201001 EuroChem_Europe_Final.pdf

8/17/2019 201001 EuroChem_Europe_Final.pdf

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CHEMICALS

The Future of theEuropean ChemicalIndustry

KPMG INTERNATIONAL


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About KPMG’sGlobal Chemicals PracticeThrough its member firms, KPMG hasinvested extensively in developing a highlyexperienced chemicals team.

KPMG’s understanding of the industry comes from KPMG member firms’ global

experience, knowledge sharing, industry training and the use of professionals

with chemical industry experience as well as participation in a variety of industry

forums.

KPMG member firms work with many of the chemical industry market leaders,

using their industry experience to understand the business priorities as well as

the strategic challenges faced by these organizations.

Our presence in many international markets enables our firms’ professionals to

assist clients in recognizing and making the most of opportunities as well as

advising on the implementation of the changes dictated by industry

developments.


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Executive summaryThe European chemical industry is facing the dawn of a new reality. While the industry worldwide is still reeling from the

current cyclical downturn and the recent global recession, chemical companies in Europe are faced with the ongoing riseof new competition in the Middle East and Asia (especially from China and India). These factors appear to be driving an

inexorable shift eastward in the global chemical industry, particularly at the bulk / commodity end of the sector.

Indeed, our research suggests that new global capacity being developed in the coming years will render 14 of 43 crackers

in Europe uneconomic by 2015. The closure of these plants would correspond to the loss of 26 percent of total cracker

capacity in Europe.

At the same time, Middle Eastern chemical producers continue to seek expansion along the value chain into higher value-

add solutions. Their Chinese counterparts are attempting to fulfill a government directive to make the country self-sufficient

in chemicals. These Middle Eastern and Chinese entities are often cash-rich and backed by government support. A rapid

path to achieving these goals appears to be offered by acquisition of technology and intellectual property from a European

chemical industry seemingly beset by structural problems.

However, KPMG believes that the death knell of the European chemical industry has been sounded prematurely. This

remains an industry that employs over 1.2 million people and contributed in 2007 to a European Union (EU) trade surplus

in chemicals of EUR35.4 billion.1 There is no doubt that the shape of the global chemical industry is changing, but the

industry in Europe can continue to play a significant role in this new reality if it can:

• Make hard choices now to rationalize unprofitable facilities that might not be able to compete with newer, more

efficient plants being built outside of Europe

• Ruthlessly identify which chemical clusters will remain competitive on the global stage and focus resources and

investment in these areas to ensure their long-term survival

• Capitalize on its historic advantage in innovation to stay ahead of the competition, especially in terms of sustainable

solutions which will be increasingly in demand

• Leverage its long-standing customer relationships to develop more specialized, higher-performance solutions

• Actively seek beneficial joint ventures and strategic alliances that provide access to both cheap Middle Eastern

feedstocks and growing Asian markets

Many European companies are already recognizing the possible advantages — and the necessity — of repositioning

themselves as solutions providers rather than just basic suppliers for their customers. This can include finding new ways to

work with companies that have traditionally been perceived as major competitors. The companies that successfully achieve

this transition should be better positioned to meet the global competitive challenges of the 21st century.

1 “High Level Group on the Competitiveness of the European Chemicals Industry, Final Report,” European Commission, July 2009

The European chemicalindustry must capitalise onits historic advantage ininnovation to stay ahead of

the competition. Chris StirlingHead of Chemicals,KPMG in Europe


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2 THE FUTURE OF THE EUROPEAN CHEMICAL INDUSTRY


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THE FUTURE OF THE EUROPEAN CHEMICAL INDUSTRY 3

Contents1. Current state of the industry in Europe 4

1.1. Industry overview 4

1.2. Impact of the current downturn 8

2. Challenges from the East 12

2.1. A global shift 12

2.2. Middle East 17

2.3. China 21

3. Innovation: the key to survival 24

3.1. Evolving from commodities to specialties 25

3.2. Maintaining a technological advantage 26

3.3. Strengthening customer relationships 28

3.4. Developing joint venture relationships 28

4. Case study – Going green with

Cognis – a flexible strategy 30

5. Case study – BASF – verbund

manufacturing 32


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As with any crisis, the recent economic downturn presents both risks and

opportunities for businesses. This is especially true for the European chemical

industry. Long a powerhouse in the global economy, the industry now faces the

need to make difficult choices about its future development and role in the face

of increased competition from overseas.

KPMG member firms believe that today’s risks need to be clearly assessed,

especially in the light of continued economic uncertainty. We also feel, however,

that companies can respond with innovative solutions in terms of market focus,

technology and business relationships. Properly developed and managed, these

innovations can help companies to not only adapt and survive but even thrive inthe 21st century.

1.1 Industry overview

Geographic breakdown of world chemicals shipments

0

100

150

50

200

250

300

350

400

450

500

550

600

650

700

750

800

850

900

736

529

157

113

109

304

204

375

C h e m i c a l s s h i p m e n t s ( €

b

i l l i o n )

World chemicals shipments in 2008 were €2,257 billion***The EU accounts for 29.1% of the total

Other* = Oceania and AfricaRest of Europe** = Switzerland, Norway and other Central & Eastern Europe.

World chemical shipments*** = ACC uses as a proxy for sales

A S I A

= 8 8 3

E U

2 7 = 5 3 7

Asia

China

JapanRest of Asia

2008

EU 27 NAFTA Latin America Rest of

Europe**

Other*

EU

Source: American Chemistry Council, 2009

Current state of the industryin Europe


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EU chemical industry sales by country

Percentage share of European chemical sales

Big 8 = Germany, France, Italy, United Kingdom, Netherlands, Spain, Belgium and Iceland

NL 10.2%

UK 10.3%

IT 11.0%

FR 14.5%

DE 25.3%

ES6.7%

BE5.8%

IE4.5%

Other11.7%

PLSE

AT

FI

CZ

HUPT

RO

Others

2.3%1.7%

1.3%

1.3%

0.9%

0.7%0.7%

0.6%

2.2%

Source: Cefic Chemdata International

Sector-wise breakdown of EU chemical industry sales

Perfumes & cosmetics

Soaps & detergents

Petrochemicals

Plastics & synthetic rubber

Man-made fibres

Other basic inorganics

Industrial gases

Fertilisers

Other specialty chemical

Paints & inks

Crop protection

Pharmaceuticals

Base chemicals 44.8% Pharmaceuticals 27.4% Specialty chemicals 17.0% Consumer chemicals 10.8%

Source: Cefic Chemdata International and Eurostat


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The European chemical industry drives a significant part of the economy across

the EU. Over 1.2 million workers are employed in the industry, manufacturingproducts, supporting research and providing supplies in many regions of the EU.

