The Future of The European Chemical Industry

CHEMICALS
The Future of the

European Chemical
Industry
K P M G I NT E R N AT I O N A L
About KPMG’s
Global Chemicals Practice
Through its member firms, KPMG has
invested extensively in developing a highly
experienced chemicals team.
KPMG’s understanding of the industry comes from KPMG member firms’ global
experience, knowledge sharing, industry training and the use of professionals
with chemical industry experience as well as participation in a variety of industry
forums.
KPMG member firms work with many of the chemical industry market leaders,
using their industry experience to understand the business priorities as well as
the strategic challenges faced by these organizations.
Our presence in many international markets enables our firms’ professionals to

assist clients in recognizing and making the most of opportunities as well as
advising on the implementation of the changes dictated by industry
developments.
Executive summary
The European chemical industry is facing the dawn of a new reality. While the industry worldwide is still reeling from the
current cyclical downturn and the recent global recession, chemical companies in Europe are faced with the ongoing rise
of new competition in the Middle East and Asia (especially from China and India). These factors appear to be driving an
inexorable shift eastward in the global chemical industry, particularly at the bulk / commodity end of the sector.
Indeed, our research suggests that new global capacity being developed in the coming years will render 14 of 43 crackers
in Europe uneconomic by 2015. The closure of these plants would correspond to the loss of 26 percent of total cracker
capacity in Europe.
At the same time, Middle Eastern chemical producers continue to seek expansion along the value chain into higher value-
add solutions. Their Chinese counterparts are attempting to fulfill a government directive to make the country self-sufficient
in chemicals. These Middle Eastern and Chinese entities are often cash-rich and backed by government support. A rapid
path to achieving these goals appears to be offered by acquisition of technology and intellectual property from a European
chemical industry seemingly beset by structural problems.
However, KPMG believes that the death knell of the European chemical industry has been sounded prematurely. This
remains an industry that employs over 1.2 million people and contributed in 2007 to a European Union (EU) trade surplus
in chemicals of EUR35.4 billion.1 There is no doubt that the shape of the global chemical industry is changing, but the
industry in Europe can continue to play a significant role in this new reality if it can:
• Make hard choices now to rationalize unprofitable facilities that might not be able to compete with newer, more
efficient plants being built outside of Europe
• Ruthlessly identify which chemical clusters will remain competitive on the global stage and focus resources and
investment in these areas to ensure their long-term survival
• Capitalize on its historic advantage in innovation to stay ahead of the competition, especially in terms of sustainable
solutions which will be increasingly in demand
• Leverage its long-standing customer relationships to develop more specialized, higher-performance solutions
• Actively seek beneficial joint ventures and strategic alliances that provide access to both cheap Middle Eastern
“
feedstocks and growing Asian markets
Many European companies are already recognizing the possible advantages — and the necessity — of repositioning
themselves as solutions providers rather than just basic suppliers for their customers. This can include finding new ways to
work with companies that have traditionally been perceived as major competitors. The companies that successfully achieve
this transition should be better positioned to meet the global competitive challenges of the 21st century.
The European chemical

industry must capitalise on
its historic advantage in
innovation to stay ahead of
the competition. Chris Stirling
Head of Chemicals,
KPMG in Europe
1
“High Level Group on the Competitiveness of the European Chemicals Industry, Final Report,” European Commission, July 2009
2 T HE F UTURE O F T HE E UROPEAN CHEMICAL I NDUSTRY
© 2010 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International.
KPMG International provides no client services. All rights reserved.
T H E F U T U R E O F T HE E UR O P E A N C HE M I C A L I ND U S T R Y 3
Contents
1. Current state of the industry in Europe 4
1.1. Industry overview 4
1.2. Impact of the current downturn 8
2. Challenges from the East 12

2.1. A global shift 12
2.2. Middle East 17
2.3. China 21
3. Innovation: the key to survival 24

3.1. Evolving from commodities to specialties 25
3.2. Maintaining a technological advantage 26
3.3. Strengthening customer relationships 28
3.4. Developing joint venture relationships 28
4. Case study – Going green with

Cognis – a flexible strategy 30
5. Case study – BASF – verbund

manufacturing 32
4 T HE FUTURE OF THE EUR OPEAN CHE MICAL IND USTRY
1 Current state of the industry

in Europe
As with any crisis, the recent economic downturn presents both risks and
opportunities for businesses. This is especially true for the European chemical
industry. Long a powerhouse in the global economy, the industry now faces the
need to make difficult choices about its future development and role in the face
of increased competition from overseas.
KPMG member firms believe that today’s risks need to be clearly assessed,
especially in the light of continued economic uncertainty. We also feel, however,
that companies can respond with innovative solutions in terms of market focus,
technology and business relationships. Properly developed and managed, these
innovations can help companies to not only adapt and survive but even thrive in
the 21st century.
1.1 Industry overview

Geographic breakdown of world chemicals shipments
2008
900
850 375
800
750
700 736
650
Chemicals shipments (€ billion)
600
550
500
450 204
ASIA = 883
EU 27 = 537
400 529
350
300
250 304
200
150 157
100 113
50 109
0
Asia EU 27 NAFTA Latin America Rest of Other*

Europe**
China EU
Japan
World chemicals shipments in 2008 were €2,257 billion***
Rest of Asia The EU accounts for 29.1% of the total
Other* = Oceania and Africa

Rest of Europe** = Switzerland, Norway and other Central & Eastern Europe.
World chemical shipments*** = ACC uses as a proxy for sales
Source: American Chemistry Council, 2009
T H E F U T U R E O F T HE E UR O P E A N C HE M I C A L I ND U S T R Y 5
EU chemical industry sales by country

Percentage share of European chemical sales
NL 10.2% 6.7% ES
UK 10.3% 5.8% BE
IT 11.0% 4.5% IE
FR 14.5% 11.7% Other
DE 25.3% PL 2.3% HU 0.7%

SE 1.7% PT 0.7%
AT 1.3% RO 0.6%
FI 1.3% Others 2.2%
CZ 0.9%
Big 8 = Germany, France, Italy, United Kingdom, Netherlands, Spain, Belgium and Iceland
Source: Cefic Chemdata International
Sector-wise breakdown of EU chemical industry sales
Soaps & detergents

