Get Out Clause? Increasing production capacity in the Middle East and drastically reduced demand due to the economic crisis are making life miserable for the petrochemical industry. New strategies are needed to get out of the disaster. Sustainable development seems to be key to coping with the challenges and can drive business forward. Ahead of the European Petrochemical Association's 43rd Annual Meeting in Berlin, Oct. 3 - 7, CHEManager Europe asked industrial leaders about their strategies to strengthen businesses.

Interview with Boy Litjens, CEO, SABIC Europe

Mr. Litjens, what challenges is the petrochemical industry facing?

B. Litjens: The coming years will be challenging for all players in our industry. A few years ago we already foresaw that 2009 until 2011 would be years with low product margins. This is because of a series of new cracker start-ups in Asia and the Middle East. What nobody could foresee however is the global recession with its impact on demand. For the cracker and cracker-related businesses, the combination of overbuilding and lost demand will result in an industry downturn. Since this industry downturn will last several years the least competitive crackers in different parts of the world (America, Europe and North East Asia) will need to close and we are already seeing more and more examples that this restructuring process is already taking place.

What is Sabic's strategy to face these challenges?

B. Litjens: The majority of Sabic's petrochemical plants are positioned in the Middle East and will be profitable also during the downturn. Our petrochemical assets in Europe are well-positioned overall since these assets are concentrated on a few sites and these sites have a large average plant scale. Our organization in Europe - with functions such as business management, sales and logistics - is cost-efficient, since this organization is taking care of the materials from Sabic's European assets as well as from Sabic's plants in the Middle East. Everyone in this industry is now cutting costs and here Sabic is no exception. At the same time our company however has the financial muscle to now continue with investments in asset improvements, product improvement and innovation.

How important is sustainability in this context?

B. Litjens: Society will continue to call for products and production processes which are sustainable. At the same time, sustainability performance will have a strong impact on the overall competitive position of a petrochemical company. Sustainability plays a role in business aspects in varying forms: energy-efficiency in manufacturing, use of renewable energy, renewable raw materials for end products and end products which save energy in the use phase. Also, sustainability plays a role in the "end-of-life" of our products. Sabic has important programs for all of these sustainability aspects, e.g. investments in combined heat and power generation, annually improving the energy efficiency of our crackers in Europe, research on renewable feedstock, develop products which preserve food, prevent waste and are clean and easy to recycle.

Interview with Graham van't Hoff, Vice President Global Base Chemicals, Shell

Mr. van´t Hoff, what challenges is the petrochemical industry facing?

G. van´t Hoff: Nobody in the chemicals industry has been immune to falling demand, rising costs, lack of credit and volatile oil and feedstock prices. Because of its intricate, interconnected value chains the effects of this downturn are hitting virtually all players, including major petrochemical producers such as Shell. We have endeavored to ensure that we have the products that our customers need when and where they need them, while optimizing stocks in our supply chain. Our global footprint is a strategic strength in this regard.

What is Shell's strategy to face these challenges?

G. van´t Hoff: We continue to take a longer-term view of our business. As part of a well-capitalized, integrated energy and chemicals group, we continue to invest in developing petrochemicals cracking capacity in markets where we expect strong demand for our products.
This means reinvesting in Europe and North America, which remain heartlands of our business, while ensuring we are positioned to meet the current and future needs of our customers in the growing markets of Asia Pacific. Operating in the mature markets demands increased emphasis on the competitiveness and sustainability of manufacturing operations, optimizing feedstock and hydrocarbon streams and running plants reliably and efficiently. Prudent investments in asset capabilities help to make us robust for potential cyclical demand.

How important is sustainability in this context?

G. van´t Hoff: Like all other industries we are also confronted with what Shell describes as the ‘three hard truths' of the energy challenge: surging demand, constrained supplies and increased stresses on the environment. Against this background, the pe­trochemical industry has to contribute to sustainability as well. We will need to access and develop a wider range of feedstock and energy resources, from fossil fuels to renewable including bio-based feedstock, enhance energy efficiency of our manufacturing sites and cut greenhouse gas emissions by new technologies such as carbon capture and storage.

Interview with Olivier Greiner , Vice-President Marketing & Sales, Total Petrochemicals, Base Chemicals

Mr. Greiner, what challenges is the petrochemical industry facing?