The European chemical industry is based on the following four categories of

products:

• Base chemicals that include petrochemicals, their derivatives and basic

inorganics. Produced in large volumes, they are sold as commodities to

manufacturers in the chemical industry or to other industries.

• Specialty chemicals that are for specialized use and produced in lower

volumes than base chemicals. Examples include ingredients used in

adhesives, additives, plastics, coatings, paints and inks, crop protection,

dyes and pigments etc.

• Pharmaceuticals including both basic pharmaceutical products and

pharmaceutical preparations.

• Consumer chemicals that are sold to end users and consumers in the

form of soaps, detergents, perfumes and cosmetics.

Large industrial customers represent 25.1 percent of chemical consumption in

the EU. This category includes metals, mechanical and electrical industries,

textiles and clothing, the automotive industry and paper and printing products.

The remaining areas of chemical consumption can be divided into the following:

• 30.3 percent for end users in private households, government and non-profit

organizations

• 16.4 percent for services

• 6.4 percent for agriculture

• 5.4 percent for construction

• 6.1 percent for manufacturing not listed above

• 10.3 percent for other industries2

Over the years, the European chemical industry has shown considerable

resilience, strength and adaptability. In 2007, 12 of the 30 leading chemical

companies in the world were headquartered in Europe, representing 10 percent

of world chemical sales.

Recent industry growth has been driven mainly by regional sales. From 1997 to

2007, sales more than doubled among EU partner countries.3 This growth has

been supported by the removal of trade and nontrade barriers among the EU

countries and by the size of the internal market — almost 500 million consumers

across Europe.

In 2008, 23 percent of European chemical sales were for customers outside of

the EU, in particular to markets in North American Free Trade Agreement(NAFTA), neighboring countries (especially Turkey and Russia) and Asia. 4

2 “Facts and Figures: The European chemical industry in a worldwide perspective: 2009,” Cefic3 Ibid.4 Ibid.

We see asustainable futurefor chemical

companies inEurope based onspecialties andbetter strategiesto support thesuccess of thecustomer.


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1.2 Impact of the current downturn

European chemical industry output, July 2008 — August 2009

-12.00%

-10.00%

-14.00%

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

% c

h a n g e o n y e a r e a r l i e r

J u l y

A u g u s t

S e p t e m b e r

O c t o b e r

N o v e m b e r

D e c e m b e r

J a n u a r y

F e b r u a r y

M a r c h

A p r i l

M a y

J u n e

J u l y

A u g u s t

Source: CIA Matters

EU chemicals production: sector outlook

-25

-20

-15

-10

-5

0

5

10

15

P r o d u c t i o n ( v o l u m e ) : g r o w

t h r a t e ( y o y )

-6.6

5.0

-20.1

-5.5

5.3

-19.7

-4.5

4.7

-12.4

-4.6

6.0

-10.6

-3.8

5.5

-9.3

-1.9

2.6

-6.5

Consumer

Chemicals

2008 2009 2010

Specialty

Chemicals

Petrochemicals Chemicals Polymers Basic Inorganics

Source: Cefic Economic Outlook Task Force (November 2009)

Like virtually every other industry worldwide, the European chemical industry

has felt an enormous impact from the recent global recession. At its lowest point

in March 2009, the industry saw a monthly year-on-year decline of 13.2 percent,

a figure that if annualized would represent an output decline of approximately

EUR56 billion.5

Describing the industry downturn, Graham van’t Hoff, Global V.P. Base Chemicals

at Shell said, “There was a complete meltdown of demand in the fourth quarter

of 2008,” adding that,“ a double whammy is coming at us [as] we now face a

supply-lead problem caused by the new Middle East capacity.”6

5 CIA Matters, July 20096 “Can the European petrochemical industr y compete against emerging producers based in the Middle East?,” Chemical Week, September 21, 2009


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In Europe, the chemical industry saw massive reductions in demand for plastics,

paint and man-made fibers, especially in key markets such as automotive and

construction. This fall in demand led to a severe destocking by many companies,

with some companies (particularly in the base chemicals, polymers and specialty

chemicals sectors) watching their own output decline by 30 to 60 percent. 7

Tight credit continues to hold back recovery. Many large companies are finding

major credit lines both difficult and expensive to obtain. Small and medium

enterprises (SMEs) are experiencing even greater difficulties in obtainingguarantees and letters of credit for imports and exports. The credit ratings for a

number of chemical companies have been downgraded, prompting banks to

carefully re-evaluate the entire industry. However, the bond markets in Europe

are currently relatively healthy, providing access to financing for those

companies that retain an investment-grade credit rating.8

7 “Reaction: KPMG’s views on the economic outlook for the chemical industry,” September 20098 “Weathering the Storm: the Chemical & Pharmaceutical Sector,” webcast conducted by Chris Sti rling, KPMG

“Largecompanies arefinding majorcredit lines bothdifficult andexpensive toobtain.

”


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Many analysts and industry observers predict a gradual though modest recovery,with demand not returning to 2007 levels until probably 2012 or even later. Cefic,

European Chemical Industry Council expects a five percent increase in output

growth in 2010 compared to 2009.9 Henrik Meinke, writing on behalf of the

European Chemical Marketing and Strategy Association (ECMSA), also offers

guarded optimism, suggesting that a significant global recovery should not be

expected before 2011, although industry conditions should improve in 2010.10

In the meantime, the industry recognizes that hard decisions need to be made,

and these have included downsizing and massive restructurings, which to date

have resulted in the redundancy of approximately four percent of the pre-

recession chemical industry workforce in Europe. Clariant, for example, sought to

shrink its workforce by a total of 3,220 positions in 2009 (equivalent to 17 percentof its global workforce).11 Akzo Nobel has announced plans to cut 20 percent of

the workforce at its Amsterdam head office and Arnhem shared service centre. 12

Even with recovery, the European petrochemical industry and its markets may

continue to contract. Many end-user industries have started to move operations

outside of Europe. The textile industry has offshored to the Middle East and Asia

to be closer to high-growth markets and benefit from lower manufacturing and

logistics costs. Parts of the automotive industry have moved to Eastern Europe,

followed by their tier 1 and tier 2 suppliers to improve their competitiveness.