Perfumes & cosmetics
Pharmaceuticals
Petrochemicals
Other specialty chemical

Paints & inks Plastics & synthetic rubber
Man-made fibres
Crop protection Other basic inorganics
Industrial gases
Fertilisers
Base chemicals 44.8% Pharmaceuticals 27.4% Specialty chemicals 17.0% Consumer chemicals 10.8%
Source: Cefic Chemdata International and Eurostat
6 T HE FUTURE OF TH E EU ROPEAN CH EMICAL IN DUSTRY
“”
The European chemical industry drives a significant part of the economy across
the EU. Over 1.2 million workers are employed in the industry, manufacturing
products, supporting research and providing supplies in many regions of the EU.
The European chemical industry is based on the following four categories of

products:
• Base chemicals that include petrochemicals, their derivatives and basic

inorganics. Produced in large volumes, they are sold as commodities to We see a
manufacturers in the chemical industry or to other industries.
sustainable future
• Specialty chemicals that are for specialized use and produced in lower
volumes than base chemicals. Examples include ingredients used in
for chemical
adhesives, additives, plastics, coatings, paints and inks, crop protection, companies in
dyes and pigments etc.
Europe based on
• Pharmaceuticals including both basic pharmaceutical products and
pharmaceutical preparations.
specialties and
• Consumer chemicals that are sold to end users and consumers in the
better strategies
form of soaps, detergents, perfumes and cosmetics. to support the
Large industrial customers represent 25.1 percent of chemical consumption in success of the
the EU. This category includes metals, mechanical and electrical industries,
textiles and clothing, the automotive industry and paper and printing products.
customer.
The remaining areas of chemical consumption can be divided into the following:
• 30.3 percent for end users in private households, government and non-profit
organizations
• 16.4 percent for services
• 6.4 percent for agriculture
• 5.4 percent for construction
• 6.1 percent for manufacturing not listed above
• 10.3 percent for other industries2
Over the years, the European chemical industry has shown considerable
resilience, strength and adaptability. In 2007, 12 of the 30 leading chemical
companies in the world were headquartered in Europe, representing 10 percent
of world chemical sales.
Recent industry growth has been driven mainly by regional sales. From 1997 to
2007, sales more than doubled among EU partner countries.3 This growth has
been supported by the removal of trade and nontrade barriers among the EU
countries and by the size of the internal market — almost 500 million consumers
across Europe.
In 2008, 23 percent of European chemical sales were for customers outside of

the EU, in particular to markets in North American Free Trade Agreement
(NAFTA), neighboring countries (especially Turkey and Russia) and Asia.4
2
“Facts and Figures: The European chemical industry in a worldwide perspective: 2009,” Cefic
3
Ibid.
4
Ibid.
T H E F U T U R E O F T H E E U R O P E A N C H E M I C A L I N D U S T R Y 7
8 T HE FUTURE OF TH E EU ROPEAN CH EMICAL IN DUSTRY
1.2 Impact of the current downturn

European chemical industry output, July 2008 — August 2009
4.00%
2.00%
0.00%
% change on year earlier
-2.00%
-4.00%
-6.00%
-8.00%
-10.00%
-12.00%
-14.00%
July
August
September
October
November
December
January
February
March
April
May
June
July
August
Source: CIA Matters
EU chemicals production: sector outlook

15
10
Production (volume): growth rate (yoy)
5.5 6.0 5.3 5.0

4.7
5 2.6
-5 -1.9
-3.8 -4.6 -4.5
-6.5 -5.5 -6.6
-10
-9.3
-10.6
-15 -12.4
-20
-19.7 -20.1
-25
Consumer Specialty Petrochemicals Chemicals Polymers Basic Inorganics
Chemicals Chemicals
2008 2009 2010
Source: Cefic Economic Outlook Task Force (November 2009)
Like virtually every other industry worldwide, the European chemical industry
has felt an enormous impact from the recent global recession. At its lowest point
in March 2009, the industry saw a monthly year-on-year decline of 13.2 percent,
a figure that if annualized would represent an output decline of approximately
EUR56 billion.5
Describing the industry downturn, Graham van’t Hoff, Global V.P. Base Chemicals
at Shell said, “There was a complete meltdown of demand in the fourth quarter
of 2008,” adding that,“ a double whammy is coming at us [as] we now face a
supply-lead problem caused by the new Middle East capacity.”6
5
CIA Matters, July 2009
6
“Can the European petrochemical industry compete against emerging producers based in the Middle East?,” Chemical Week, September 21, 2009
T H E FU T U R E OF TH E EU R O P E A N CH E M I C A L IN D U S T R Y 9
“”
In Europe, the chemical industry saw massive reductions in demand for plastics,
paint and man-made fibers, especially in key markets such as automotive and
construction. This fall in demand led to a severe destocking by many companies,
with some companies (particularly in the base chemicals, polymers and specialty
Large
chemicals sectors) watching their own output decline by 30 to 60 percent.7
Tight credit continues to hold back recovery. Many large companies are finding
major credit lines both difficult and expensive to obtain. Small and medium
enterprises (SMEs) are experiencing even greater difficulties in obtaining companies are
guarantees and letters of credit for imports and exports. The credit ratings for a finding major
number of chemical companies have been downgraded, prompting banks to
carefully re-evaluate the entire industry. However, the bond markets in Europe credit lines both
are currently relatively healthy, providing access to financing for those difficult and
companies that retain an investment-grade credit rating.8
expensive to
obtain.
7
“Reaction: KPMG’s views on the economic outlook for the chemical industry,” September 2009
8
“Weathering the Storm: the Chemical & Pharmaceutical Sector,” webcast conducted by Chris Stirling, KPMG
1 0 T HE FUTURE OF TH E EU ROPEAN CH EMICAL INDUSTRY
Many analysts and industry observers predict a gradual though modest recovery,
with demand not returning to 2007 levels until probably 2012 or even later. Cefic,
European Chemical Industry Council expects a five percent increase in output
growth in 2010 compared to 2009.9 Henrik Meinke, writing on behalf of the
European Chemical Marketing and Strategy Association (ECMSA), also offers
guarded optimism, suggesting that a significant global recovery should not be
expected before 2011, although industry conditions should improve in 2010.10
In the meantime, the industry recognizes that hard decisions need to be made,
and these have included downsizing and massive restructurings, which to date
have resulted in the redundancy of approximately four percent of the pre-
recession chemical industry workforce in Europe. Clariant, for example, sought to
shrink its workforce by a total of 3,220 positions in 2009 (equivalent to 17 percent
of its global workforce).11 Akzo Nobel has announced plans to cut 20 percent of
the workforce at its Amsterdam head office and Arnhem shared service centre.12
Even with recovery, the European petrochemical industry and its markets may
continue to contract. Many end-user industries have started to move operations
outside of Europe. The textile industry has offshored to the Middle East and Asia
to be closer to high-growth markets and benefit from lower manufacturing and
logistics costs. Parts of the automotive industry have moved to Eastern Europe,
followed by their tier 1 and tier 2 suppliers to improve their competitiveness.
9
“EU chemical industry expected to follow a modest and fragile recovery in 2010,” press release, Cefic,17 November 2009
10
“INSIGHT: Gathering signs of recovery for chems,” ICIS, 11 March 2009
11
“Clariant To Cut 570 Jobs,” Chemical & Engineering News, 30 November 2009
12
“Results fall on weak demand; economy begins to stabilize,” Chemical Week, 2 November 2009
T H E FU T U R E OF T H E EU R O P E A N CH E M I C A L IN D U S T R Y 1 1
A key issue is how the European chemical industry and European governments
seek to respond to these changing dynamics. Certainly recently, there has been
a trend toward protectionism in the industry. China, the EU and India recently
initiated anti-dumping measures against the Middle East.13 China has also
imposed definitive anti-dumping duties of between 5.9 percent and 35.4 percent
on imports of adipic acid from the EU, Korea and the US.14
With the scale of capacity expansion under way in the Middle East and Asia likely
to result in significant overcapacity in the industry in the medium term, there is a
real danger that individual countries or regions could resort to protectionist
measures which is likely to harm the industry and hamper growth. Whilst new
plants are typically in the lowest-cost position on the global cost curve and, as a
result, can expect to be profitable in most market conditions, older plant in
Europe is likely to become uneconomic.
Global ethylene capacity and demand

