With the recent wave of petrochemical plant closures across Europe affecting a significant number of facilities and thousands of jobs, some industry sources are proclaiming the “death” of the region’s chemical industry. However, Ashok Kishore, a seasoned petrochemicals trader with decades of experience in Europe and beyond, tells OPIS editor Fahima Mathé that those reports are greatly exaggerated. While Kishore acknowledges the serious challenges ahead, he remains cautiously optimistic about the industry’s ability to adapt and innovate in the face of adversity.

OPIS: Given the recent petrochemical plant closures in Europe, where do you see the European petrochemical industry heading?

Kishore: What we see happening today is part of a continual evolution of the European petrochemical industry. Chemical plant closures first started in Europe during the early 1990s as the green movement gained strength, especially in Germany. Chemical production, which was also partly the cause of bad effluent, was gradually outsourced and factories in the Ruhrgebiet and Rhineland in Germany were shut down.

If you cast your mind back to the period until the mid-1980s, lead was an acceptable octane booster in motor gasoline. Then, demand for aromatics surged as they were used to replace lead, until tailpipe emission analysis showed that this was not the best solution for solving air pollution problems either.

So, in some ways, plant closures (or modifications) are also a reflection of the evolution of legislation and consumer preferences over the decades.

Companies such as Exxon, Sabic, Dow or BASF all have a global presence and they no doubt find it more economical to produce some chemicals outside Europe, while trying to retain market share. In other cases, they are losing out to competition that can make and supply chemicals more economically and gain access to the European market.

But the overall trend is clear: the EU27 share of the global chemical market declined to 14% in 2022 from 27% in 2002, according to data from the European Chemical Industry Council (CEFIC), a forum of chemical companies across Europe.

However, it is important to note that while Europe’s share of global chemical production has dropped by 13% in 10 years, the value of the market has increased over the same period, rising to €760 billion ($817 billion) from €363 billion. Elsewhere, capital spending increased to €32 billion in 2022 from €13 billion in 2004. If we use BASF as an example, the company’s sales revenue increased to $92 billion in 2022 from $33 billion in 2001.

So, the above shows there is growth in the European chemicals industry, which makes me optimistic, although the flip side is that since the Covid-19 crisis, and further accentuated by the war in Ukraine, there has been a sharp decline in output. This makes me pessimistic about the continuing growth.

Having said that, recently, there’s been an intriguing development with major commodity traders acquiring smaller refineries in Italy and France. While these refineries have a modest chemical output, it raises questions about their future under new ownership. Will the new owners choose to shut down the chemical operations of these refineries? Or will they venture into assets comprising refineries and petrochemical units deeply integrated across sites, along with logistics and supply chain infrastructure (also called Oil to Chemicals or “O2C”), following larger refining majors’ strategies?

Larger refineries equipped with integrated petrochemical plants will be able to compete globally. Similarly, ethane-fed crackers with dedicated feedstock supply lines are expected to thrive.

Overall, though, I tend to lean somewhat towards pessimism in both output and global share of chemical manufacturing in Europe. The INEOS cracker project in Antwerp was expected to add significant ethylene capacity, but development has been stalled. That is bad news.

OPIS: It is clear Europe has faced significant challenges with petrochemical plant closures, and one of the major reasons cited is high production costs. How did Europe get itself into this tough situation?

Kishore: History teaches us fascinating lessons. In the 1970s, during the aftermath of the first oil crisis, many countries in Europe focused on energy security. This led to the establishment of national refineries across different countries within the European Economic Community (EEC), which later became the EU. Each country prioritized its own energy needs and built refineries to cater to domestic demand.

The availability of naphtha, a primary feedstock for petrochemicals at that time, from these national refineries encouraged the development of petrochemical plants as well. These plants spread over Europe were sized to meet domestic market demand rather than designed for larger-scale international competitiveness.

The fragmentation of the industry across multiple countries meant that Europe lacked economies of scale in petrochemical production. Each country’s petrochemical plants were often smaller and less integrated compared to those in regions with either more centralized planning or larger domestic markets, like the United States or Asia. Over time, as global competition intensified and production costs became a critical factor, Europe’s fragmented approach meant that its petrochemical plants struggled to achieve cost competitiveness.

High production cost is, of course, a relative term. Due to a series of economic events and pollution related policies, Europe never got around to making large investments in capacity expansion as demand grew. This slowly led to disadvantages as other parts of the world invested in larger and more modern plants.

No doubt the plants built in Europe from the mid-1970s onwards were very competitive for the period, but this inward-looking approach made them uncompetitive as the world market grew following long years of demand stagnation in the mid-1970s to mid-1980s. The economic downturn which started following the first oil shock and continued for a decade did not help. The two oil crises of the 1970s led to increased oil production and availability from the North Sea, but that has since declined which no doubt affected Europe in terms of competitive feedstock.

The U.S. had the Gulf of Mexico as a feedstock hub, allowing a concentration of refineries and petrochemicals along the Gulf Coast. The Middle East Gulf also had its own oil and gas that allowed Saudi Arabia to build heavily in the 1980s.