9 “EU chemical industry expected to follow a modest and fragile recovery in 2010,” press release, Cefic,17 November 200910“INSIGHT: Gathering signs of recovery for chems,” ICIS, 11 March 200911“Clariant To Cut 570 Jobs,” Chemical & Engineering News, 30 November 200912“Results fall on weak demand; economy begins to stabilize,” Chemical Week, 2 November 2009


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A key issue is how the European chemical industry and European governments

seek to respond to these changing dynamics. Certainly recently, there has beena trend toward protectionism in the industry. China, the EU and India recently

initiated anti-dumping measures against the Middle East.13 China has also

imposed definitive anti-dumping duties of between 5.9 percent and 35.4 percent

on imports of adipic acid from the EU, Korea and the US.14

With the scale of capacity expansion under way in the Middle East and Asia likely

to result in significant overcapacity in the industry in the medium term, there is a

real danger that individual countries or regions could resort to protectionist

measures which is likely to harm the industry and hamper growth. Whilst new

plants are typically in the lowest-cost position on the global cost curve and, as a

result, can expect to be profitable in most market conditions, older plant in

Europe is likely to become uneconomic.

Global ethylene capacity and demand

100

110

90

80

120

130

140

150

160

170

180

m i l l i o n t o n n e s )

2007 2008 2009 2010 2011 2012 2013

Global capacity Global demand

Source: Bank of America Securities/Merrill Lynch

KPMG analysis shows that European petrochemical capacity may decline

dramatically in the coming years. According to recent estimates, 40 out of 200

crackers worldwide are likely to become uneconomic by 2015, and approximately

14 out of these 40 will be in Europe. The closure of these plants would

correspond to the loss of 26 percent of total cracker capacity in the EU. Similarly,

10 out of 17 European ethylene glycol plants may become uneconomic,

corresponding to 65 percent of total European capacity.15

US chemical producers are likely to be similarly impacted. However, there is a

sentiment within the industry that the US will be more ruthless in restructuring

uneconomic plant as the industry there is less encumbered by political issues

which can make restructuring difficult in Europe. The challenge for the European

chemical industry is to resist the urge to hide behind protectionist barriers.

Rather, there should be a process to identify and rationalize chemical plant and

clusters made uneconomic by the new world order (principally, likely to be

small, land-bound, non-integrated units). This should allow future investment to

focus on those areas in which the European chemical industry remains

competitive on the global stage (see verbund manufacturing, section 5). “Clariantsought to shrinkits workforce bya total of3,220 positionsin 2009.

”13“Antidumping Cases Target Mideast Petchem Exports,” Chemical Week, 30 November 20 0914“China Dumping Duties,” Chemical Week, 16 November 20 0915KPMG research and analysis


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As European chemical companies recover from the recession, they will face even

greater challenges from increased competition overseas. Although most of this

competition will come from the Middle East and China, the relative importance of

these regions can be best understood as part of a larger transition in economic

strength from developed to emerging markets.

2.1 A global shift

International comparison of chemical production growth

1997 – 2007

P r o d u c t i o n

i n d e x

( 1 9 9 7

=

1 0 0 )

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

2007

95

105

115

125

135

145

155

165

175

Average growth p.a. (1997-2007)

Asia Pacific* 5.7%Latin America 3.2%

NAFTA 1.4%EU 1.3%

EU NAFTA Asia Pacific* Latin America

*Asia Pacific includes Japan, China, India, Korea, Malaysia, Philippines, Singapore, Taiwan, Thailand, Pakistan,Bangladesh and Austraila

Source: Cefic Chemdata International

Challenge from the East


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Chemical demand (excluding pharma)

2008 EUR1,700 billion

€650billion

€1,150billion

2020 EUR2,400 billion

Rest of world 10%

South America 6%

Western Europe 25%

North America 21%

Asia Pacific

Rest of world

South America

Western Europe

North America

Asia Pacific

+ 4. 5 – 5. 0 % p.a.

38%

11%

6%

19%

18%

46%

Source: BASF, 2008

World natural gas costs

Canada

US

Venezuela

Argentina

Trinidad

Russia$1.25

West Europe

Ukraine$3.60

North Africa$0.75

Indonesia

Middle East

$5.75

$6.75

$0.80

$1.50

$2.50

$7.60

$2.00

$0.75

Source: JP Morgan’s Chemical primer, June, 2008


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Global ethylene trade

-15

-10

-25

-20

-5

0

5

10

15

25

20

( m i l l i o n t o n n e s )

Net imports

North America South America West Europe Middle East

India Sub. Northeast Asia Southeast Asia Others

2002 2003 2004 2005 2006 2007 2008 2009f 2010f 2011f 2012f

Net exports

Source: Jadwa Investments, GPCA Annual Forum, December 2009


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New polyethylene plants planned for start-up, October 2009 – 12