180
170
160
150
(million tonnes)
140
130
120
110
100
90
80
2007 2008 2009 2010 2011 2012 2013
“”
Global capacity Global demand
Source: Bank of America Securities/Merrill Lynch
KPMG analysis shows that European petrochemical capacity may decline

dramatically in the coming years. According to recent estimates, 40 out of 200
crackers worldwide are likely to become uneconomic by 2015, and approximately
14 out of these 40 will be in Europe. The closure of these plants would
correspond to the loss of 26 percent of total cracker capacity in the EU. Similarly,
10 out of 17 European ethylene glycol plants may become uneconomic,
corresponding to 65 percent of total European capacity.15
Clariant
US chemical producers are likely to be similarly impacted. However, there is a
sentiment within the industry that the US will be more ruthless in restructuring
uneconomic plant as the industry there is less encumbered by political issues
which can make restructuring difficult in Europe. The challenge for the European sought to shrink
chemical industry is to resist the urge to hide behind protectionist barriers.
Rather, there should be a process to identify and rationalize chemical plant and
its workforce by
clusters made uneconomic by the new world order (principally, likely to be a total of
small, land-bound, non-integrated units). This should allow future investment to
focus on those areas in which the European chemical industry remains
3,220 positions
competitive on the global stage (see verbund manufacturing, section 5). in 2009.
13
“Antidumping Cases Target Mideast Petchem Exports,” Chemical Week, 30 November 2009
14
“China Dumping Duties,” Chemical Week, 16 November 2009
15
KPMG research and analysis
2 Challenge from the East

As European chemical companies recover from the recession, they will face even
greater challenges from increased competition overseas. Although most of this
competition will come from the Middle East and China, the relative importance of
these regions can be best understood as part of a larger transition in economic
strength from developed to emerging markets.
2.1 A global shift

International comparison of chemical production growth
1997 – 2007
175
165 Average growth p.a. (1997-2007)

Asia Pacific* 5.7%
Latin America 3.2%
Production index (1997 = 100)
155
NAFTA 1.4%
EU 1.3%
145
135
125
115
105
95
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
EU NAFTA Asia Pacific* Latin America
*Asia Pacific includes Japan, China, India, Korea, Malaysia, Philippines, Singapore, Taiwan, Thailand, Pakistan,
Bangladesh and Austraila
Source: Cefic Chemdata International
Chemical demand (excluding pharma)

2008 EUR1,700 billion 2020 EUR2,400 billion
Rest of world 10% 11% Rest of world
South America 6% 6% South America
Western Europe 25% €650 €1,150 19% Western Europe

p.a.
+ 4.5 – 5.0%
billion billion
North America 21% 18% North America
Asia Pacific 38% 46% Asia Pacific
Source: BASF, 2008
World natural gas costs
$1.25 Russia
$0.75 North Africa
$3.60 Ukraine
$2.00 Indonesia
$5.75 Canada
$0.80 Venezuela
$1.50 Argentina
$6.75 US
$7.60 West Europe
$2.50 Trinidad
$0.75 Middle East
Source: JP Morgan’s Chemical primer, June, 2008
Global ethylene trade

25
20
Net exports
15
10
5
(million tonnes)
-5
-10
-15
Net imports
-20
-25
2002 2003 2004 2005 2006 2007 2008 2009f 2010f 2011f 2012f
North America South America West Europe Middle East
India Sub. Northeast Asia Southeast Asia Others
Source: Jadwa Investments, GPCA Annual Forum, December 2009
T H E F U T U R E O F T H E E U RO P E A N C H EM I C A L I N D U S T R Y 1 5
New polyethylene plants planned for start-up, October 2009 – 12

Capacity ('000
Company Location Grade m.t./p.a.) Startup
Saudi Kayan Saudi Arabia HDPE 400 Q1 2011
Saudi Kayan Saudi Arabia LLDPE 400 Q1 2011
Qatofin Qatar LLDPE 450 End 2010
Borouge 2 UAE HDPE 540 Mid 2010
Borouge 2 UAE LLDPE 650 Mid 2010
Ilam PC Iran HDPE 300 2010
Kermanshah Iran HDPE 300 2010
Lorestan Iran HDPE 300 2010
Kordestan Iran LDPE 300 2011
Mahabad Iran HDPE 300 2011
Sinopec Tianjin China HDPE 300 Online 2009
Sinopec Tianjin China LLDPE 300 Online 2009
Sinopec Zhenhai China LLDPE 450 Q2 2010
Baotou Shenhua China PE 300 May 2010
PTT Chemical Thailand LLDPE 400 Online 2009
PTT Chemical Thailand HDPE 300 Online 2009
Siam Cement Thailand HDPE 400 Mar 2010
Siam Cement Thailand LLDPE 350 Mar 2010
Haldia PC India PE 670 Jan 2010
GAIL India HDPE 200 Apr 2010
Indian Oil Corp India HDPE 350 2012
Indian Oil Corp India HDPE 300 2012
BPCL India HDPE 220 After 2010
ONGC India HDPE 360 Dec 2012
Total 9,940
Source: Platts, GPCA Petrochemical Report, December 2009
Top 10 chemical producers (sales value), 2008

Rank Company Country
1. BASF Germany
2. Exxon Mobil US
3. Dow Chemical US
4. Royal Dutch Shell UK/Netherlands
5. Ineos UK
6. SABIC Saudi Arabia
7. Lyondell Basell US/Netherlands
8. Sinopec China
9. DuPont US
10. Total France
Source: Chemical Week
1 6 T HE FUTURE OF THE E UROPEAN CHEMICAL INDUSTRY
Top 10 chemical producers, 2015?16

