Chemicals in Europe:

the way forward

Balancing the equation with
customized innovation and
strategy
Contents

Executive summary 3

The European chemicals industry today 4

What is slowing the growth of European chemicals? 5

What gives Europe a favourable business environment? 7

What are the global chemicals leaders doing in Europe? 9

What strategies can the chemicals players in Europe consider in future? 13

Why EY? 17

References 18

Contacts 19
2 Chemicals in Europe: the way forward
Executive summary

The competitive advantage of the European chemicals industry them on their evolutionary path.
appears to decline, as the US and Asia develop low-cost
production for chemicals. Furthermore, with demand growth As the global environment becomes all the more volatile,
shifting to the emerging markets of Asia and Latin America, chemical players in Europe can consider developing a strategy
manufacturing facilities have been moving to these regions and that enables constant evolution to optimize market share and
the chemicals producers are following suit. In addition, stringent margin growth. In an environment where uncertainty regarding
regulations in the European chemicals industry, heavy green feedstock prices, demand growth, currency fluctuations and
taxes and slow take up of alternate feedstock technology (shale regulations pose varied challenges every day, companies need
etc.) contribute to the slow growth of the industry. to be ready to adapt to the changing environment to improve
their competitive position.
However, Europe continues to be a major contributor to global
chemicals with a favorable environment for innovation, expertise Chemicals companies need to differentiate their strategies
in specialized chemicals and a strong infrastructure to support according to their business segments and targeted market
business. Moreover, the recent decline in oil prices may help position. For instance, for a commodity chemicals business,
Europe retain cost competitiveness in chemicals production. which is highly feedstock intensive, optimized feedstock strategy
Nonetheless, the reduction of its share in the global chemicals is and innovation in developing low-cost processes should be the
a cause for concern for the chemicals companies in the region. imperative. While, for a specialty chemicals business, alignment
with the customer’s business and collaborative innovation would
We tracked the initiatives by major chemicals players in Europe be the crucial differentiator.
and arrived at the crucial strategic considerations that can help

Five-point strategy: key imperatives for companies in Europe

Commodity Specialty
How should business be A business model with dedicated sales team,
A business model with a value chain
structured to compete in the which has a high level of collaboration with end-
integrated with the raw materials or feedstock
marketplace? clients
Which is the optimum feedstock Partnering with peers for acquiring chemicals
Strategic partnerships to identify and acquire
blend for the given product raw materials; developing a supply chain model
alternate or low-cost feedstock
portfolio? with high frequency and low order sizes
What combination of product
Increasing the share of products used in Focusing on products with a stable renewal
portfolio will be ideal to meet
industries with high-growth potential demand
anticipated future state?
Innovation in alternate technology or
Where should the R&D Customer-oriented innovation; new applications
feedstock (e.g., coal-to-olefins (CTO), bio-
expenditure and innovation be for their products
based etc.) to reduce cost and facilitate
directed to?
sustainability
How to procure the suitable skill Hiring a higher share of technology and Recruiting product and research experts to
set and talent mix? feedstock experts to reduce costs develop new products and applications

3 Chemicals in Europe: the way forward

European chemicals industry today — losing share not sheen
European chemicals has witnessed reduced cost competitiveness and demand, however, it
still offers a favourable business environment
Europe, which contributed to almost 25% of the global chemicals sales in 2008, has been losing share in the global industry, since
most of the chemical plants are being set up in the regions of Asia that offer low-cost labor. While the global chemicals industry grew
at a computed annual growth rate (CAGR) of 7.4% between 2010 and 2015, the European industry registered a CAGR of only 3%.
The low feedstock and energy costs in the US and the Middle East prove Europe to be a disadvantageous manufacturing location. In
addition, the shift of manufacturing to these regions is triggered by the decelerating overall demand in Europe — between 2004 and
2014, the European Gross Domestic Product (GDP) grew at a CAGR of 4.7%, against the global average of 6% during that period.

European chemicals’ revenue has witnessed slow growth for the last three years with a stagnant
share in the global market

Chemicals revenue and share in global Chemicals attractiveness map

industry
673 668 High
642 630 649 Asia
578

Chemicals industry performance

25%
23%
22% RoW
20% 20% 19%

North America

South
America

2010 2011 2012 2013 2014 2015E Europe

European chemical sales (€ billion)

Low Business environment stability High
Europe's share in global chemicals

Source: CEFIC Facts & Figures 2015 Source: EYK analysis

Bubble size represents the chemicals sales for 2013
European chemicals have been facing low sales growth in RoW includes Middle East and Africa (majorly)
the past ten years and high relative cost of production
Performance Business environment
leading to a shift of manufacturing base to emerging
parameters: stability parameters:
countries and decelerating capacity addition in chemicals. A
number of chemicals players in Europe have been shutting Sales growth, cost of End-user industry outlook,
down operations as manufacturing has become increasingly production, change in chemicals sales growth
expensive owing to relatively higher feedstock and labor exports and imports share, outlook, technological
costs. In the past few years, around 144 chemicals plants in capital expenditure readiness, institution index,
Europe have either been closed or are currently non- growth, chemicals industry innovation index, GDP growth
operational accounting for 12% of the total chemicals outlook outlook
capacity in Europe.

While the demand growth is low, Europe Methodology

displays a competent business environment We evaluated major chemicals producing regions on the
basis of parameters that reflect the current performance in
On the other hand, Europe offers a strong and stable the chemicals industry and the favorability of the business
business environment. The region provides strong investment.
infrastructure and highly efficient public institutions which
The current performance axis rates the regions on
facilitate a legally stable environment for business operation.
parameters including sales growth from 2004–14, cost of
The relatively high political stability in the region implies a
production, change in share of chemicals exports and
large percentage of stable population which confirms
imports, and chemicals’ capital expenditure growth.
continuity of renewal demand. Furthermore, it offers a more
favorable investment environment owing to high The business environment stability axis rates according to
technological readiness, policies encouraging innovative the end-user industry outlook, technological readiness,
knowledge, and high-business sophistication across institutional quality index, infrastructure index, innovation
industries. index and GDP growth outlook.