Company Location GradeCapacity ('000

m.t./p.a.) Startup

Saudi Kayan Saudi Arabia HDPE 400 Q1 2011

Saudi Kayan Saudi Arabia LLDPE 400 Q1 2011

Qatofin Qatar LLDPE 450 End 2010

Borouge 2 UAE HDPE 540 Mid 2010

Borouge 2 UAE LLDPE 650 Mid 2010

Ilam PC Iran HDPE 300 2010

Kermanshah Iran HDPE 300 2010

Lorestan Iran HDPE 300 2010

Kordestan Iran LDPE 300 2011

Mahabad Iran HDPE 300 2011

Sinopec Tianjin China HDPE 300 Online 2009

Sinopec Tianjin China LLDPE 300 Online 2009

Sinopec Zhenhai China LLDPE 450 Q2 2010

Baotou Shenhua China PE 300 May 2010

PTT Chemical Thailand LLDPE 400 Online 2009

PTT Chemical Thailand HDPE 300 Online 2009

Siam Cement Thailand HDPE 400 Mar 2010

Siam Cement Thailand LLDPE 350 Mar 2010

Haldia PC India PE 670 Jan 2010

GAIL India HDPE 200 Apr 2010



Indian Oil Corp India HDPE 350 2012

Indian Oil Corp India HDPE 300 2012

BPCL India HDPE 220 After 2010

ONGC India HDPE 360 Dec 2012



Total 9,940

Source: Platts, GPCA Petrochemical Report, December 2009

Top 10 chemical producers (sales value), 2008

Rank Company Country1. BASF Germany

2. Exxon Mobil US

3. Dow Chemical US

4. Royal Dutch Shell UK/Netherlands

5. Ineos UK

6. SABIC Saudi Arabia

7. Lyondell Basell US/Netherlands

8. Sinopec China

9. DuPont US

10. Total France

Source: Chemical Week


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Top 10 chemical producers, 2015?16

Rank Company Country

1. SABIC Saudi Arabia

2. BASF Germany

3. Reliance India

4. Exxon Mobil US

5. Sinopec China

6. Sinochem China

7. Dow Chemical US

8. Saudi Aramco Saudi Arabia

9. Dupont US

10. ADNOC / IPIC Abu Dhabi

Source: KPMG in the UK, December 2009

Even before the current recession, the European chemical industry saw a gradual

but steady decline in global market dominance. This shift can be measured by a

number of metrics.

• Between 1995 and 2005, world chemical production increased by almost 40

percent. However, over 95 percent of that growth was concentrated in

developing countries.17

• From 1997 to 2007, global chemicals sales increased by 60 percent, but the

portion of global EU sales declined by 2.7 percent.18

• BASF estimates that global chemical demand from 2008 to 2020 will increase

eight percent in the Asia-Pacific region but decrease six percent in Western

Europe.19

Several factors can be cited to explain this shift in market leadership. For

example, the cost of raw material feedstock is significantly higher in Western

Europe than in most other regions of the world, and this cost difference will

almost certainly continue in the future.

In particular, it should be noted that chemical producers on the US Gulf coast

have an advantage over Europe since they are primarily fed by lower-cost ethane

rather than the more expensive heavy feeds that supply Europe.

In addition, strong demand in Asian markets supports growth in production for

domestic chemical companies in that region. Meanwhile, weakening consumer

demand for end products in Europe has led to significant underutilization of

capacity, plant shutdowns and margin erosions.

As a result, most analysts and industry observers agree that the global chemical

industry will continue in its steady shift to the East, with a greater portion of

chemical majors headquartered outside the EU in the future. In 2008, 4 of the top

10 chemical producers were located in Europe, but KPMG suggests that by 2015,

only 1 of the top 10 producers is likely to be still in Europe while six are likely to

be based in the Middle East or Asia.“Between1995 and 2005,

95 percent ofworld chemicalproductiongrowth wasin developingcountries.

” 16“This assumes that the rate of growth in petrochemical companies continues at the current rate until 2015.”17“The state of the European Chemicals Industry – a thoughtstarter for the High Level Group on the competitiveness of the European ChemicalsIndustry,” European Commission, 200718“Facts and Figures: The European chemical industry in a worldwide perspective: 2009,” Cefic19BASF, 2008


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This will mark the conclusion of the process to break up the majority of the

historic, integrated European chemical giants (which began with the break up of

the likes of Hoechst and ICI), with their 21st century equivalents being created in

the Middle East and Asia. The opportunity for European chemical producers is to

focus their remaining activities on emerging mega-trends and to retain a level of

flexibility that enables them to rapidly adapt as these trends change.

2.2 Middle East

Middle East – Major ethylene oxide producers

The Kuwait Olefins Co - (TKOC)

Equate Petrochemical Co

Yanbu National

Petrochemical Co - (YanSab)

Rabigh Refining and

Petrochemical Co - (Petro-Rabigh)

Jubail United Petrochemical

Co - (JUPC)

Eastern Petrochemical Co - (Sharq)

Saudi Kayan Petrochemical Co

Arabian Petrochemical Co

Ras Tanura In tegrated

Petrochemical Co

Arak Petrochemical Co - (ARPC)

Marun Petrochemical Co

Gachsaran Petrochemical

- (Arvand)

Morvarid Petrochemical Co

Farsa Chemical Co

ExxonMobil Chemical/

Qatar Petroleum

ChemaWEyaat

Duqm Refining & Petrochemical

Complex - (DRPC)

Plants operating

Plants under study/planned/construction/delayed

Major seaports

IraqTo Lebanon

Qaisumah

Riyadh

East West Petroline

Yanbu

Muajjiz

Rabigh

Jeddah

Iraq Pipeline Across

Saudi Arabia

East West NGL Line

Saudi Arabia

Yemen

Oman

UAE

Kuwait

Zubair

Al Jubail

Riyadh

PS3

Ras Tanura

Shaybah

Safaniya oil field Zuluf oil field

Shaybah oil field

Ghawar oil field

Mazalij Manjoura

Shaden Waqr Tinat

Niban gas fields

North & South

Kidan gas fields

Iran

Qatar

Ca. 60% of Saudi Arabia’s

natural gas reserves consist of

associated gas mainly from

Ghawar Shaybah and Zuluf fields

Source: BP statistical review the world energy 2007 and ICIS plant research as of October 2008.

Updated by KPMG International, 2009

Operating margins, 2008

0

5%

10%

15%

20%

25%

30%

90

28.4

5.5

3.8

7.79.2

4.8

SABIC BASF Dow Chemical ExxonMobil DuPont Formosa

Plastics

Source: Samba, September 2009


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The availabilityof theseresourcesprovides thechemical industryin the Middle

East with bothenergy andfeedstock atrelatively lowprices.



