappage scheme are with drawn then demand could fall back and hit the chemical sector hard."

But this period of adjustment may not be all bad. "There will be a shake out and we could yet see more rationalisation during 2010. For anyone who is cash rich, this could provide an opportunity to acquire some good assets," Hodges says. "At the same time it should be an opportunity for the chemical and wider manufacturing and business sectors to consider how they can move forward, but in a more sustainable way."

At the same time chemical companies have shown that swift action and flexibility can turn a negative into a positive. During September 2009 Germany's speciality chemical company Lanxess won the ICIS Company of the Year award.

Lanxess said that its formula for sustainable success was based on a business portfolio focused on innovative speciality products, leading market positions, regional diversification and entrepreneurial management.

It would be fair to say that 2010 is set to be turbulent. But for those businesses able to take advantage of the many opportunities presented by some of the world's most pressing issues, it will prove to be a very busy year indeed.