4 Chemicals in Europe: the way forward

What is slowing the growth of European chemicals?

High-cost disadvantage (particularly in base Low capacity addition for key petrochemicals
petrochemicals)
Driven by their low-cost advantage, North America, Middle
Europe predominantly uses naphtha for production of East and Asia are making new capacity additions for
petrochemicals, which contributed to more than 45% of the ethylene. Europe, however, does not have significant
European chemicals sales in 2014. In spite of declining oil ethylene capacity in the pipeline. Currently the region
prices since July 2014, the cost of producing a ton of contributes 17% of the global ethylene capacity while Asia
ethylene (a widely used building block for petrochemicals) in and Middle East together contribute half of it. Further, Europe
Europe is more than 2.5 times the cost in the Middle East accounts for only 8% of the global planned ethylene capacity
and double the cost in the US. This poses a major up to 2020 compared to Asia which accounts for 50%.
disadvantage for chemicals production in Europe. In
addition, low labor costs and investment in the coal-to-olefin
technology in Asia further toughens the competition for
Europe. Expected ethylene capacity additions (2016-
2020)
Ethylene cash cost (US$ per ton) — 2015* (total – 63.5 million tons per annum (TPA))

31.6
With energy subsidy cuts in Saudi Arabia, the production cost in
Middle East is expected to cross US$200 per ton. However, it’ll
still retain competitiveness over Europe
650
500 550 12.1
9.5
170 240 5.4 4.9

Middle East US ethane Europe Northeast Southeast Asia Pacific Middle East North America Europe Others
ethane Naphtha Asia naphtha Asia naphtha

Source: Credit Suisse report via ThomsonOne, ICIS report 2015 Source: ICIS news
*The graph shows indicative prices

In spite of declining oil prices, since July 2014, the cost of producing a ton of ethylene in Europe is
more than 2.5 times the cost in the Middle East and double the cost in the US.

Slowing overall demand growth Shifting manufacturing base

In the last 15 years, the GDP of emerging countries has With an increasing cost advantage coupled with demand shift
increased at a CAGR of 12% as compared with the global to the emerging markets of Asia, the global manufacturing
average of 6%. The recent economic down-cycles have base has also shifted. This has reduced Europe’s share in the
affected Europe the most, indicating a slow down in GDP global manufacturing revenues from 33% in 2004 to 27% in
growth. This slowdown is also because of saturation of the 2014.
economy in the Western European countries (GDP CAGR
of 1.6% between 2009 and 2014) and slower than expected
growth in the Central and Eastern European (CEE)
countries; GDP CAGR of 2.1% during the period as
compared with the global average of 5.3%.
Share of global manufacturing revenue
GDP at current prices (US$ billion) (2004–14)
80,000 40%
33%
Europe
Widening gap
60,000 29%
due to slower
demand revival 27%
Asia
40,000 than the global
rate 21% 18%
North
20,000
7% America
8%
0 Latin
1999 2002 2005 2008 2011 2014 2004 2009 2014 America
World Europe
Source: World Economic Outlook database — 2015 Source: World Bank Global Economic Monitor 2015

5 Chemicals in Europe: the way forward

Slow growth in R&D investment Regulatory costs or burdens
Innovation can prove to be a differentiator for a chemicals The regulatory cost in Europe has doubled during 2004–14,
company, with the growing competition in customer while labor cost per employee has increased by 44% during
acquisition and cost. However, the growth of R&D investment 2002–14. Furthermore, the emission and industrial process
in Europe between 2004 and 2014 has been much lower legislation costs index quadrupled between 2004 and 2014.
when compared to Asia. The growth is even lower than the However, REACH cost is expected to decline by 2018.
US, which, like Europe, is a developed market.
2.5 Regulatory costs index in European
2.0
Chemicals industry
Region-wise R&D spending 2004 vs 2014 (€
billion)
CAGR 2004–14 1.5

1.0
EU28 8.9 +1.3%
7.8 0.5

0.0
11.9 +4.7%

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014
The US
7.5

China 9.1 +20.1% Transport legislation

1.5 Customs and trade legislation
Chemicals specific product legislation
Japan 5.8 +0.2%
5.7 Workers safety legislation
Emissions and industrial processes legislation

South Korea 1.6 +10.1% Energy legislation

0.6 Chemicals legislation

1.2 Source: CEFIC Facts & Figures 2015

India +9.5%
0.5
Additionally, rigid labor laws in the European
manufacturing industry make layoffs difficult for companies
Switzerland 0.5 +0.5%
0.4 experiencing an economic down cycle, forcing them to
2014 2004 absorb the cost burden. Major European producers such
as Germany, the Netherlands and Italy have a high cost of
laying off tenured employees. Plant shutdowns in Europe,
Source: CEFIC Facts & Figures 2015 amid slow demand, further aggravates the issue with
employee dismissal.
Aging pool of blue-collar employees in
Share of labor-force in chemical manufacturing by age
chemicals
Age-group 3Q08 3Q15
Europe currently witnesses an aging blue-collar workforce
in chemicals manufacturing as the number of workers 15–24 years 7.4% 5.4%
joining the industry has been declining over the years. The
share of workers aged between 50 and 64 has increased 25–49 years 66.9% 65%
from 25.7% to 29.6% in the last seven years while it has
decreased for workers aged between 15–24 years. 50–64 years 25.7% 29.6%

The industry needs to identify ways to attract new talent.