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Middle East ethylene capacity

0

5

10

15

20

25

30

35

40


0

5

10

15

20

25

( p e r c e n t )

2007 2008 2009 2010 2011 2012 2013

Capacity

Capacity as a percent of global capacity

Source: Bank of America Securities/Merrill Lynch, 2009

Major Middle East sovereign wealth funds

Country FundsAssets under management

(US$ billion)

UAE Abu Dhabi Investment Authority 875

Saudi Arabia Various 300

Kuwait Kuwait Investment Authority 250

Libya Reserve Fund 50

Qatar Qatar Investment Authority 40Iran Foreign Exchange Reserve Fund 15

Source: ‘CIA the Word Factbook’, 2009

The Middle East has emerged as a major competitor for the European chemical

industry, based mainly on ready access to cheap feedstocks, proximity to growing

markets in Asia and support by governments and local authorities.

The Middle East region has about 67 percent of the world’s oil reserves and 45

percent of all natural gas reserves, the largest such reserves found anywhere.

The availability of these resources provides the chemical industry in the Middle

East with both energy and feedstock at relatively low prices. Companies like

Saudi Basic Industries Corporation (SABIC) pay only US$0.75 for one millionBritish Thermal Units (BTU) of natural gas compared to the average market price

of between US$7 – 8 in Western countries.20 Some analysts estimate that

ethane-based Middle East producers have a cost advantage of up to US$350/mt

over some of their naphtha-based competitors in Europe.21 Whilst the

government-backed oil producers in Saudi Arabia have announced plans to

increase the cost of natural gas to petrochemical producers from 2012 (initial

estimates suggest US$1.25/m BTU) there will only be a marginal erosion of this

massive cost advantage.

20American Chemistry Council, October 200821“Can the European Petrochemical Indust ry Compete Against Emerging Producers Based in the Middle East?,” Chemical Week, 21 September 2009


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Whilst a recent survey suggests that 85 percent of product that is sold from

plant currently being built will specifically target China, the rest of Asia and the

Middle East itself, Tom Crotty, CEO of Ineos Olefins and Polymers Europe said,

“whatever is left over will have to find a home and the next obvious place is

Europe,” adding that, “some of the new capacity will wash back into Europe but

the unknown is how much.”27

In addition, recent transactions such as SABIC’s acquisition of GE plastics and the

acquisition of Nova Chemicals Corp. by International Petroleum Investment Co.

indicate a long-term strategy by major players in the Middle East to expand

globally into downstream areas.

This explosive growth and expansion in the Middle East has helped to drive

significant changes in the European commodity chemicals market. Ten years ago,

North America was the primary exporter and supplier of products such as PE

and PP to the world. Europe was well balanced between supply and demand.

However, trade flow patterns have changed dramatically, and the Middle East

is now the dominant inter-regional exporter of polyolefins. Older Europeancommodity-based plants will likely be less competitive in the years ahead. Many

European customers have already turned to the Middle East for supplies of raw

materials such as PE, and Europe is expected to become a net importer of

polyolefins by 2010.28

The same cost advantages that help chemical companies in the Middle East to

enter European markets will also help to increase their success in Asia. Although

more port facilities, tankers and pipelines need to be developed, it is still cheaper

to transport raw materials and products from the Middle East to Asia than from

Europe. This geographical advantage will enable the Middle East to further expand

into Asian markets, gain new customers and even displace European companies

from markets where they have traditionally dominated.

2.3 China

0

1

2

3

4

5

6

7

8

9

10


1997 1998 1999 2000 2001 2002 2004 2006 20072003 2005

Dependency to foreign countries Growth of demand Consumption Output

Source: www.chemhello.com. Cited in “Chemicals in China: Responding to new challenges,” 2009

27Quoted in “Reinforcing Leadership in Petrochemicals,” Chemical Week, 23 November 200928Analysis by KPMG International 2008

Whateveris left over willhave to finda homeand the nextobvious placeis Europe.

—Tom CrottyCEO of Ineos Olefins and

Polymers Europe

http://www.chemhello.com/http://www.chemhello.com/


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Chemicals sales growth rates of selected countries and regions

0

5

10

15

20

A v e r a g e a n n u a l s a l e s g r o w t h r a t e ( % )

C h i n a

M e x i c o

I n d i a

T a i w a n

K o r e a ,

R e p u b l i c

B r a z i l

R u s s i a

S w i t z e r l a n d

E U - 2 7

C a n a d a

A f r i c a

U S A

J a p a n

1997–2007

8.77.6 7.6 7.3

5.4

4.0 3.93.4

2.92.1

0.1

World sales growth

4.8% p.a.6.8

16.5

Source: Cefic Chemdata International, 2008

China Foreign Exchange reserves (US$billion)

U S

$ b i l l i o n

2000 2001 2002 2003 2004 2005 2006 2007 2008

166 212

286403

610

819

1,066

1,528

1,946

0

500

1000

1500

2000

2500

Source: China State Administration of Foreign Exchange, 2009

The current economic downturn has reduced industry growth in China and limited

further capital investment over the short and medium term. According to the

China Petroleum and Chemical Industry Association, consumption of finished oil

products (a key indicator of their chemical industry) dropped 8.6 percent in

December of 2008.29

Despite the recession, chemicals output from China in 2009 may grow by overfour percent.30 Part of this growth can be attributed to China’s massive stimulus

programs, but questions remain whether the stimulus will have long-lasting

benefits. Nevertheless, the Chinese chemical industry continues to grow in

strength. By 2015, China is expected to overtake the US as the largest chemical

producer in the world.31

Self-sufficiency for the industry is an expressly stated policy of the government.

China has, in fact, been close to self-sufficient in base chemicals since the

1980s. The country’s self-sufficiency index for basic chemicals, resins and fibers

is now approximately 80 percent, according to estimates from Chemical Market

Associates Inc. (CMAI), but significant additional capacity will be required to

29“China’s petrochemical industry reverses 10-y high growth,” www.chinamining.org,18 February 200930“Global chemicals output could fall 6% in ‘09” Oxford Economic Forecasting (Source ICIS news), 24 February 200931“World chemicals market: Asia gaining ground”

http://www.chinamining.org/http://www.chinamining.org/


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satisfy the expected growth in demand in the coming years.32 China also

imported more than US$84.5 billion worth of chemicals in 2008, much of it in

specialties, and the country currently lacks sufficient domestic manufacturing

capabilities to completely satisfy domestic demand.33

To meet their growing demand for specialties, China is constructing its own

chemical plants and has been using joint ventures with European players to

increase capacity. Before the economic downturn, almost all major multinational

chemical companies established a presence in China. However, the financial

crisis has caused many international chemical firms to reassess much of their

investment plans and cut staff worldwide.