Rank Company Country
1. SABIC Saudi Arabia
2. BASF Germany
3. Reliance India
4. Exxon Mobil US
5. Sinopec China
6. Sinochem China
7. Dow Chemical US
8. Saudi Aramco Saudi Arabia
9. Dupont US
10. ADNOC / IPIC Abu Dhabi
Source: KPMG in the UK, December 2009
Even before the current recession, the European chemical industry saw a gradual
but steady decline in global market dominance. This shift can be measured by a
number of metrics.
• Between 1995 and 2005, world chemical production increased by almost 40

percent. However, over 95 percent of that growth was concentrated in
developing countries.17
• From 1997 to 2007, global chemicals sales increased by 60 percent, but the
portion of global EU sales declined by 2.7 percent.18
“”
• BASF estimates that global chemical demand from 2008 to 2020 will increase
eight percent in the Asia-Pacific region but decrease six percent in Western
Europe.19
Several factors can be cited to explain this shift in market leadership. For
example, the cost of raw material feedstock is significantly higher in Western
Europe than in most other regions of the world, and this cost difference will
almost certainly continue in the future.
In particular, it should be noted that chemical producers on the US Gulf coast

have an advantage over Europe since they are primarily fed by lower-cost ethane
Between
rather than the more expensive heavy feeds that supply Europe.
In addition, strong demand in Asian markets supports growth in production for
1995 and 2005, domestic chemical companies in that region. Meanwhile, weakening consumer
demand for end products in Europe has led to significant underutilization of
95 percent of capacity, plant shutdowns and margin erosions.
world chemical As a result, most analysts and industry observers agree that the global chemical
production industry will continue in its steady shift to the East, with a greater portion of
chemical majors headquartered outside the EU in the future. In 2008, 4 of the top
growth was 10 chemical producers were located in Europe, but KPMG suggests that by 2015,
in developing only 1 of the top 10 producers is likely to be still in Europe while six are likely to
be based in the Middle East or Asia.
countries.
16
“This assumes that the rate of growth in petrochemical companies continues at the current rate until 2015.”
17
“The state of the European Chemicals Industry – a thoughtstarter for the High Level Group on the competitiveness of the European Chemicals
Industry,” European Commission, 2007
18
“Facts and Figures: The European chemical industry in a worldwide perspective: 2009,” Cefic
19
BASF, 2008
T H E F U T U R E O F T HE E UR O P E A N C HE M I C A L I ND U S T R Y 1 7
This will mark the conclusion of the process to break up the majority of the
historic, integrated European chemical giants (which began with the break up of
the likes of Hoechst and ICI), with their 21st century equivalents being created in
the Middle East and Asia. The opportunity for European chemical producers is to
focus their remaining activities on emerging mega-trends and to retain a level of
flexibility that enables them to rapidly adapt as these trends change.
2.2 Middle East

Middle East – Major ethylene oxide producers
The Kuwait Olefins Co - (TKOC) Arak Petrochemical Co - (ARPC)
Equate Petrochemical Co Marun Petrochemical Co
Gachsaran Petrochemical
- (Arvand)
Iran
To Lebanon
Iraq Ca. 60% of Saudi Arabia’s
Morvarid Petrochemical Co
Zubair natural gas reserves consist of
associated gas mainly from
Safaniya oil field Ghawar Shaybah and Zuluf fields
Kuwait Zuluf oil field Farsa Chemical Co
Yanbu National Qaisumah Al Jubail
Petrochemical Co - (YanSab)
Riyadh Ras Tanura
Saudi Arabia ExxonMobil Chemical/
Rabigh Refining and PS3 Qatar Petroleum
Petrochemical Co - (Petro-Rabigh)
East West NGL Line Qatar
East West Petroline Ghawar oil field
UAE
Jubail United Petrochemical Riyadh Shaybah
ChemaWEyaat
Co - (JUPC) Yanbu
Shaybah oil field
Iraq Pipeline Across
Muajjiz
Saudi Arabia
Rabigh Mazalij Manjoura North & South
Eastern Petrochemical Co - (Sharq)
Shaden Waqr Tinat Kidan gas fields
Jeddah Niban gas fields Duqm Refining & Petrochemical
Oman
Complex - (DRPC)
Saudi Kayan Petrochemical Co
Arabian Petrochemical Co
Yemen
Ras Tanura Integrated Major seaports

Petrochemical Co Plants operating
Plants under study/planned/construction/delayed
Source: BP statistical review the world energy 2007 and ICIS plant research as of October 2008.
Updated by KPMG International, 2009
Operating margins, 2008

30%
28.4
25%
20%
15%
10%
9.2
7.7
5% 5.5
3.8 4.8
90
0
SABIC BASF Dow Chemical ExxonMobil DuPont Formosa
Plastics
Source: Samba, September 2009
“
1 8 T HE FUTURE OF THE EUROPEAN CHEMICAL INDUSTRY
The availability
of these
resources
provides the
chemical industry
in the Middle
East with both
energy and
”
feedstock at
relatively low
prices.
Middle East ethylene capacity

40 25
35
20
30
25
15
(million tonnes)
(percent)
20
10
15
10
5
5
0 0
2007 2008 2009 2010 2011 2012 2013
Capacity
Capacity as a percent of global capacity
Source: Bank of America Securities/Merrill Lynch, 2009
Major Middle East sovereign wealth funds

Assets under management
Country Funds (US$ billion)
UAE Abu Dhabi Investment Authority 875
Saudi Arabia Various 300
Kuwait Kuwait Investment Authority 250
Libya Reserve Fund 50
Qatar Qatar Investment Authority 40
Iran Foreign Exchange Reserve Fund 15
Source: ‘CIA the Word Factbook’, 2009
The Middle East has emerged as a major competitor for the European chemical
industry, based mainly on ready access to cheap feedstocks, proximity to growing
markets in Asia and support by governments and local authorities.
The Middle East region has about 67 percent of the world’s oil reserves and 45
percent of all natural gas reserves, the largest such reserves found anywhere.
The availability of these resources provides the chemical industry in the Middle
East with both energy and feedstock at relatively low prices. Companies like
Saudi Basic Industries Corporation (SABIC) pay only US$0.75 for one million
British Thermal Units (BTU) of natural gas compared to the average market price
of between US$7 – 8 in Western countries.20 Some analysts estimate that
ethane-based Middle East producers have a cost advantage of up to US$350/mt
over some of their naphtha-based competitors in Europe.21 Whilst the
government-backed oil producers in Saudi Arabia have announced plans to
increase the cost of natural gas to petrochemical producers from 2012 (initial
estimates suggest US$1.25/m BTU) there will only be a marginal erosion of this
massive cost advantage.
20
American Chemistry Council, October 2008
21
“Can the European Petrochemical Industry Compete Against Emerging Producers Based in the Middle East?,” Chemical Week, 21 September 2009
2 0 T HE FUTURE OF THE EUR OPEAN CHE MICAL IND USTRY
HDPE delivered costs to SE Asia