According to the first European employment survey for Stringent regulations; paving
chemists and chemical engineers (conducted by Rainer way for a better working world?
Salzer, European Chemistry Thematic Network and TU
Dresden, Germany), only 18% of the total chemistry
graduates joined the chemicals sector. The remainder have The strict regulations in Europe might weigh it down as an
joined competing sectors such as health care, bio-tech, investment option, however, the sustainable view of the
food, mining and metals, etc. Only 7% of respondents industry paves way for future chemicals which facilitate
chose production as their current job as compared to 43%, safety of employees and consumers. The region has
who selected R&D as their current job function. already reduced greenhouse gas emissions by
approximately 60% in the past two and half decades.
Sustainable chemicals and processes is the way for
chemicals tomorrow, and European chemicals have taken
the rightful initiative in that direction.

6 Chemicals in Europe: the way forward

What gives Europe a favourable business environment?

High level of political stability Favorable environment for innovation

Seven out of eight (except Russia) major European European countries enjoy a high innovation index reflecting
chemicals producers enjoy strong governance and political high-quality research institutes, increased share of company
stability, higher than major manufacturing hubs such as spending on R&D, Patent Co-operation Treaties (PCT) and
China and India. The European countries above the global availability of highly skilled research professionals as
average score (-0.23) of political stability index together compared to other regions. The EU spent around 1.6% of its
constitute approximately 14% of global chemicals sales. chemicals investment on R&D, while China spent only 0.8%^
in 2014. A strong R&D base in Europe provides the region
with a favorable environment and prospects for innovation,
Political stability index in 25 top chemicals thereby, facilitating products with a higher value-add for the
markets (–2.5: weak governance to 2.5: strong customers.
governance)
Access to suitable skills
European chemicals industry is increasingly focusing on
Singapore 1.2 producing high-value specialty products. The success of
Canada 1.2 specialty chemicals industry depends on the extent and
Netherlands 1.0 frequency of innovation in products. For an innovation-driven
industry, criteria such as access to suitable talent is often
Japan 1.0
more important than any other. We compared the availability
Germany 0.9 of scientists and engineers and quality of education as the
Taiwan 0.8 two parameters to measure the access to skilled labor for
Belgium 0.7 top-15 chemicals-producing countries — European countries
such as Belgium and the Netherlands score high on quality
US 0.6
of education while Germany and Spain have a large pool of
Italy 0.5 scientists and engineers available.
Chile 0.5
UK 0.4
France 0.4 Access to skilled workforce in top 15
Spain Global 0.3 chemicals-producing nations
average: - (WEF GCI ratings — 0 to 7, 7 being best)
Brazil 0.0
0.23 6 Belgium
Saudi Arabia -0.2
China (mainland) -0.5 Netherlands
Mexico -0.8 Germany
Russia -0.8 France UK
US
India -1.0 5
Quality of education

South Korea -1.1

Japan
China
Spain
Source: CEFIC Facts & Figures 2014, World Bank World
Government Indices survey 2014
4

Top six European countries (contributing 12.5%

Well-established infrastructure to the global chemicals industry revenues) have
relatively greater access to the skilled workforce
The major European chemicals-producing countries enjoy
better chemical–related infrastructure (than Asia and Latin Brazil
3
America) including transportation, supply chain, logistics,
3 4 5 6
energy supply to support business activities. The Global
Competitive Index rates major European producers Availability of scientists and engineers
(including Germany, the Netherlands, France etc.) between
European countries
4.8 and 6.2 (out of 7) in terms of infrastructure while Asian
producers such as India and China are rated 3.6 and 4.7, Size of the bubble represents 2013 sales
respectively.
Source: CEFIC Facts & Figures 2014, World Economic Forum – GCI
dataset 2005-15
^ - Source: CEFIC Facts & Figures 2016

7 Chemicals in Europe: the way forward

Growing demand in the emerging and low-to Integrated cost-efficient chemicals clusters
medium-income countries of Europe Europe has strong competitive clusters which are the
The average GDP growth of emerging Europe*, in the next backbone of the European chemicals industry. According to
five years, is expected to be 5.9%, according to World European Chemical Site Promotion Platform (ECSPP),
Economic Outlook, above the global average of 5.4%. The Europe has 95 active chemicals clusters or parks with an aim
demand for chemicals and their end-user industries in these to position Europe as an attractive region for new chemicals
regions are expected to witness strong growth reflecting an investment. European chemicals parks provide stable
overall growth in the GDP. production conditions and reliable infrastructure owing to their
long production history and highly professional site operators.
According to the American Chemistry Council report for The main advantage of European chemicals parks and
2015, the chemicals output for CEE, (includes the emerging industrial parks is the availability of well-qualified personnel at
Europe countries and Germany) is expected to grow at a all levels.
CAGR of 4% by 2025 as compared with 3.6% for the global
chemicals output and 2% for Western Europe chemicals. Overall, investment cost levels are higher than at Asian sites
More than 50% of the planned chemicals capacity in because of higher material, construction and engineering
Europe* in the next four to seven years will be in low and costs. However, these costs are lower than those in the
medium income countries of Central and Eastern Europe Middle East. Continuous improvement of parks'
(Poland, Hungary, Croatia Romania, Belarus, etc.) competitiveness and attractiveness enable European
chemicals industry to be prepared for increased competition
► Poland — growth in pharmaceuticals, plastic products from China, Southeast Asia and the Middle East.
and organic chemicals
► Croatia — chemicals, rubbers and plastic form more
than 7% of the country’s exports