Later, increasing prosperity in the region east of Suez led to bigger markets prompting investment in larger sized petrochemical facilities, first in Taiwan and South Korea and then moving on to other countries.

OPIS: How do these challenges impact petrochemical market dynamics, including those for aromatics for example? You’ve traded benzene and its derivatives at major companies, what do you expect?

Kishore: To use a cliché, change will continue to be the only constant. During my career, I have seen aromatics trading companies come and go, with those focused purely on Europe being extremely successful, until they were not. As European dynamics changed, those aromatics companies who spread their wings to other parts of the world and connected these overseas locations to operations in Europe continued to be successful. Those who relied mainly on their European connections had to seek other pastures.

I believe we are at the most mature part of the petrochemical trading cycle. In a bell-shaped curve, we went from very few traders in the mid-seventies to a large number by the late 2000s and back down to very few now.

Those who continue to have a place in the future will have to be willing to compete as well as cooperate with the large global producers and consumers and their offshoots that have trading ambitions. They need to have the financial wherewithal to find a place in an industry where capacity is getting bigger than it ever used to be.

The recent refinery acquisition spree by commodity trading houses will also influence how aromatics trading develops. For example, Trafigura has acquired refineries in Italy and France, and Vitol has made a similar acquisition in Italy. These European acquisitions include small chemical plants, which could impact the local aromatics market.

In contrast, the deal in Singapore involves significant chemical capacity, specifically Glencore/Chandra Asri Group’s acquisition of Shell Energy and Chemicals Park Singapore (SECP) in May 2024. The Jurong facility is notable for its substantial chemical processing capacity (including 1.1 million mt/year ethylene cracker). I wonder if this acquisition underscores a trend where commodity trading houses get involved in larger, more integrated chemical capacity.

Another factor worth mentioning is the dramatic increase in shipping freight into Europe over the last three years. Specifically, this has impacted the trade of benzene and paraxylene from the Middle East and India. While styrene has also been affected, the regular sources of imports from the U.S. Gulf and Saudi Arabia have maintained their supply based on available demand. I believe these increased shipping costs have hit Europe harder than some other markets, adding to the existing challenges.

Overall, the landscape of the petrochemical market, particularly for aromatics, will be shaped by these dynamics. Companies must adapt by broadening their geographic reach, building financial resilience, and navigating the complexities introduced by evolving global trade patterns and cost structures.

OPIS: What role do you think government policy and regulation has in influencing the competitiveness and sustainability of the European petrochemical industry amidst these closures?

Kishore: Back in the 1970s, national governments played a big role in encouraging investment without much regard to other aspects. Now Europe is perhaps amongst the most regulated markets for chemicals. Starting with phasing out of lead in gasoline referred to above and coming to the era of biofuels, the government has played a role in influencing investment every step of the way. If it wasn’t for subsidies, I very much doubt we would have E5 and E10 gasoline.

Aromatics replaced lead and oxygenates can replace aromatics. Oxygenates have replaced aromatics for example, with methyl tertiary butyl ether (MTBE), ethyl tertiary butyl ether (ETBE) and ethanol. Aromatics continue to be blended in motor gasoline, but over the last decades the proportion of aromatics in the blends has declined.

Polluting chemical plants have been shut down and production outsourced. We should also be mindful of labor legislation that must be respected and can sometimes constrain European competitiveness. Please don’t get me wrong – I am not arguing against the climate or labor practices of the governments in Europe. But all actions have consequences.

What does all that mean for the future of aromatics: while some sectors will use less aromatics, humans still need clothing and plastics in all walks of life, requiring aromatics as a building block!

OPIS: Are there any emerging trends or opportunities within the European petrochemical market that you believe industry players should pay attention to in response to recent plant closures?

Kishore: Perhaps this is also a cliché, but industry players must continue to focus on their strengths. The main advantage that they have over non-European competitors is the high barrier of entry into the EU market. A combination of factors like limited infrastructure, language and cultural barriers and complex, non-uniform VAT regulation adds to the cost of entering the European market.

For example, China is by far the largest global chemical producer (with €2.39 trillion in sales in 2022). But factoring in high freight rates and distance to market makes entry for countries even such as China more challenging.

For the main part, I believe that European producers should continue to protect their customers and make every effort to hold on to their market share. This includes investing in infrastructure that allows access for potentially outsourced production.

OPIS: Considering the forecasted shutdowns and potential future closures, what long-term strategies do you think European petrochemical companies should adopt to navigate these challenges?

Kishore: I do not think European companies are just sitting on their hands and watching their world crumbling around them. They have been taking active steps to improve their competitiveness, whether by adapting their commercial strategies or making technical innovations.

One strategy already adopted by olefin producers is to adapt ethylene plant feed from naphtha to NGLs and set up alternative supply chains. In some cases, crackers have been converted to mixed feed to allow them to take advantage of changing supply/demand dynamics.

Investment in research and innovation has also increased. According to CEFIC data, the EU27 research and innovation spend increased to €11 billion in 2022 from €6.8 billion in 2004. However, as a percentage of added value, it declined to 6% from 8%. So, is that enough, or does there need to be more?

