Chemical reaction

The European chemical industry has been a lightening rod for the forces unleased by the energy crisis.

In comparison to other energy intensive industries, the chemical sector is particularly vulnerable to changes in economic sentiment. Often the first to feel the impact of rising consumer demand, the sector is also the first to feel the impact when consumption softens.

Exacerbating the challenge facing the industry is the inherent volatility of petrochemical prices. Sharp upswings in virgin plastic prices typically incentivise the building of lots more capacity, but because of long lead times this capacity may only come on-stream just as prices plummet. And then, as prices plunge the depths, there is little incentive to cut capacity as long as each plant can be cash positive – further perpetuating the volatile cycle.

The worst situation for the sector is when it is caught in the middle between two opposing forces - strong energy prices and weak petrochemical prices.

In a series of articles I plan to delve into the factors driving recent European production and emission trends across six of the most carbon intensive industries. As free allowances are gradually phased out over the next decade, the outlook for production across these industries will become increasingly important in determining demand for EU carbon allowances. This update focuses on the European chemical sector.