TTIP expected to increase EU’s

attractiveness

The Transatlantic Trade and Investment Partnership (TTIP) Europe can be expected to retain its position as a significant
is expected to enhance demand in European industries chemicals player given the favorable business environment,
particularly in the manufacturing sector with reduced tariffs coupled with opportunities from TTIP. Furthermore, market
and lesser bureaucracy. dynamics such as the low-oil prices and depreciating Euro will
also affect the competitiveness of Europe. Assuming that the
Industries that would benefit the most include chemicals, low-oil price scenario continues, Europe will begin to regain
metals and metal products, food processing and automotive. its market share. Moreover, strategic options to acquire low-
The resultant higher trade activity, besides increasing cost feedstock — by exploring shale-based options
demand, will also imply uniform global standards, thereby (particularly for large integrated players) in Europe or
enhancing innovation. importing from the US — can also offer further growth
Further, tariff elimination under TTIP is expected to save opportunities.
€168 million in duties for the chemicals sector, according to However, the global and European demand outlook scenario
IHS Chemical Week. The European chemicals sector could continues to be a concern for Europe. We analyze the steps
benefit from US export supplies of shale gas (in the wake of taken by several chemicals majors to improve their market
recent natural gas boom) to help their crackers become competency in Europe and other regions and list the crucial
more competitive in the global market. This will particularly strategic steps which can be considered by these players.
boost the trade of specialty chemicals and agrochemicals
from Europe as the global population continues to grow.

Countries in Emerging Europe – Albania, Armenia, Azerbaijan, Belarus, Bosnia Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Georgia,
Hungary, Kosovo, Latvia,
Lithuania, Moldova, Montenegro, Poland, Republic of Macedonia, Romania, Serbia, Slovakia, Slovenia – Emerging Europe
*Excluding Russia

8 Chemicals in Europe: the way forward

What are the global chemicals leaders doing in Europe?

Amidst the cost and demand challenges, companies operating in Europe are finding ways to tackle the situation. The corrective
measures include a range of solutions from portfolio optimization to maintaining operational excellence through shutting down plants
for high-cost, low-margin products. Most of the solutions include using one or more of these five levers: identifying the right
feedstock, restructuring business operations, portfolio optimization, moving to high-growth regions and markets, and growing
innovation capacity.

Strategizing around feedstock or raw material costs

Since feedstock forms the major chunk (~40%) of the chemicals production costs, chemicals companies continuously work on
optimizing their feedstock strategy. Furthermore, with increasing environmental concerns and regulations, sustainable feedstock is
the need of the hour. Overall, key success factors for an optimal feedstock strategy are proximity to the low-cost feedstock region,
access to the latest technology and a sustainable feedstock for long term. Therefore, chemicals players are moving closer to the low-
cost regions and deploying alternate feedstock technology (such as coal-to-olefins, methane-to-propylene).
European companies are increasingly investing in these regions to diversify their feedstock mix. If the oil prices rebound in the
medium term, importing ethane from the US to feed plants in Europe will continue to be an attractive option for the chemicals players
in the region. As of 2014, ethylene cost saving set by naphtha-ethane price spread and cost of investment (around €175 million) was
approximately €328.8 (US$ 375) per ton ethylene. However, the decision to invest in conversion will also depend on location, current
cracker products, ease of ethane conversion, major business portfolio and capital expenditure.
However, in case of sustained low-oil price scenario, using the existing naphtha-based crackers in Europe will be a better option. As
a result, the need for flexible feedstock or supply chain arises; companies need to develop technologies to be able to shift to a
different feedstock without losing output or increasing costs.

Initiatives of European chemicals companies

Developing mixed feed Leveraging low-cost feedstock available from shale Developing sustainable
crackers (the US) feedstock technologies

Importing ethane from the Investing in propane Developing technology for Using biomass for
US dehydrogenation plants methane to propylene plants in chemicals production
in the US the US and Europe

Expanding capacity of ethane

crackers in the US and Europe

Some other notable measures by chemical players in Europe include:

► LyondellBasell is expanding multi-plant ethylene capacity, which benefits from shale gas production.
► Annual ethylene capacity expansion by 839,000 tons (1.85 billion pounds)
► Investment of €1.17 billion (US$1.3 billion)
► In April 2015, SABIC has announced plans to import ethane to its Teesside plant in UK to secure the future of its cracker at Wilton
and to keep it competitive.
► INEOS Europe AG has entered into ethane purchase agreements with CONSOL Energy (2014), Royal Dutch Shell and
ExxonMobil (2015) for long-term sourcing of low-price US ethane for its European crackers.
► In 2014, BASF announced to invest €1.2 billion (US$1.4 billion) in US shale gas. BASF aims to produce on-purpose propylene by
leveraging low cost US shale gas to meet internal demand for propylene in North America.
Further, European companies are developing technologies to use sustainable feedstock or processes for chemicals production:
► In 2014, BASF and Corbion Purac JV — Succinity, started its first commercial production facility (capacity ~10,000 TPA for bio-
based succinic acid at Corbion Purac's Montmeló, Spain, site.
► Novozymes and Cargill are jointly developing a bio-based process for producing 3-hydroxypropionic (3-HP) acid and acrylic acid
from renewable raw material.
► Evonik and AkzoNobel have started constructing membrane electrolysis plant in Germany. The plant will produce 130,000 TPA of
potassium hydroxide solution and 82,000 TPA of chlorine. The plant, to be operational in 2017, is expected to improve its
ecological footprint by 25% to 30% for each ton of chlorine.