At the risk of repeating myself, I feel that European companies should invest in logistical infrastructure. To give an example, Italy is an importer of benzene but the infrastructure they have makes it very difficult and expensive for the buyers to get supplies from outside the Mediterranean Sea.

OPIS: With the closures of petrochemical plants, what opportunities do you see within the European petrochemical sector?

Kishore: I think there will be more opportunities for companies involved in importing polymers rather than aromatics. This is because some of the aromatic-consuming plants are closing or are at risk of long-term closure. Examples are Trinseo’s styrene monomer plant in Germany, the Indorama PTA site in Portugal and INEOS’ PTA facility in Belgium. We also saw a press release recently from LyondellBasell suggesting that they are reviewing their European assets. Perhaps this includes their propylene oxide/styrene monomer unit in the Netherlands?

Some of these units don’t make polymers directly but contribute raw materials, adding to the polymers made directly from ethylene and propylene.

While these plants are facing closure, the average GDP growth rate of 1.5 to 2% in the EU suggests that demand is growing anyway. So, we need petrochemical derivatives like polymers, fibers, and a host of other materials in the construction and automobile industries as well as for direct personal consumption. The increased requirements of packaging that emerged during the pandemic also continues.

This is not to say that aromatics traders will not have opportunities (especially when there are short-term disruptions), but I feel that we may have seen the peak here. As I spent many years as an aromatics trader it pains me to say these words, and I hope that I will be proven wrong!

OPIS: Given the global energy objectives towards cleaner fuels and renewable alternatives, how do you envision the role of petrochemicals evolving in Europe, and what strategies should companies adopt to stay relevant in this changing landscape?

Kishore: The short answer is that the role of petrochemicals in our daily life is too important and on a wider level, producers will continue to stay relevant and continue adopting increasingly climate friendly practices.

Corporate social responsibility, environmental, social and governance, recycling, circularity and other buzzwords are evolving to keep us politically correct when it comes to discussing the climate impact of the chemical industry. We know that this industry is essential to our daily life, even though some media outlets would make the public believe that the petrochemical industry is only harmful.

The fact is that the world GDP was $101 trillion in 2022, according to World Bank data, and global chemical sales (CEFIC data) in 2022 was $58 billion, so let’s say, 6% of global GDP was contributed to by the chemical industry.

Being green and clean is an objective that’s been fully accepted and adopted by the chemical industry for decades now. Strategies to deal with this are already in place with all chemical producers, which are no doubt continuing to evolve with local, national and global legislation.

I believe that as we continue the move towards a decarbonized world, we may need to look for sources of essential hydrocarbons outside the conventional places that we have been used to. An example is the conversion of a naphtha-based steam cracker to a gas-based feed. This means that products like pyrolysis gas, a feedstock for benzene, butadiene, a feedstock for rubbers, and others may have to be found elsewhere. Increasing the olefins output from about 55% to about 95% will have a knock-on effect on the output of heavier products.

But to insert a dose of skepticism here and the influence of national politics: if nuclear fuel becomes more popular for electricity generation and fossil fuels become more available and cheaper as a result, will there be pressure on the petrochemicals industry to move back to using them for feed? Or to use other sources of energy in other industries?

Witness the dramatic increase in coal consumption in countries like India and China when oil prices moved up leading into and after the conflict in Ukraine. Change is constant, and policies adopted by companies will also continue to change with the times.

OPIS: Is Europe able to handle the changes in trade flows that may be an outcome of shifts in production?

Kishore: Absolutely. But there has to be a change in focus and an openness to alternatives. I have already mentioned the need to invest in infrastructure. In addition, companies will have to consider incentivizing alternate supply sources.

Given price volatility, the need for risk control and hedging strategies will increase. Some companies are further ahead in this area than others. Some others deliberately take risk as a strategy and that allows them to deal with the changes in trade flows. But recently, shipping from new supply sources in Asia has been a challenge due to an increase in shipping costs, a lower availability of vessels and an expectation of forward supply availability. This can lead to price backwardation in destination markets, so a supplier may be reluctant to ship longer distances.

So, while Europe can adapt to the changes in trade flows resulting from shifts in production, it will require strategic investments in infrastructure, incentivizing alternative supply sources, and enhancing risk control and hedging strategies to manage the associated challenges effectively.

OPIS: What kind of companies are most likely to survive the challenges discussed here?

Kishore: Those companies that think outside the box and are not afraid to acknowledge the need for change. “We have always done it like this” is a refrain that I used to hear a lot, but less now than before. This does involve risk, and there is the need to recognize that risk is not a dirty word.

One of the constant features of the petrochemicals market has been its cyclical nature. An up cycle has always followed a down cycle. It looks bleak, but day always follows night, though the nights can sometimes be long. Over the years I have seen Europe in crisis multiple times, and it has always come out of it stronger, albeit looking different from before.

To misquote the American writer Mark Twain, “reports of the death of the European chemical industry are greatly exaggerated.”