1200
1000
800
600
400
200
0.0
ME USGC S. Korea NWE
Freight to SEA Fixed Costs Raw Materials

Overhead Utilities
Source: ChemSystems, 2009
Of more concern to Middle Eastern producers is continued access to cheap

ethane allocations as alternative LPG and naphtha feeds have a significantly lower
cost advantage. Whilst reports have suggested that additional ethane allocations
were likely to be limited, His Excellency Ali Al-Naimi, Minister of Petroleum and
Natural Resources, Kingdom of Saudi Arabia recently announce that Saudi Arabia’s
proven gas reserves, which stood at 263 trillion standard cubic feet (SCF) at the
end of 2008, will increase by 5 trillion SCF in 2010. The Kingdom’s gas production
is expected to increase from 8.8 billion SCF a day now to 13 billion SCF a day in
2020, allowing it to, “stay ahead of demand for natural gas [for] chemical
feedstock.”22
Backed by a dependable supply of resources as well as significant cash reserves,

Middle Eastern countries are making huge investments to increase capacity in
both upstream and downstream production facilities (principally in the form of
world-scale, integrated complexes). More than 19 million mt/year of ethylene
capacity will come onstream in the Mideast by 2015, according to SRI Consulting
in a recent analysis.23
Some development projects have been delayed by financing constraints. The

global downturn has led to questions about the ability of worldwide markets to
absorb capacity from the Middle East and other regions. China, the EU and India
have each begun antidumping procedures this year against petrochemical exports
from the Mideast.24
Nevertheless, the region is still expected to become a leading producer for a range
of petrochemicals and plastics, including ethylene glycol (EG), polyethylene (PE),
and polypropylene (PP). EG capacity will increase in the region from 6.2 million mt/
year in 2009, to 8.8 million mt/year in 2014, raising its share of the global total
from 28 percent to 32 percent over the five-year period.25 Forecasts until the year
2020 predict that the region will continue to grow at an average of over 9.5
percent per year, more than twice the global rate.26
22
GPCA Annual Forum, 9 December 2009
23
Quoted in “Reinforcing Leadership in Petrochemicals,” Chemical Week, 23 November 2009
24
GPCA 2009: Mideast Influence Continues to Grow, Chemical Week, 7 November 2009
25
Ibid.
26
“World chemicals market: Asia gaining ground,” Deutsche Bank Research, July 2008
“”
Whilst a recent survey suggests that 85 percent of product that is sold from
plant currently being built will specifically target China, the rest of Asia and the
Middle East itself, Tom Crotty, CEO of Ineos Olefins and Polymers Europe said,
“whatever is left over will have to find a home and the next obvious place is
Whatever
Europe,” adding that, “some of the new capacity will wash back into Europe but
the unknown is how much.”27
In addition, recent transactions such as SABIC’s acquisition of GE plastics and the

acquisition of Nova Chemicals Corp. by International Petroleum Investment Co. is left over will
indicate a long-term strategy by major players in the Middle East to expand have to find
globally into downstream areas.
a home
This explosive growth and expansion in the Middle East has helped to drive
significant changes in the European commodity chemicals market. Ten years ago, and the next
North America was the primary exporter and supplier of products such as PE obvious place
and PP to the world. Europe was well balanced between supply and demand.
However, trade flow patterns have changed dramatically, and the Middle East is Europe.
is now the dominant inter-regional exporter of polyolefins. Older European
commodity-based plants will likely be less competitive in the years ahead. Many —Tom Crotty
European customers have already turned to the Middle East for supplies of raw CEO of Ineos Olefins and
materials such as PE, and Europe is expected to become a net importer of Polymers Europe
polyolefins by 2010.28
The same cost advantages that help chemical companies in the Middle East to
enter European markets will also help to increase their success in Asia. Although
more port facilities, tankers and pipelines need to be developed, it is still cheaper
to transport raw materials and products from the Middle East to Asia than from
Europe. This geographical advantage will enable the Middle East to further expand
into Asian markets, gain new customers and even displace European companies
from markets where they have traditionally dominated.
2.3 China
10
6
(million tonnes)
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Dependency to foreign countries Growth of demand Consumption Output
Source: www.chemhello.com. Cited in “Chemicals in China: Responding to new challenges,” 2009
27
Quoted in “Reinforcing Leadership in Petrochemicals,” Chemical Week, 23 November 2009
28
Analysis by KPMG International 2008
2 2 T HE FUTURE OF THE EUR OPEAN CHE MICAL IND USTRY
Chemicals sales growth rates of selected countries and regions

1997–2007
20
Average annual sales growth rate (%)

15 16.5
10
8.7 World sales growth

7.6 7.6 4.8% p.a.
7.3 6.8
5
5.4
4.0 3.9
3.4
2.9
2.1
0 0.1
China
Mexico
India
Taiwan
Korea, Republic
Brazil
Russia
Switzerland
EU-27
Canada
USA
Japan
Africa
Source: Cefic Chemdata International, 2008
China Foreign Exchange reserves (US$billion)

2500
2000 1,946
1,528
1500
US $ billion
1,066
1000
819
610
500 403
286
166 212
0
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: China State Administration of Foreign Exchange, 2009
The current economic downturn has reduced industry growth in China and limited
further capital investment over the short and medium term. According to the
China Petroleum and Chemical Industry Association, consumption of finished oil
products (a key indicator of their chemical industry) dropped 8.6 percent in
December of 2008.29
Despite the recession, chemicals output from China in 2009 may grow by over
four percent.30 Part of this growth can be attributed to China’s massive stimulus
programs, but questions remain whether the stimulus will have long-lasting
benefits. Nevertheless, the Chinese chemical industry continues to grow in
strength. By 2015, China is expected to overtake the US as the largest chemical
producer in the world.31
Self-sufficiency for the industry is an expressly stated policy of the government.