9 Chemicals in Europe: the way forward

In a bid to survive the cut-throat competition, European companies are streamlining their operations
and divesting non-core businesses to cut costs and improve efficiency

Remodeling operations

In an environment of rising costs and declining pricing power, it is imperative for European chemicals companies to focus on cost and
efficiency management to increase their profitability. One of the most used strategic initiatives to improve business efficiency is to
target operational excellence for accomplishing cost leadership. Automation of manufacturing processes, integration of business
operations (vertically and horizontally), enhancing supply chain efficiency and deploying cost saving programs are being used by
chemicals players to achieve this.
► In November 2015, BASF opened a new 300,000 TPA toluene di-isocyanate (TDI) plant at its Ludwigshafen site (Germany) with
an investment of over €1 billion. It is an integrated plant having all the most competitive facilities in the world. BASF also
implemented a cost excellence program STEP between 2012 -15 with a targeted cost-saving of €1.3 billion. The company is now
initiating its new commercial excellence program –’Drive Efficiency’ (DrivE) – with a target savings of €1 billion between 2016 and
2018.
► During 2010–14, Clariant’s excellence initiative resulted in positive effects of €380 million owing to cost reduction and additional
sales. Furthermore, Clariant has also popularized a culture of continuous performance improvements at business unit level (six
sigma).

Solvay raised the expected excellence impact of €800 million on BASF — targeted savings from commercial
2016 REBITDA vs 2013 excellence programs
(€ billion)
€800 million excellence impact on 2016
REBITDA*
STEP (2012-15) 1.3

Operational Commercial
DrivE (2016-18) 1
Innovation

Source: Company website Source: Company website

Chemicals companies are increasingly implementing process automation. One of the more popular ways of automation is industrial
internet of things (IIoT). IIoT refers to an information system made up of sensors linking physical objects together using Internet
technology. It is crucial for automation of processes in a chemicals manufacturing facility. IDC predicts that there will be €146 billion
(US$ 167 billion) of IIoT revenues opportunities for process manufacturing industries (including chemicals) by 2018. While IOT is
most commonly implemented in developing a more agile and efficient supply chain, other implementations are also being explored
► Facilitating worker safety: Facilitating worker safety through wearable sensors. Tata Sons is developing safety wearables for its
workers in Tata Chemicals, Tata Power and Tata Motors.
► Mitigating supply chain risks: Detecting possible malfunctions through predictive maintenance thereby eliminating the supply
chain risks. Tracking of logistics for location and authenticity, RFID tags (or using global positioning system (GPS) technology)
can send alerts for change in temperature and moisture. e.g., Dow has used IIoT to build supply chain risk management
programs to improve the supply chain.
► Developing precision agriculture as a service: Sensors capturing and transmitting data related to local weather, GPS, soil
type, fertilizer requirement levels to be used in precision farming.
In addition, companies are investing in digitization, big data and analytics, which address the complete chemicals manufacturing
lifecycle from R&D to market, cutting the cost and time needed to bring a new product to market.

* Recurring EBITDA; operating result before depreciation and amortization, non-recurring items, financial charges and income taxes.

10 Chemicals in Europe: the way forward

Strengthening core business

There has been a fierce competition in the chemicals markets from the emerging countries. To survive in these rough times and to
retain their market share, particularly in their core business, companies are streamlining their portfolios to confirm focus on core. This
is leading the companies to divest non-core businesses and increase investment in business that aligns with their strategy.
► In February 2016, BASF announced the sale of its industrial coatings segment to AkzoNobel for €475 million (£368 million). Both
the companies will benefit from this:
► BASF’s coatings division will now focus on automotive coatings and decorative paints.
► AkzoNobel is expected to benefit since industrial coatings is one of its four focus end-user segments.
► In February 2016, Lanxess started its second production line for high-performance plastics at its facility in North Carolina, the US,
doubling the production capacity from 20,000 to 40,000 TPA. It entailed an investment of around €13.3 million (US$15 million) and
it will cater to the growing US automotive industry. This investment is aligned to the company’s strategy to focus on high-
performance compounds and to move toward high-growth markets.
► In December 2015, Solvay acquired automotive composites business (Cytec). This acquisition adds value because Cytec
complements Solvay’s specialty formulations in mining and oil and gas chemicals and has a similar service-oriented business
model.
► In September 2015, the Bayer group separated its material science business and formed a new entity “Covestro”. Covestro may
consider bolt-on acquisitions to grow its business.
► In July 2015, DuPont spun-off its struggling performance chemicals business into a separate public company, Chemours.
► Dow Chemical targeted to raise €7.6 billion (US$8.5 billion), from the sale of non-core assets by mid-2016.
► INEOS’s purchase of BASF’s stake in Styrolution and its formation of a PVC partnership with Solvay in November 2014, will grow
INEOS’s core basic plastics businesses and help BASF and Solvay home in on specialties.

Dow-DuPont merger Mega-deal may trigger consolidation in European Agrochemicals

The recently announced Dow-DuPont mega- Amidst declining crop sales and thereby prices globally, the merger is expected to
merger is expected to create a combined create increased competition for their European agrochemicals rivals (BASF,
entity with a market cap of €117 billion Syngenta, etc.) in Americas as the combined companies would sell around 16%
(US$130 billion). It will be further split into of the world’s pesticides and become the third-largest crop chemicals player.
three entities with each focussing on Besides, the merger may have boosted consolidation in global agrochemicals
advanced materials, specialty chemicals and industry with ChemChina planning to acquire Syngenta and Bayer bidding to buy
agrochemicals, respectively, another Monsanto. However, European companies (such as BASF, Clariant and Bayer)
instance of retaining focus on the core would have opportunities to buy more assets that may be on sale arising from
competencies. anti-trust issues related to the deal.

