Although low crude oil prices have given the European chemical industry some breathing space recently, the abundance of shale gas in the US, oil and gas in the Middle East and coal in China mean Europe is under increasing pressure to find new ways to create a sustainable competitive advantage. The key to future success lies in innovation and new strategic partnerships.

An outstanding opportunity exists in the creation of new value chains with biobased feedstocks as the starting point and biorefineries at the core. The industrial application of biotechnology will not only broaden the range of raw materials used as the principal input for chemical production but also generate products and materials with new properties and applications. The required infrastructure to bridge the existing gaps between the agricultural and the chemical industry and business communities, while significant, is manageable.

Where Agri Meets Chemicals

An in-depth analysis, published by Deloitte and sponsored by Rabobank among others, on the cost competitiveness of sugar from sugar beet in North West Europe, shows that biobased feedstocks can help Europe participate in this emerging segment and regain its competitive edge.

An excellent opportunity for improving the competitive position of North-West Europe lies in increasing the applications of industrial biotechnology and biobased feedstock for the fermentation-based chemical industry. This opportunity spans the entire value chain, from seed to new functional molecules with new properties. Current examples at opposite ends of this value chain include the potential of the “Energybeet”, developed by the seed producer KWS, and the additional properties of Avantium’s technology for producing polyethylene-furanoate (PEF) for Coca Cola’s PlantBottle replacing the conventional PET bottle.

In the broader economic context, a remarkable development is the ratio between the prices for crude oil and white sugar. Before the turn of the millennium, the ratio between Brent Crude and London’s No 5 contract for white sugar, both in $/GJ, hovered around 7. However, soaring oil prices and low sugar prices in 2000 led to the ratio plummeting to about 3. The ratio continued to decline gradually until early 2015 when oil prices, due to unique measures of the producing counties, dropped to historic levels.

Climate change, its impact and uncertainties have produced another relevant development. Major global brand-owners of consumer products, such as Ikea, Lavazza, Lego and Unilever, are pushing harder for sustainability in their product portfolio, end-to-end value chains and consumer brand marketing.

The Potential of Fermentation-based Chemical Products and Materials

The fermentation-based industry, already worth over $127 billion in 2013, processes 200-250 million t of carbohydrate equivalents (CHEQ) annually from either sugars, starches or cellulosic origins, including finished products such as production grade white sugar and intermediates such as thick juice and cane juice. By far the largest share goes to bioethanol – 94% in terms of volume and 87% in terms of value. However, functional molecules, including plastics, provide a much higher economic value and market growth in the biobased chemical segment compared to alcohols and biogas. The projected annual growth until 2020, excluding alcohols, is 6.5%, which is well-above projected GDP growth.

Next to its relatively ease of production, the key driver for the importance of bioethanol are the significant supplements to fossil fuels for the transportation sector. Various regulatory measures in the US, Brazil and Europe stimulated the growth.

Other key fermentation products with sufficient market potential (i.e. excluding bioethanol) equate to roughly 11.6 million t of CHEQ and have a gross margin potential of $17.1 billion. These include amino acids, organic acids such as lactic and succinic acid, as well as polymers such as xanthan.

Sugar Can Compete against Fossil Alternatives

The attractiveness of the fermentation based-chemical industry depends on the price levels of the functional molecules as chemical products, the fossil-based alternatives with which they compete, the yield of fermentation processes and the market prices for biobased feedstocks.

Sugar, a major biobased feedstock, comes either directly from cane or beet or indirectly from corn or tapioca starch, and it can be competitive against fossil alternatives for selected high-value-added products. Globally, four main regions emerge as attractive locations for fermentation businesses, each with a different feedstock:

• Brazil: sugar cane
• US: corn
• South-East Asia: tapioca/cassava and sugar cane
• North-West Europe: wheat and sugar beets

The cost levels of sugar in North-West Europe are amongst the lowest in the world due to increasing crop and sugar yields in the fields and from production efficiencies. Although exchange rates and weather conditions are also relevant, the analysis of the underlying drivers show the relative cost position is likely to improve further in the coming years. The global supply-cost curve for the 2012/2013 season illustrates the impact of efficiency improvements (see figure).

Sugar beet from North-West Europe appears to be particularly cost competitive due to low inbound and outbound transportation costs, high sugar yields per hectare of land, large-scale facilities and the ability to supply ample volumes of thick sugar juice on a year-round basis.

Dispelling the Myth Surrounding European White Sugar

A recent EC report on industrial white sugar shines an interesting light on the wrong perception that European prices exceed world market prices. The facts are:

• EU prices were higher than the world market prices before 2009, leading companies to invest elsewhere
• EU prices were below London No 5 white sugars between 2009 and 2012
• EU prices for non-food sugars converged to world market levels in 2013

Furthermore, the EU will be lifting production quotas for food-grade sugar in 2017. Deregulation means the production volume of sugar beets sales will grow substantially. It also entails production shifts to the most efficient growing areas in Europe.

Overcoming Investment Hurdles

Legislators and other stakeholders need to jump some hurdles to create a level playing field. The most relevant of these is the set of measures that stimulates the use of biomass for biofuels. These measures discourage investment in European facilities that produce high value-added biobased materials because they limit access to biomass for other uses and increase net costs. The unintentional consequence is the advantage given to fossil-based alternatives.

The report shows that it is worthwhile taking on these challenges. The biotechnological (r)evolution has the potential to stimulate innovation, economic growth and create jobs. The convergence of the chemical and agricultural eco-system and the biotechnological know-how in North-West Europe make for a prime location.

A Golden Opportunity

The fermentation platform is where “agri meets chemicals”: It bridges the gap between the two and thereby unlocks an attractive opportunity for both important sectors. Key is innovation in biotechnology and biorefineries, which requires new partnerships between the agricultural and chemical sectors.

The worlds of agriculture and chemicals have never been closer. Economics, technology and sustainability are driving the two together. As a result collaboration is becoming more and more important: it increases competitiveness and enables sustainable growth; it enables organizations to innovate, remove boundaries, transform and develop new products.

The chemical industry in Europe is within reach of a golden opportunity for sustainable growth. Ongoing innovation and further investments in the production of biobased materials and chemical building blocks form the core of a strategy to regain its competitive edge. The chemical industry has a key role to play in this transition towards the biobased economy. The greening of global brand owners and consumers buying their products is one of the megatrends driving this. Stimulated by new solutions and functional properties, the shift towards the biobased economy will accelerate.