China has, in fact, been close to self-sufficient in base chemicals since the
1980s. The country’s self-sufficiency index for basic chemicals, resins and fibers
is now approximately 80 percent, according to estimates from Chemical Market
Associates Inc. (CMAI), but significant additional capacity will be required to
29
“China’s petrochemical industry reverses 10-y high growth,” www.chinamining.org,18 February 2009
30
“Global chemicals output could fall 6% in ‘09” Oxford Economic Forecasting (Source ICIS news), 24 February 2009
31
“World chemicals market: Asia gaining ground”
satisfy the expected growth in demand in the coming years.32 China also
imported more than US$84.5 billion worth of chemicals in 2008, much of it in
specialties, and the country currently lacks sufficient domestic manufacturing
capabilities to completely satisfy domestic demand.33
To meet their growing demand for specialties, China is constructing its own
chemical plants and has been using joint ventures with European players to
increase capacity. Before the economic downturn, almost all major multinational
chemical companies established a presence in China. However, the financial
crisis has caused many international chemical firms to reassess much of their
investment plans and cut staff worldwide.
BASF is reconsidering the opening of a major methylene diphenyl isocyanate

(MDI) chemical plant in southwestern China, because of weakened global
demand. The plant was scheduled to begin production in 2010. The company,
however, is moving ahead with plans for a major petrochemical complex in
Nanjing with Sinopec. The two companies have invested US$2.9 billion in the
Nanjing venture.
Other European chemical companies will also continue to develop their

partnerships and market presence in China, attracted by a low-cost base and
expanding markets. For example, Clariant opened its first plant in Guangzhou in
1995, making masterbatches, or plastic dye pellets. The company now has
numerous plants in other provinces as well. The plants operate through a local
entity but are overseen by Clariant for all management, governance and
investment issues. Fully-owned or joint venture operations with full trading
licenses have been established.
As in the Middle East, the Chinese chemical majors have ready access to
massive funding through their government, thus removing the credit barrier
faced by companies in the West. At the same time, Chinese companies face
critical challenges in terms of poor logistics, tight raw material supply and the lack
of experienced management. Accordingly, the industry will continue to need
access to Western technologies and resources, particularly at the specialty end
of the chemicals value chain.
We believe that we will increasingly see Chinese chemical majors as bidders in

M&A auction processes as their focus turns from attracting inbound Western
investment to establishing themselves on the global stage through outbound
acquisitions. In the first instance, this is likely to focus on distressed Western
assets which provide access to the technologies they require to reach their
development goals.
32
“Chemicals in China: Responding to New Challenges,” KPMG 2009
33
Emerging Markets Information Service, 3 April 2009
3 Innovation – a key to
survival
Share of country in total PCT filings, January 2008 – August 2009

35 32.5
30 29.3
25
Share of Country (%)
20.0
20
17.4
15
10.9 11.5
10
4.9 4.8 4.6 4.4 4.1
5 3.6 3.4 3.4 2.9 2.6 2.4 2.3 2.3 2.5 1.7 1.8 1.6 1.8
0
United States Japan Germany Republic China France United Netherlands Switzerland Sweden Italy Canada
of America of Korea Kingdom
Jan. – Aug. 2009 Jan. – Aug. 2008
Source: WIPO Statistics Database, 2009
Annualized growth rate of PCT Filings, August 2008 – August 2009

Annualized Growth Rate based tender Line
20
15.7
15 10.9
10
5.7
5 2.3
-11.7 -2.8 -4.3 -4.5 -0.6 -4.2 -6.9 -7.6
0
-5
-10
Total PCT Fillings Growth Rate(-2.7%)
-15
of America
Japan
Germany
Republic of Korea
China
France
United Kingdom
Netherlands
Switzerland
Sweden
Italy
Canada
United States
Note : 2009 data are provisional and incomplete. The growth rate is the annualized growth rate between August 2008 and August 2009. Counts are based on the international
filling date and the country of residence of the first name applicant.
Source: WIPO Statistics Database, 2009
We believe that a key to survival for European chemical companies is based

on innovation at three different levels — moving from bulk chemical
production to the specialty end of the value chain, leveraging their traditional
advantage in technology and establishing closer customer and competitor
relationships through joint development agreements, acquisitions, value add
services and other strategic initiatives.
3.1 Evolving from commodities to specialties

In its final report in February 2009, the European Commission’s High Level Group
(HLG) on the Competitiveness of the European Chemicals Industry recognized that
abandoning petchems and focusing on specialty chemicals is a clear necessity.34
In many ways, this move to specialties is a matter of both “push” and “pull.” As
noted above, European companies are being pushed out of commodities because
of the cheap feedstocks available to producers in the Middle East. In addition, the
last 15 to 20 years have seen relatively little investment in the EU in the basic
chemical sub-sectors; the last cracker was built in the early 1990s. This has led to a
significant loss in competitive advantage. The average cracker size in the EU is
currently about 450,000 tons/year while the new, world-scale crackers being built in
Asia and the Middle East reach a capacity of more than 1,000,000 tons/year.
European companies that continue focusing on commodities will have to make
massive investment simply to survive.
In terms of “pull,” European companies are attracted both by strong specialty

markets and the fact that value-added, specialty manufacturing requires a high level
of technical capability found more often in the EU than in developing countries.
Because of this, the European petrochemical industry is a natural choice for
complex specialties for biotechnology and nanotechnology, as well as for emission-
abatement products such as insulation materials for residential and industrial
buildings.
34
“Final Report of the High Level Group on the Competitiveness of the European chemicals industry”
2 6 T HE FUTURE OF THE EUROPEAN CHEMICAL INDUSTRY
Obviously, this move up the value chain by European companies will require
strategic investment in the face of tight credit, rising costs and other business
pressures. European companies also need to maintain sources for commodity
chemicals through clustering of crackers with downstream manufacturing, even
though this strategy will become more challenging as commodity production
increases in the Middle East, China and other areas.
Despite these challenges, specialty chemicals remains a highly attractive global

market worth more than US$680 billion. Established European companies have
the resources and experience in this market to help them compete as major
players worldwide.
3.2 Maintaining a technological advantage

The overall technological advantage of one region over another can be
estimated in various ways, including the rate of patent filings and the number
of patents in force.
China is now the third largest patent application jurisdiction in the world and
may soon overtake the U.S. in total patent applications. The State Intellectual
Property Office (SIPO) received a total of 828,328 patent applications in 2008,
a year-on-year increase of 19.4 percent.35 However, EU countries also enjoy a
leadership position in patented technology, accounting for 28 percent of Patent
Cooperation Treaty (PTC) filings from January 2008 to August 2009. During the
same period, China accounted for only 4.6 percent of PCT filings.
To protect their technological advantage, European companies should review

their R&D plans and extend corporate research programs to medium and long
term objectives. The public sector should also provide effective support for
these efforts, in particular for SMEs. In addition, intellectual property should be
protected by appropriate and cost-effective rules regarding intellectual property
rights (IPR). The European Commission supports the development of a more
coherent IPR policy, with a more centralized and coordinated approach.36
This includes a common jurisdictional framework and greater alignment of
international patent law through the World Intellectual Property Organization
(WIPO) and initiatives such as the Transatlantic Economic Council (TEC).
Sustainable development is another opportunity for innovation by European

chemical companies. Using their technological advantage to stay ahead of
the market, these companies are uniquely positioned as leaders in the
development of new energy-efficient products, efficient manufacturing
processes and alternative feedstocks based on natural materials such as
sugar, vegetable oils and plant extracts. (See “Going green with Cognis –
a flexible strategy,” section 4).
35
“Firms get upper hand in application process,” China Business Weekly, 23 February 2009
36
“Final Report of the High Level Group on the Competitiveness of the European chemicals industry”
Despite the lack of concrete