Dow Chemicals: Sales by segment — 2015 (US$ billion) DuPont: Sales by segment — 2015 (US$ billion)

Performance plastics 18.4 Agriculture 9.8

+
Performance materials, chemicals 11.8 Performance materials 5.3
Safety and protection 3.5
Infrastructure solutions 7.4
Nutrition and health 3.3
Agricultural sciences 6.4
Electronic and commmunication 2.1
Consumer solutions 4.4 Industrial biosciences 1.2

DowDupont
Pro forma: US$74 billion

Agriculture (US$16 billion) Materials (US$46 billion) Specialty products (US$12 billion)

DuPont: Agriculture DuPont: Performance materials DuPont: Nutrition and health, Industrial
Dow: Agriculture sciences Dow: Performance plastics, biosciences, Safety and protection and
Performance materials and Electronics and communications
Chemicals, Infrastructure solutions, Dow: Electronic materials business
Consumer solutions (excluding (Consumer solutions)
Electronic materials)

11 Chemicals in Europe: the way forward

Further, European companies are increasingly directing their investments towards high-growth end
markets and emerging markets

Targeting high growth markets Driving growth through innovation

The emerging markets contributed more than 40% in the While innovation spearheads the growth for every
global chemicals sales in 2014 and the share is only manufacturing industry, it has become increasingly pivotal for
expected to go up with the high GDP growth outlook. the chemicals market amid increasing cost competition and
Hence, European companies are strategizing to expand increasing commoditization of chemicals. Global leaders in
their share in emerging regions to capitalize on the growth chemicals are not only investing in developing innovative
opportunities. This is evident from the increasing revenue products, but are also taking a more customer-centric
share and capital spending in these regions. approach to R&D.
► BASF increased its planned capital expenditure in Asia Interestingly, European chemicals and plastics makers are
Pacific from 14% over 2010–14 to 18% in 2015–19. It is also reducing in-house research and collaborating with
also investing €3.68 billion (US$4 billion) in a industrial customers to develop customized solutions while
petrochemicals plant in Iran, seeking to more than saving on R&D budgets. This often implies partnering with
double its capacity in the next decade after the lifting of exclusive supplier contracts.
sanctions.
► BASF has started working with sportswear maker Adidas
► Leading soda ash producer Solvay witnessed trebling of to make running shoe soles more bouncy.
its revenues from Asia-Pacific during 2010–14 with the ► Solvay is collaborating with an oil-producing company to
region’s share increasing from 14% to 33% in 2015. develop polymer linings for corroded pipelines
Solvay – revenue by region ► Lanxess is partnering with VW unit Skoda for innovation
3.5 related to car parts by developing light-weight materials.
Other regions* 1.0
7.1
Further, innovation for sustainability, i.e. new and greener
6.1
Asia-Pacific feedstock, sustainable production processes and expanding
portfolios to include greener products are major initiatives by
2010 2015
several chemicals players.
€7.1 billion €10.6 billion
Source: Solvay annual reports Moreover, stringent regulations in Europe are pushing the
Industrial gases major Linde is extensively investing in their companies to develop eco-friendly products.
growth markets (Eastern Europe, Africa, South & East Asia ► As in September 2014, more than 20% of BASF’s
and Greater China) and North America to achieve its target products analyzed (by sales) are contributing significantly
of long-term profitable growth. to sustainability

Linde’s total capex of major committed As the emerging economies are taking over production of
projects (in € million) commodity chemicals business, chemicals players in Europe
are investing in R&D to retain their competitive edge by
550 700 supplying products which offer a higher value-add.
600
370
100 250 100 50
average 2011– 2014 2015E 2016E
2013
Mature markets Growth markets
Source: The Linde Group, 1H15 Presentation
In addition, many companies have made organic and
inorganic investments in the emerging markets during the last
few years:

► Clariant is investing €9.22 million (CHF10 million) in a

healthcare packaging manufacturing plant in Tamil Nadu,
India. The company is also constructing a masterbatch
plant in Saudi Arabia to serve the growing Middle East and
African markets.
► Clariant invested about 62% of its total investments in
North America and emerging markets in 2014.

► In 2015, LyondellBasell acquired polypropylene

compounding assets of Zylog Plastalloys Pvt. Ltd with *Other regions include Europe, North America and Latin America
plans to further expand its India operations.

12 Chemicals in Europe: the way forward

What strategies can the chemicals players in Europe consider in future?

► While restructuring business operations is the need of the hour for European chemicals industry, the industry also needs to have a
focused approach to reorganize their business and operating model. An integrated business model which features a proximity to the
raw material supplier and development of new differentiated products to meet the needs of the end-consumer is an imperative for
the industry.
► Unlike earlier, identifying a high-growth product or industry is not enough for a chemicals player. It requires a consistent evaluation of
the product (and services) portfolio and its validity amidst the current industry scenario. A company needs to manage the complete
chemicals life-cycle of its products. Further, chemicals companies can no longer be oblivious to the needs and preferences of the
end-customer. The chemicals players need to develop specialized products and services for the domain end-user industry of their
customers.
► While doing this, companies also have to be responsible toward society and its stakeholders. They need to produce products that
will improve health, environmental performance and security.
► To facilitate this, the companies need to develop a customized business model considering the value chain hierarchy of its
businesses. After analyzing the top performers of the industry, we present a five-point strategy model that can be considered
chemicals companies.

How should business be structured to

compete in the marketplace?

How should energy and feedstock

How to procure the suitable skill set
cost volatility and supply-demand
and talent mix?
imbalances be managed?

What combination of product portfolio

Where should the R&D expenditure
will be ideal to meet anticipated future
and innovation be directed to?
state?