O. Greinier: The world petrochemical industry is currently facing a double challenge in terms of supply/demand balance. One was well expected and analyzed; that is the large amount of new production capacity being started right now in the Middle East, and based on such advantaged energy and feedstock costs that it will be able to beat any competing production in the world. The other was more unexpected to this industry; that is the financial crisis, rapidly replaced by a global recession, that brutally ended four years of healthy growth for all industrial products and turned demand evolution for petrochemical products in a decreasing figure where most of us where hoping to keep some growth. The results of these two phenomena are very low operating rates and rapidly decreasing financial performance. If you add to that - at least for the European players - two key regulatory processes, which are the implementation of Reach and the increased cost of CO2 quotas, you can easily predict that the face of our industry will be different in five years from now, especially in the so called mature markets.

What is Total Petrochemicals' strategy to face these challenges?

O. Greinier: Total Petrochemicals has anticipated well the current downturn. Decisions have been taken to adapt production capacities and create world scale units where possible in order to concentrate on competitive production units with low breakeven points. Today's strategy focuses on three main axes: consolidate and reinforce the competitiveness of our assets located in mature markets, participate to the development of new petrochemical hubs based on competitive feedstock and increase our productions in areas where the demand grows fastest. No "rocket strategy" but one which we follow and implement effectively and consistently. Of course the actual contraction of cash flows forces us to be particularly attentive to operating and capital expenses, but without losing the focus on the long-term objectives.

How important is sustainability in this context?

O. Greinier: As a key historical player in Europe, Total Petrochemicals is aware that its activities are there to last. Sustainability is therefore not new to us or the petrochemicals industry. The concept evolves however and pushes us to meet increasingly demanding standards in terms of acceptability of our operations. That means for us: master and permanently improve the impact of our activities on surrounding people and the environment; contribute to the economical and social development programs of the countries and regions where we operate; anticipate tomorrow's needs trough innovation in new technologies, new products, reducing energy or water consumptions and diversifying feedstock including renewables, all this taking into account the complete life cycle of our products.

Interview with Ralf Kuhlmann, Business Director, Basic Chemicals Europe Exxonmobil

Mr. Kuhlmann, what challenges is the petrochemical industry facing?

R. Kuhlmann: What's happening in our industry today is unprecedented. We are adding more than 15 % steam cracking capacity over the next two years, with most of this addition coming from Asia and the Middle East. This increase is the greatest we have ever seen in the history of the chemical industry. However, we did not anticipate the financial meltdown and economic crisis that drastically impacted demand. The cause for the significant drop in demand is two-fold. First, the banking crisis plunged us into a global recession. This hit the key sectors of our economy very hard, including many downstream purchasers of chemical products. Over the last quarter, we have seen some restocking of the supply chain and some modest increases in month-to-month volumes. While these signs are encouraging, long-term recovery in global GDP growth will be tied to industrial production as consumer demand increases.

What is Exxon's strategy to face these challenges?

R. Kuhlmann: We try to take a long-term view of the business and look through the cycles when we consider our business plans and investments.
Over the long term, we still see a world demand for chemicals growing on average about 2  % above world GDP. It's growing faster than GDP because our products continue to be substitutes for a number of widely used materials because of their superior performance. For example, polyester is being used instead of cotton and wool. Asia will represent 60 % of global demand growth between now and 2015, by which time half of Asia's demand will be in China. Despite aggressive investment in Asia, which will nearly double over the next five years, capacity in the region will still not keep up with demand. The shortfall will be supplied by new capacity, primarily in the Middle East, which will become the primary exporter to the rest of the world. Due to the essential and critical role chemicals play in developing our societies, the outlook for the chemical business remains strong in the long term.

How important is sustainability in this context?

R. Kuhlmann: Our position on sustainability is pretty simple: Sustainability is just good business. Today, we're working more pro-actively with our customers and policymakers to demonstrate how we're applying the principles of sustainability, which are economic growth, societal development and environmental impact. Global economies will continue to grow and the chemical industry will play a major role in improving societies. A new ICCA study found that the U.S. chemical industry has reduced its energy consumption per unit of output by more than half (53 %) since 1974 and reduced greenhouse gas emissions since 1990 by 16 %. This reduction exceeds the requirements of the Kyoto Protocol. Moreover, for every unit of greenhouse gas emitted by the chemical industry during production more than two units are saved by society through the use of products and technologies enabled by our industry. We continue to focus on developing new technologies and products that enable our industry to promote energy efficiency. Our internal performance in the sustainability areas is greatly enabled by efficient technology, such as cogeneration and steam cracking efficiencies, which at Exxonmobil Chemical has resulted in an overall 10 % energy efficiency improvement in the last five years.