commitments resulting from the
recent Copenhagen Climate
Conference, the green agenda is
increasingly being driven by the
chemical industry’s end customers
who are demanding sustainable
products and solutions. There is a clear
opportunity for the chemical industry in
Europe to capitalize on its historical
technological advantage and provide
global leadership in the realm of
sustainable development.
For the chemical industry, another

metric is especially important — the
number of graduates in chemical
engineering and related fields. Highly
qualified human resources are vital to
European chemical companies: an
average of 32 percent of their
employees have attained third-level
education as compared to an average
of 26 percent for other industries.37
However, the last decade has seen

a serious drop in the number of
European students taking chemistry
at the third level. Chemistry currently
scores last among the most preferred
subjects studied at secondary school.38
During the same period, surveys have
shown a dramatic rise in the number of
chemistry and engineering graduates in
Asia.39 European companies recognize
the consequences if these trends
continue.
Fortunately, the EU has one of the

most well developed and successful
educational systems in the world.
Chemical companies should take the
opportunity to join with governments
and private organizations to encourage
more students to enter fields that
support the chemical industry.
37
Source: Eurostat
38
“The state of the European Chemicals Industry – a thoughtstarter for the High Level Group on the competitiveness of the European Chemicals
Industry,” European Commission, 2007
39
Higher Education Statistics Agency Limited 2009
3.3 Strengthening customer relationships

European chemical companies should seek to expand beyond just trading,
supplying commodities or competing on price. Now is the time to focus on the
success of their customers. This can involve strategic partnerships and joint
initiatives with engineers, researchers and other professionals from different
companies, working together on R&D projects and providing value add services.
The benefits of these initiatives are clear, but they also require new strategies
and attitudes on the part of companies. As Peter Linder of Clariant in China
stated, “We have to keep our sales force focused on adding value through strong
customer relationships, rather than simply getting drawn into competition with
lower-cost rival producers.”40
3.4 Developing joint venture relationships

European companies can develop joint ventures and strategic alliances with
competitors — in the Middle East to gain access to feedstocks and in China to
develop a local market presence.
The most successful European chemical companies in the coming years are likely
to be those that embrace the changing dynamics in the global industry and
position themselves to take advantage. Inevitably, joint relationships involve an
element of trade-off and a challenge for European chemical companies will be to
establish agreements that allow them to enjoy the benefits, without giving away
too much of their technological advantage, so as to preserve their long-term
competitiveness.
40
“Chemicals in China: Responding to New Challenges,” KPMG, 2009.
T H E F U T U R E O F T H E E U R O P E A N C H E M I C A L I N D U S T R Y 2 9
“” European
chemical
companies should
seek to expand
beyond just
trading, supplying
commodities or
competing on
prices.
4 Case study – Going green with

Cognis – a flexible strategy
Raw material basis of Cognis in terms of volume in 2008*

Naturals
(Natural oils, fats and derivatives, glucose, plants and extracts) 50%
Inorganics
(Inorganic acids and bases, salts) 8%
Inorganics
(Silicates) 17%
Petrochemicals
25%
*Core businessess CC, N&H, FP
Source: Cognis, 2009
Headquartered in Monheim, Germany, Cognis is one of the world’s leaders in

specialty chemicals, providing raw materials and ingredients for products for
personal and home care, nutrition and health, and for a number of other
industries such as coatings and inks, lubricants, agriculture and manufacturing.
Cognis is one of the leaders in green solutions for the chemical industry,
dedicating its activities to a high level of sustainability and the use of natural
source raw materials and ingredients.
As a European chemical company, the strategies adopted by Cognis offer

several advantages. For example, the use of natural raw materials such as fats
and plant extracts has significantly reduced its dependence on petrochemical
feedstocks from the Middle East. In addition, its raw materials are gathered
from a number of countries across Asia, the Pacific and South America, further
reducing its dependence on any particular region.
Cognis has also taken care to establish a local presence in emerging markets
such as China, enabling it to target rapidly moving markets for specialty
chemicals and consumer goods. The company recognizes that the time and cost
required to manufacture products in Europe and then ship them to Asia would
hurt their competitive position. As a result, Cognis has focused on expanding
their presence in Asia through plant expansions and joint ventures with local
companies.
In its European plants, Cognis continues to develop more efficient

manufacturing processes to reduce costs and improve their regulatory position.
This emphasis on innovation applies to its focus on product performance. As
with other European chemical companies, it can leverage a strong background
in R&D to help ensure that its products remain competitive in global markets.
Richard Ridinger, Executive Vice President Care Chemicals, recently summed up

the situation facing many of today’s European chemical companies. “In Europe,
we have unique challenges but also unique advantages in terms of technology,
“”
innovation and flexibility. Those chemical companies that work hard to balance
sustainability with performance and price will succeed.”
Cognis
is also
recognized
as a leader
in green
solutions for
the chemical
industry.
5
Major Chemical Cluster in Europe
Rockall
(U.K.)
ORKNEY
ISLANDS
Bergen
Oslo
Stockholm
Case study – BASF – verbund
manufacturing
ALAND
ISLANDS Tallinn
EST ONIA
RUSSIA
HEBRIDES Stavanger
North Aberdeen Göteborg Gotland LAT VIA