Refashioning business model How should business be structured to compete in the marketplace?
and operations
Commodity chemicals Diversified Specialty chemicals
To facilitate smooth operations,
chemicals companies need to ► Reducing investment ► Utilizing the large asset base ► Developing dedicated
consistently evaluate and question in siloed assets and by undertaking shared teams comprising of
their operating model. A close investing more in manufacturing with peers or sector and marketing
scrutiny of the operational assets at integrated affiliates to leverage experts to collaborate
parameters, technology and sites or clusters economies of scale with each customer
processes in use, the products in ► Modifying operations ► Expanding capacity in ► Teaming with your
the market etc. is crucial for a strategy to focus on integrated chemicals clients closely through
company’s success in Europe. preserving cash, production sites or industrial digital portals
Further, vertical and horizontal managing excess parks to optimize costs and
integration across the value chain capacity, and securing margins ► Developing direct
and functions respectively needs access to capital sales models for low-
to be an integral part of the ► Integrating continuous margin products (to
business model. However, a high ► Developing integrated monitoring and evaluation of reduce costs)
rate of restructuring may also (vertically and operations in the strategy
► Integrating smaller
hinder a company’s growth in the horizontally) and
sustainable supply ► Optimizing frequency of (but similar) plants or
market. Hence, it needs to
chains (greener restructuring activities that operations to facilitate
optimize the frequency of
modes of transport, may shift management's focus cost efficiency
reorganization activities to
to internal activities instead of
maintain leadership’s focus on the product swaps etc.)
growing market share
core business.

13 Chemicals in Europe: the way forward

With the emergence of shale and other low-cost alternates to operational and supply chain efficiency. While several players
chemicals production, many companies felt the need to revisit actively implement digitization, it needs to go beyond the basic
their business models to achieve sustainable margins. However, function of predictive maintenance and enter all the phases of
with the volatility in oil prices and the dependent feedstock, the chemicals value chain from procurement to sale to customer
particularly since July 2014, the need for an agile business feedback.
model and operations, which are easily adaptable to the
changing business environment has augmented more than ever. Further, digitization can be leveraged to develop a new business
model for the chemicals industry. Several agrochemicals
Moreover, digitization is considered a disruptive trend which can companies such as DuPont, Monsanto offer precision farming
help chemical companies to take that big leap to improve service as a part of their portfolio.

Identifying the optimum feedstock blend How should energy and feedstock costs volatility be
managed?
Chemicals companies need to evaluate the right mix of
feedstock and production technology for chemicals Commodity Diversified Specialty
production in Europe. They need to identify the chemicals chemicals
optimum strategy for partnering around the acquisition
of the feedstock. While a base petrochemicals player ► Strategic ► Developing ► Partnering with
may focus on acquiring low-cost feedstock from the US partnership flexible peers for
(or other low-cost region), a specialty chemicals player s to identify feedstock producing or
will need to evaluate its cost structure and identify the and acquire technology acquiring base
right collaboration strategy to acquire raw materials alternate (particularly for chemicals used
from commodity and diversified chemicals companies. low-cost petrochemicals as raw materials
A diversified company, on the other hand, can invest in feedstock companies) to leverage
an integrated facility to achieve cost savings with a economies of
sustainable supply of raw material. scale

Enhancing supply chain flexibility How should supply-demand imbalances be managed?

Being faced by volatility perennially, chemicals Commodity Diversified Specialty
companies in Europe need to identify the best way to chemicals chemicals
develop an agile and adaptable supply chain.
Simultaneously, the chemicals supply chain needs to ► Facilitating ► Sourcing from ► Developing a
fulfill the safety requirements. A supply chain challenge multiple low-cost supply chain
such as the bull-whip effect is magnified in case of the sourcing (owned or model with
chemicals industry as the excess inventory not only options to peers’) facilities high frequency
increases shelf space, but also deteriorates in value. improve in regions and low order
bargaining (such as sizes to
power China) achieve
efficiency

► Developing ► Formulating a
horizontal market strategy
and vertical to form
integration contracts with
along the the global
supply chain parent instead
to improve of separate
efficiency contracts with
and subsidiaries
productivity
and
facilitating
better asset
deployment

14 Chemicals in Europe: the way forward

Ascertaining the suitable business portfolio
Chemicals players in Europe can consider restructuring their portfolio according to the changing end-user markets. They need to
identify the emerging mega trends in the regions served by them and how they will drive the demand for their products. Growth will
come from technology breakthroughs in medical (miniaturization, nanotechnology, silicone usages, etc.), IT, electronics, automotive
and energy (production, storage, increasing efficiency etc.) sectors primarily. An eye for the mega trends will help differentiate the
high-margin high-growth potential products from the low-medium margin products offering unimpressive growth.
For example, specialty chemicals companies serving the automotive sector need to restructure their product portfolio to meet trends
such as light-weight and low-emission products. Similarly, within Europe, the companies need to revisit their strategies according to
the varied growth trends in the emerging and developed Europe.

What combination of product portfolio will be ideal to meet anticipated future state?

Commodity chemicals Diversified Specialty chemicals

► Increasing the share of products used in ► Focusing on the non-cyclical ► Focusing on products with a stable
specialty chemicals or consumer end-markets of food, personal renewal demand and high pricing
chemicals particularly in the high-growth care and health industry power (ingredients for consumer
segments chemicals)

► Petrochemicals companies can focus on ► Offering the most profitable products

producing C4 and C6 derivatives which and services at increasing levels of
have a relatively stable demand in Europe sophistication

Emerging megatrends in chemicals’ end-user markets

Industry Trend Products for which the demand will

increase

Automotive Fuel efficiency, autonomous cars Lightweight plastics components, electronic

chemicals

Healthcare Monitoring health through mobile Electronic materials or chemicals, Lithium-ion

devices, use of big data and chemistry, polymers replacing metal and
analytics glass in health care

Energy Energy storage, smart grids,

smart meters, growing market for
renewables

Construction Smart buildings — energy Materials for smart grids, automated

efficiency, high illumination and electrical systems, insulation; smart materials
thermal comfort such as nano-materials, self-healing
coatings, etc., and other construction
chemicals

Agriculture Precision agriculture, sustainable Additional services such as precision

agriculture agriculture, bio-pesticides or bio-herbicides

Textiles Smart fabric — built in health Advanced materials

monitoring sensors

E-commerce New designs in packaging, eco- Innovative material in packaging — inks,