BASF is reconsidering the opening of a major methylene diphenyl isocyanate

(MDI) chemical plant in southwestern China, because of weakened global

demand. The plant was scheduled to begin production in 2010. The company,

however, is moving ahead with plans for a major petrochemical complex in

Nanjing with Sinopec. The two companies have invested US$2.9 billion in theNanjing venture.

Other European chemical companies will also continue to develop their

partnerships and market presence in China, attracted by a low-cost base and

expanding markets. For example, Clariant opened its first plant in Guangzhou in

1995, making masterbatches, or plastic dye pellets. The company now has

numerous plants in other provinces as well. The plants operate through a local

entity but are overseen by Clariant for all management, governance and

investment issues. Fully-owned or joint venture operations with full trading

licenses have been established.

As in the Middle East, the Chinese chemical majors have ready access to

massive funding through their government, thus removing the credit barrier

faced by companies in the West. At the same time, Chinese companies face

critical challenges in terms of poor logistics, tight raw material supply and the lack

of experienced management. Accordingly, the industry will continue to need

access to Western technologies and resources, particularly at the specialty end

of the chemicals value chain.

We believe that we will increasingly see Chinese chemical majors as bidders in

M&A auction processes as their focus turns from attracting inbound Western

investment to establishing themselves on the global stage through outbound

acquisitions. In the first instance, this is likely to focus on distressed Western

assets which provide access to the technologies they require to reach their

development goals.

32“Chemicals in Chi na: Responding to New Chall enges,” KPMG 200933Emerging Markets Information Service, 3 April 2009


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Innovation – a key tosurvival

Share of country in total PCT filings, January 2008 – August 2009

0

5

10

15

20

25

30

35

S h a r e o f C o u n t r y ( % )

29.3

20.0

17.4

10.9 11.5

4.9 4.8 4.63.6

4.4 4.1 3.4 3.4 2.9 2.6 2.4 2.3 2.3 2.5 1.7 1.8 1.6 1.8

United Statesof America

Japan Germany Republicof Korea

China France Netherlands Sweden Italy CanadaUnitedKingdom

Switzerland

Jan. – Aug. 2009 Jan. – Aug. 2008

32.5

Source: WIPO Statistics Database, 2009

Annualized growth rate of PCT Filings, August 2008 – August 2009

A n n u a l i z e d G r o w t h R a t e b a s e d t e n d e r L i n e

U n i t e d S t a t e s

o f A m e r i c a

J a p a n

G e r m a n y

R e p u b l i c o f K o r e a

Total PCT Fillings Growth Rate(-2.7%)

Note : 2009 data are provisional and incomplete. The growth rate is the annualized growth rate between August 2008 and August 2009. Counts are based on the international

filling date and the country of residence of the first name applicant.

C h i n a

F r a n c e

U n i t e d K i n g d o m

N e t h e r l a n d s

S w i t z e r l a n d

S w e d e n

I t a l y

C a n a d a

-15

-10

-5

0

5

10

15

20

10.9

-2.8-11.7 -4.3

15.7

5.7

-4.5

2.3

-0.6 -4.2 -6.9 -7.6

Source: WIPO Statistics Database, 2009


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We believe that a key to survival for European chemical companies is based

on innovation at three different levels — moving from bulk chemical

production to the specialty end of the value chain, leveraging their traditional

advantage in technology and establishing closer customer and competitor

relationships through joint development agreements, acquisitions, value add

services and other strategic initiatives.

3.1 Evolving from commodities to specialties

In its final report in February 2009, the European Commission’s High Level Group

(HLG) on the Competitiveness of the European Chemicals Industry recognized that

abandoning petchems and focusing on specialty chemicals is a clear necessity.34

In many ways, this move to specialties is a matter of both “push” and “pull.” As

noted above, European companies are being pushed out of commodities because

of the cheap feedstocks available to producers in the Middle East. In addition, the

last 15 to 20 years have seen relatively little investment in the EU in the basic

chemical sub-sectors; the last cracker was built in the early 1990s. This has led to a

significant loss in competitive advantage. The average cracker size in the EU is

currently about 450,000 tons/year while the new, world-scale crackers being built in

Asia and the Middle East reach a capacity of more than 1,000,000 tons/year.

European companies that continue focusing on commodities will have to make

massive investment simply to survive.

In terms of “pull,” European companies are attracted both by strong specialty

markets and the fact that value-added, specialty manufacturing requires a high level

of technical capability found more often in the EU than in developing countries.

Because of this, the European petrochemical industry is a natural choice for

complex specialties for biotechnology and nanotechnology, as well as for emission-

abatement products such as insulation materials for residential and industrial

buildings.

34“Final Report of the High Level Group on the Competitiveness of the European chemicals industry”


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Obviously, this move up the value chain by European companies will require

strategic investment in the face of tight credit, rising costs and other businesspressures. European companies also need to maintain sources for commodity

chemicals through clustering of crackers with downstream manufacturing, even

though this strategy will become more challenging as commodity production

increases in the Middle East, China and other areas.

Despite these challenges, specialty chemicals remains a highly attractive global

market worth more than US$680 billion. Established European companies have

the resources and experience in this market to help them compete as major

players worldwide.

3.2 Maintaining a technological advantage

The overall technological advantage of one region over another can be

estimated in various ways, including the rate of patent filings and the number

of patents in force.

China is now the third largest patent application jurisdiction in the world and

may soon overtake the U.S. in total patent applications. The State Intellectual

Property Office (SIPO) received a total of 828,328 patent applications in 2008,

a year-on-year increase of 19.4 percent.35 However, EU countries also enjoy a

leadership position in patented technology, accounting for 28 percent of Patent

Cooperation Treaty (PTC) filings from January 2008 to August 2009. During the

same period, China accounted for only 4.6 percent of PCT filings.