Atlantic Rig a NORTH
Brunsbuttel
SEA
Glasgow
Vits yebsk Smolensk
Ocean Edinbur gh North Barents
Öland LITHUANIA
Belfast UNITED Sea
DENMARK
Malmö
Sea Vilnius Mahily ow
Wilhelmshaven Hamburg
Isle
Copenha gen Kaliningr ad Minsk
RUSSIA
Dublin Irish
of
Man Bornholm
BELARUS Eemshaven Bremerhaven
Sea
(U.K.) Leeds
Manchester
Gdansk
´ Hrodna
Homyel' GREAT
IREL AND Liverpool
KINGDOM
Hambur g
BRITAIN Amsterdam
emen Berlin Poznan´
War sa w Brest
NETHERLANDS
Cardiff POLAND Kyiv
Rotterdam
Celtic London
Lódz´ Rivne
London
Leipzig
Wr ocla w Chemsite
Sea
GERMANY UKRAINE Zeebrugge
GERMANY
Pr a gue L'viv
Guernse y (U.K.) Fr ankfurt Kr ak ów
Jersey (U.K.) am Main Chernivtsi
g CZEC H REPUBLIC
Brno SL OVAKIA
Myk
Dunkirk Ghent Antwerp
Stuttgart Bratisl a va
Chisin au
Chem Cologne
Nantes
Strasbour g Munich
Vienn a Bud apest Cluj-
Napoca
Iasi
¸
MOLDOVA CHANNEL
LIEC H.
Z ü rich Vaduz
AUSTRIA
HUNG ARY BELGIUM
FRANCE
Bern
GenevaSWITZ.
ROMANIA Le Havre
Bay of Ljublj an a
Z a gr eb
Buchar est L.
Ludwigshafen
Biscay Milan SL OVENIA
MASSIF Lyon Venice
Turin
Bordeaux CENTRAL BOSNIA AND
Belgr ade Danube
Varna
HERZEGO VIN A
FRANCE
Genoa SAN CROATIA SERBIA
Bilbao MARINO
Toulouse MONAC O Sar aje vo BULG ARIA
Andorr a Ligurian Flor ence Pristina
Sofi a
Porto
PYR
ENE l a V ell a Marseille Sea Adriatic KOS. Istanbul
ES ITALY Sea
Podgorica Skopje
Z ar agoz a MONT.
ANDORRA Corsica Rome MACEDONIA
Bur
Madrid VATIC AN Tir an a T hessaloní ki
PORTUG AL Barcelona CIT Y ALB.
Tagus Balearic Naples EY
TURKEY
Lisbon ·Izmir
SPAIN Valencia
Sea Sardinia Tyrrhenian
Sea GREECE
Aegean
Sea
BALEARIC Athens
Sevilla ISLANDS Cagliari Ionian
Palermo Sea
Gibralt ar Má laga Mediterranean Sea Rhodes
(U.K.) Sicily
Strait of Gibraltar
Ceut a Alboran
Algier s
(SPAIN) Sea
Source: European Chemical Site Promotion Platform, 2009
Headquartered in Ludwigshafen, where the Verbund concept was The Verbund principle also applies to
Germany, BASF is one of the world’s developed and optimized before it was energy. In the Energy Verbund, the
leading chemical companies with applied to other sites around the world. excess heat given off in chemical
production and sales facilities in many reactions is immediately converted into
BASF estimates that it saves more
economic regions. The BASF portfolio steam and is fed into the steam
than EUR500 million each year at its
comprises chemicals, plastics, network so that it can be made
Ludwigshafen site alone. By linking
performance products, functional available to other plants.41
plants in a Production Verbund, they are
solutions, agricultural solutions and oil
able to create efficient value-adding Speaking about the importance of the
and gas.
chains starting with basic chemicals verbund concept, Dr. Albert Heuser,
BASF is widely recognized as the and extending to higher value products Head of BASF’s Petrochemicals
founder of the verbund manufacturing like coatings and crop protection Division stated, “strengthened
concept. Worldwide, BASF operates products. In addition, by-products from cooperation between companies and
six Verbund sites and about 330 one plant can be used as raw materials efficient Verbund structures within each
production sites. In Verbund, they link elsewhere. Production plants are company, as well as optimization of
production plants intelligently to save connected by an intricate network of logistics and infrastructure, will play a
resources and energy. The largest pipes that provides an environment- major role in the European
Verbund site in BASF Group is located friendly method of transporting raw petrochemical industry’s future.”42
in Ludwigshafen, Germany. This was materials and energy quickly and safely.
41
basf.com, 2009
42
“Sustainable Manufacturing of Petrochemicals in Europe,” Chemical Week, September 21, 2009
kpmg.com
Contacts:
In Europe
Chris Stirling
KPMG in the UK
Tel: +44 (0)20 7311 8512
e-mail: chris.stirling@kpmg.co.uk
In Asia
Norbert Meyring
KPMG in China
Tel: +86 (21) 6288 2298
e-mail: norbert.meyring@kpmg.com.cn
In USA
Mike Shannon
KPMG in the US
Tel: +1 973 912 6312
e-mail: mshannon@kpmg.com
Author
Paul Harnick
KPMG in the UK
Tel: +44 (0)15 1473 5226
e-mail: paul.harnick@kpmg.co.uk
The information contained herein is of a general nature and is not intended to address the © 2010 KPMG International Cooperative (“KPMG International”),
a Swiss entity. Member firms of the KPMG network of
circumstances of any particular individual or entity. Although we endeavor to provide accurate and independent firms are affiliated with KPMG International. KPMG
timely information, there can be no guarantee that such information is accurate as of the date it is International provides no client services. No member firm has
received or that it will continue to be accurate in the future. No one should act on such information any authority to obligate or bind KPMG International or any other
member firm vis-à-vis third parties, nor does KPMG International
without appropriate professional advice after a thorough examination of the particular situation. have any such authority to obligate or bind any member firm. All
rights reserved.
KPMG and the KPMG logo are registered trademarks of
KPMG International Cooperative (“KPMG International”), a
Swiss entity.
Publication name: The Future of the European Chemical Industry
Publication number: 1001503
Publication date: January 2010

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CHEMICALS

The Future of the

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

The European chemical

2. Challenges from the East 12

3. Innovation: the key to survival 24

4. Case study – Going green with

5. Case study – BASF – verbund

1 Current state of the industry

1.1 Industry overview

Asia EU 27 NAFTA Latin America Rest of Other*

Other* = Oceania and Africa

Source: American Chemistry Council, 2009

EU chemical industry sales by country

FR 14.5% 11.7% Other

DE 25.3% PL 2.3% HU 0.7%

Source: Cefic Chemdata International

Sector-wise breakdown of EU chemical industry sales

Soaps & detergents

Other specialty chemical

Source: Cefic Chemdata International and Eurostat

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

• Base chemicals that include petrochemicals, their derivatives and basic

• 16.4 percent for services

• 6.4 percent for agriculture

• 5.4 percent for construction

• 6.1 percent for manufacturing not listed above

• 10.3 percent for other industries2

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

1.2 Impact of the current downturn

EU chemicals production: sector outlook

5.5 6.0 5.3 5.0

2008 2009 2010

Source: Cefic Economic Outlook Task Force (November 2009)

Global ethylene capacity and demand

Source: Bank of America Securities/Merrill Lynch

KPMG analysis shows that European petrochemical capacity may decline

2 Challenge from the East

2.1 A global shift

165 Average growth p.a. (1997-2007)

EU NAFTA Asia Pacific* Latin America

Source: Cefic Chemdata International

Chemical demand (excluding pharma)

Rest of world 10% 11% Rest of world

South America 6% 6% South America

Western Europe 25% €650 €1,150 19% Western Europe

Asia Pacific 38% 46% Asia Pacific

Source: BASF, 2008

World natural gas costs

$0.75 North Africa

$7.60 West Europe

$0.75 Middle East

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

Global ethylene trade

North America South America West Europe Middle East

India Sub. Northeast Asia Southeast Asia Others

Source: Jadwa Investments, GPCA Annual Forum, December 2009

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

Top 10 chemical producers (sales value), 2008

Top 10 chemical producers, 2015?16

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

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

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