@ friendly packaging sealants; eco-friendly packaging materials

15 Chemicals in Europe: the way forward

Reshaping innovation strategy Where should the R&D expenditure and innovation be directed to?
around the margin driver
Commodity chemicals Diversified Specialty chemicals
Chemicals players in Europe need to
differentiate their innovation investment Feedstock and process Product-oriented Solution-oriented
strategy according to their customers. oriented innovation innovation innovation
For instance, a commodity chemicals ► Investing in innovation ► Adopt the ‘innovate to ► Investing in customer-
company which is highly energy- and in alternate technology differentiate’ strategy oriented innovation
feedstock-intensive should invest in or feedstock ( e.g., facilitating value and new applications
innovation in raw material which CTO, bio-based) to addition to its for their products
reduces the overall costs and facilitates reduce cost and customers
sustainable products. Further, the facilitate sustainability
chemicals players in Europe need to
develop innovation roadmaps with ► Developing R&D ► Developing local R&D ► Directing innovation to
specific R&D targets for the company in clouds for leveraging and technical the high-growth high-
each — feedstock, processes and the expertise available capability in the margin products, such
products and solutions — thereby across the industry emerging markets as raw materials for
facilitating a premeditated (knowledge sharing) sustainable products
apportionment of limited resources. (light-weight vehicles,
novel solar
photovoltaic
technologies)

Attracting the right skill set How to procure the suitable skill set and talent mix?

To achieve growth in market share Commodity chemicals Diversified Specialty chemicals

along with margins, a chemicals
► Hiring high share of ► Hiring major share of ► Investment in
company requires three integrated
technology or chemicals value chain recruiting industry and
elements in its talent pool — scientists
resources experts to experts to facilitate research experts to
who develop innovative products,
reduce costs optimum integration of develop new products
industry experts which identify the
manufacturing, supply and applications
emerging need of the dynamic end-user
chain, logistics etc.
industry and technology experts which
facilitate consistent upgrading of the ► Developing safe and ► Providing advanced
company’s technology to optimize costs. secure working skill training to the
Companies need to modify their environment for the existing employees
compensation, HR and employee safety employees
policies to facilitate a better working
environment so as to position their
companies a lucrative option for
chemical graduates.

16 Chemicals in Europe: the way forward

Why EY?
EY is known for its chemicals sector knowledge, relationships with the industry’s key
stakeholders, and strong global capabilities
In an industry synonymous with innovation, the bar is set pretty high. Embrace new technology, develop new logistics networks,
comply with new regulations at home and abroad and satisfy the ever-changing demands of end consumers. At the same time,
manage costs, meet or exceed stakeholder expectations, “do more with less.” EY global chemicals sector can help. We’ll continue to
provide high-quality assurance, tax, transaction and advisory services relevant to your industry and enterprise..
In summary, we strive to provide our people with deep and leading practice sector knowledge and experience, market leading
business insights and services to assist our clients. Our goal is to confirm EY is branded as the organization of choice to work with the
most valued and respected multinational companies in the world.

How our clients benefit from the experienced global chemicals professionals

Network Execution
► We connect approximately 2,500 experienced global ► We bring together a pool of chemicals professionals with
professionals who share information on current and technical experience and industry knowledge.
emerging trends in the sector to help you manage risk,
optimize performance, and increase operational ► Industry risks are identified, analyzed, and
effectiveness. communicated to service teams.

► We have multi-disciplinary teams working with global ► We offer industry specific point-of-view and thought
chemicals leaders. leadership.

► We bring you closer to your suppliers and customers to ► We develop educational platforms and training sessions
network and discuss business needs and issues. for our people and clients.

Quality Insight
► Expectations of Service Quality (ESQ) and Assessment ► We share relevant and practical thought leadership
of Service Quality (ASQ) process is routinely proactively.
administered to a broad array of key stakeholders.
► We organize issue-based forums addressing industry,
► Industry feedback is tracked and monitored for continual technical and regulatory issues.
improvement.
► We develop knowledge and learning initiatives that are
► Senior partner on each engagement is focused on vital to the strategic direction of our clients.
quality and staffing.
► We facilitate sessions and roundtables to help clients
understand, prioritize and address matters critical to their
success.

“EY is teaming with many of the world’s leading chemicals companies today, helping them realize sustainable business
improvements and removing unrewarded complexity.”

17 Chemicals in Europe: the way forward

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18 Chemicals in Europe: the way forward

Contacts

EY Europe EY Asia-Pacific

Michiel Swets Shiju Suto

Partner – TAX Partner – Assurance
+31 88 40 78517 +81 3 3503 1100
michiel.swets@nl.ey.com sutoh-shj@shinnihon.or.jp
The Netherlands Japan

Frank Leenders
EY India
Partner – Advisory
+31 88 40 78812
frank.leenders@nl.ey.com Devinder Chawla
The Netherlands Partner – Advisory
+91 124 6714610
Tobias Broeders devinder.chawla@in.ey.com
Senior Manager – TAS India
+31 88 40 79123
tobias.broeders@nl.ey.com Paolo Prisco
The Netherlands Partner – Advisory
+41 58 286 8544
Steve Whicher Paolo.Prisco@in.ey.com
Energy & Resources BD Leader, EMEIA India
+31 6 2125 1389
steve.whicher@nl.ey.com
The Netherlands

EY Americas Acknowledgements

Jade Rodysill Daksh Tyagi

Partner – Advisory Bhavna Pruthi
+12149698650
jade.rodysill@ey.com Jiwanjot Singh
The US

Bradley Newman
Partner – Advisory
+17732307793
bradley.newman@ey.com
The US

19 Chemicals in Europe: the way forward

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