To protect their technological advantage, European companies should review

their R&D plans and extend corporate research programs to medium and long

term objectives. The public sector should also provide effective support for

these efforts, in particular for SMEs. In addition, intellectual property should be

protected by appropriate and cost-effective rules regarding intellectual property

rights (IPR). The European Commission supports the development of a more

coherent IPR policy, with a more centralized and coordinated approach.36

This includes a common jurisdictional framework and greater alignment of

international patent law through the World Intellectual Property Organization

(WIPO) and initiatives such as the Transatlantic Economic Council (TEC).

Sustainable development is another opportunity for innovation by European

chemical companies. Using their technological advantage to stay ahead of

the market, these companies are uniquely positioned as leaders in the

development of new energy-efficient products, efficient manufacturing

processes and alternative feedstocks based on natural materials such as

sugar, vegetable oils and plant extracts. (See “Going green with Cognis –

a flexible strategy,” section 4).

35“Firms get upper hand in application process,” China Business Weekly, 23 February 200936“Final Report of the High Level Group on the Competitiveness of the European chemicals industry”


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Despite the lack of concrete

commitments resulting from therecent Copenhagen Climate

Conference, the green agenda is

increasingly being driven by the

chemical industry’s end customers

who are demanding sustainable

products and solutions. There is a clear

opportunity for the chemical industry in

Europe to capitalize on its historical

technological advantage and provide

global leadership in the realm of

sustainable development.

For the chemical industry, another

metric is especially important — the

number of graduates in chemical

engineering and related fields. Highly

qualified human resources are vital to

European chemical companies: an

average of 32 percent of their

employees have attained third-level

education as compared to an average

of 26 percent for other industries.37

However, the last decade has seen

a serious drop in the number of

European students taking chemistry

at the third level. Chemistry currently

scores last among the most preferred

subjects studied at secondary school.38

During the same period, surveys have

shown a dramatic rise in the number of

chemistry and engineering graduates in

Asia.39 European companies recognize

the consequences if these trends

continue.

Fortunately, the EU has one of the

most well developed and successful

educational systems in the world.

Chemical companies should take the

opportunity to join with governments

and private organizations to encourage

more students to enter fields that

support the chemical industry.

37Source: Eurostat38“The state of the European Chemicals Industry – a thoughtstarter for the High Level Group on the competitiveness of the European Chemicals

Industry,” European Commission, 200739Higher Education Statistics Agency Limited 2009


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3.3 Strengthening customer relationships

European chemical companies should seek to expand beyond just trading,

supplying commodities or competing on price. Now is the time to focus on the

success of their customers. This can involve strategic partnerships and joint

initiatives with engineers, researchers and other professionals from different

companies, working together on R&D projects and providing value add services.

The benefits of these initiatives are clear, but they also require new strategies

and attitudes on the part of companies. As Peter Linder of Clariant in China

stated, “We have to keep our sales force focused on adding value through strong

customer relationships, rather than simply getting drawn into competition with

lower-cost rival producers.”40

3.4 Developing joint venture relationships

European companies can develop joint ventures and strategic alliances with

competitors — in the Middle East to gain access to feedstocks and in China to

develop a local market presence.

The most successful European chemical companies in the coming years are likely

to be those that embrace the changing dynamics in the global industry and

position themselves to take advantage. Inevitably, joint relationships involve an

element of trade-off and a challenge for European chemical companies will be to

establish agreements that allow them to enjoy the benefits, without giving away

too much of their technological advantage, so as to preserve their long-term

competitiveness.

40“Chemicals in China: Responding to New Challenge s,” KPMG, 2009.


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Europeanchemicalcompanies should

seek to expandbeyond justtrading, supplyingcommodities orcompeting onprices.


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Raw material basis of Cognis in terms of volume in 2008*

Naturals(Natural oils, fats and derivatives, glucose, pla nts and extracts) 50%

Inorganics(Inorganic acids and bases, salts) 8%

Inorganics(Silicates) 17%

Petrochemicals25%

*Core businessess CC, N&H, FP

Source: Cognis, 2009

Headquartered in Monheim, Germany, Cognis is one of the world’s leaders in

specialty chemicals, providing raw materials and ingredients for products for

personal and home care, nutrition and health, and for a number of other

industries such as coatings and inks, lubricants, agriculture and manufacturing.

Cognis is one of the leaders in green solutions for the chemical industry,

dedicating its activities to a high level of sustainability and the use of natural

source raw materials and ingredients.

As a European chemical company, the strategies adopted by Cognis offer

several advantages. For example, the use of natural raw materials such as fats

and plant extracts has significantly reduced its dependence on petrochemical

feedstocks from the Middle East. In addition, its raw materials are gathered

from a number of countries across Asia, the Pacific and South America, further

reducing its dependence on any particular region.

Cognis has also taken care to establish a local presence in emerging markets

such as China, enabling it to target rapidly moving markets for specialty

chemicals and consumer goods. The company recognizes that the time and cost

required to manufacture products in Europe and then ship them to Asia would

hurt their competitive position. As a result, Cognis has focused on expanding

their presence in Asia through plant expansions and joint ventures with local

companies.

Case study – Going green withCognis – a flexible strategy


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In its European plants, Cognis continues to develop more efficient

manufacturing processes to reduce costs and improve their regulatory position.

This emphasis on innovation applies to its focus on product performance. As

with other European chemical companies, it can leverage a strong background

in R&D to help ensure that its products remain competitive in global markets.

Richard Ridinger, Executive Vice President Care Chemicals, recently summed up

the situation facing many of today’s European chemical companies. “In Europe,

we have unique challenges but also unique advantages in terms of technology,

innovation and flexibility. Those chemical companies that work hard to balance

sustainability with performance and price will succeed.”

Cognisis alsorecognizedas a leaderin greensolutions forthe chemicalindustry.


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Case study – BASF – verbundmanufacturing

Headquartered in Ludwigshafen,

Germany, BASF is one of the world’s

leading chemical companies with

production and sales facilities in manyeconomic regions. The BASF portfolio

comprises chemicals, plastics,

performance products, functional

solutions, agricultural solutions and oil

and gas.

BASF is widely recognized as the

founder of the verbund manufacturing

concept. Worldwide, BASF operates

six Verbund sites and about 330

production sites. In Verbund, they link

production plants intelligently to save

resources and energy. The largest

Verbund site in BASF Group is located

in Ludwigshafen, Germany. This was

where the Verbund concept was

developed and optimized before it was

applied to other sites around the world.

BASF estimates that it saves more than EUR500 million each year at its

Ludwigshafen site alone. By linking

plants in a Production Verbund, they are

able to create efficient value-adding

chains starting with basic chemicals

and extending to higher value products

like coatings and crop protection

products. In addition, by-products from

one plant can be used as raw materials

elsewhere. Production plants are

connected by an intricate network of

pipes that provides an environment-

friendly method of transporting raw

materials and energy quickly and safely.

The Verbund principle also applies to

energy. In the Energy Verbund, the

excess heat given off in chemical

reactions is immediately converted intosteam and is fed into the steam

network so that it can be made

available to other plants.41

Speaking about the importance of the

verbund concept, Dr. Albert Heuser,

Head of BASF’s Petrochemicals

Division stated, “strengthened

cooperation between companies and

efficient Verbund structures within each

company, as well as optimization of

logistics and infrastructure, will play a

major role in the European

petrochemical industry’s future.”42

Major Chemical Cluster in Europe

FRANCE

(U.K.)

GREECE

BULG ARIA

Ceut a

(U.K.)ManofIsle

(U.K.)

CROATIA

ES T ONIA

MOLDOVA

ANDORRA

MONACO

LIEC H.

Gibralt ar

(SPAIN)

GERMANY UKRAINE

BEL ARUS

POLAND

JerseyGuernse y

(U.K.)

(U.K.)

TURKEY

LAT VIA

DENMARK

IREL AND

KINGDOM

UNITEDLITHUANIA

RUSSIA

CZEC H REPUBLICSLOVAKIA

HERZEGOVIN ABOSNIA AND

SERBIA

MONT.

HUNG ARY

SL OVENIA

SWITZ.

AUSTRIA

ROMANIA

MACEDONIA

MARINO

VATICANCIT Y

ITALY

PORTUG AL

SAN

ALB.

RUSSIA

SPAIN

KOS.

·

¸

Porto

Athens

Barcelona

Algier s

Palermo

Naples

Cagliari

Tir an a

Podgorica

Smolensk

Strasbour g

Genev a

Genoa

Flor ence

Venice

Stavanger

Aberdeen

Chernivtsi

Rivne

Myk

Skopje

Ljublj an a

Manchester

l a V ell aAndorr a

Toulouse

Nantes

am Main

´

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Bern

Rig a

Lisbon

Madrid

Rome

Sofi aSar aje v o

Belgr ade

Z a gr eb Buchar est

Vaduz

Vienn a Bud apest

Bratisl a va Chisin aug

Pr a gue

London

KyivBerlin War sa w

Dublin

MinskCopenha genVilnius

TallinnStockholmOslo

T hessalon í ki

Milan

Brest

Hrodna

Mahily ow

Vits yebsk

Z ü rich

Brno

Homy el'

Varna

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Malmö

Göteborg

ergen

Gdansk

Kaliningr ad

Bur

Sevilla

Z ar agoz a

Valencia

Má laga

Bilbao

LyonBordeaux

Marseille

Cardiff

Edinbur gh

Leeds

Belfast

Kr ak ów

Lódz

L'viv

Munich

Stuttgart

Liverpool

Izmir

Istanbul

Turin

Poznan

Wr ocla w

Glasgow

Fr ankfurt

Hambur g

emen

Leipzig

Pristina

Sicily

Sardinia

Rhodes

ISLANDSBALEARIC

Corsica

Öland

Bornholm

Gotland

ALANDISLANDSRockall

ORKNEYISLANDS

HEBRIDES

P Y R E N E E S

MASSIFCENTRAL

P Y R E N E E S

MASSIFCENTRAL

CelticSea

O c e a n

N o r t hA t l a n t i c

SeaNorth

AegeanSea

AdriaticSea

LigurianSea

BalearicSea

Alboran

TyrrhenianSea

IonianSeaMediterranean Sea

Strait of Gibraltar

Tagus

Bay ofBiscay

n a D bu e

hsirI aeS

Barents

Sea

FRANCE

L.

GERMANY

London

GREAT

BRITAIN

BELGIUM

Antwerp

NETHERLANDS

Chemsite

Chem Cologne

Ludwigshafen

HamburgBrunsbuttel

Wilhelmshaven

BremerhavenEemshaven

Amsterdam

Rotterdam

Zeebrugge

Dunkirk

Le Havre

CHANNELGhent

NORTH

SEA

Source: European Chemical Site Promotion Platform, 2009

41basf.com, 200942“Sustainable Manufacturing of Petrochemicals in Europe,” Chemical Week, September 21, 2009


35/36


36/36


kpmg.com

Contacts:

European Sector Leader

Chris Stirling

KPMG in the UK

Tel: +44 (0)20 7311 8512

e-mail: [email protected]

In France

Wilfrid Lauriano do Rego

KPMG KPMG S.A.

Tel: +33 1 55 68 68 72


211 475 6666

In Germany

Vir Lakshman

KPMG AG Wirtschaftspr¸

fungsgesellschaft

Tel: +49


In Netherlands

Lex Gardien

KPMG N.V.

Tel: +31 (0)10 453 4163


In Belgium

Guido De Grefte

KPMG Belgium

Tel: +32 (0)2 708 48 93


The information contained herein is of a general nature and is not intended to address thecircumstances of any particular individual or entity. Although we endeavor to provide accurate andtimely information, there can be no guarantee that such information is accurate as of the date it isreceived or that it will continue to be accurate in the future. No one should act on such information

without appropriate professional advice after a thorough examination of the particular situation.

© 2010 KPMG International Cooperative (“KPMG International”),

a Swiss entity. Member of the KPMG network of

independent are with KPMG International. KPMG

International provides no client services. No member has

any authority to obligate or bind KPMG International or any other

member vis-à-vis third parties, nor does KPMG International

have any such authority to obligate or bind any member All

i ht d

In Spain

Luis Walter

KPMG KPMG S.A.

Tel: +34 932 532 917


In Switzerland

Erik Willems

KPMG Holding AG/SA

Tel: +41 44 249 45 20


Author

Paul Harnick

KPMG in the UK

Tel: +44 (0)15 1473 5226


Documents

201001 EuroChem_Europe_Final.pdf