sunset petroleum
Image by RENE RAUSCHENBERGER from Pixabay

If you were trying to think of ways to kill an industry, you might consider high energy prices, high levels of taxation, stringent regulation, a lack of government strategy or high labour costs.

Europe's petrochemical industry faces all of these challenges and more.

The petrochemical industry creates a wide range of essential commercial and household items. Petrochemicals are used in products ranging from perfumes, pesticides, and paints to wind turbines and water bottles.

The scale of petrochemical production is huge and complex, with the industry spanning everything from extraction and refinery through complex chemical processes to manufacturing and distribution.

Despite the current constraints, petrochemical producers contribute a whopping €155,000,000,000 (€155bn) to European GDP.

A combination of a range of internal issues at the EU and national government levels, alongside increasing market dominance from China and the US, means that the industry has been battling for its survival over the last few years.

European governments must urgently consider steps to save the industry from bankruptcy or risk losing its benefits forever.

But the industry, too, needs to adapt.

Inefficiencies within the system, exacerbated by a fragmented supply chain, only compound the already challenging market conditions.

As the industry is so broad and diverse, companies in the sector often have a narrow focus. This means many businesses are involved in the journey from extraction to completed product. With every additional step in this long process, there are increased costs and delays.

Plants producing chemicals and compounds we use daily, from plastics to rubbers, rely on feedstocks, often byproducts of the oil and gas industry. If those byproducts are exported or go to waste, they must be imported from elsewhere, creating inefficiencies and higher costs.

Europe's petrochemical industry needs improved vertical integration to combat these inefficiencies and reduce its vulnerability to challenging market circumstances.

By integrating the various systems involved, companies could streamline their operations and avoid frustrating additional costs such as logistics, transportation, and other intermediaries.

Increasing the localisation of these processes would also help countries secure their domestic supply, decreasing their reliance on external powers, particularly those with different or opposing strategic interests to Europe.

Given the high costs associated with petrochemical production, building large-scale industrial complexes that host a range of upstream and downstream processes would help European companies lower operating costs, improve their margins, and become internationally competitive again.

This isn't the first time the industry has faced setbacks, and history offers some lessons on how the petrochemical sector could rebuild itself if it makes the required capital investment.

Following the collapse of the USSR in 1991, the Russian and Eastern European petrochemical industry was in difficulty. Like many post-Soviet industrial systems, it struggled with inefficiencies caused by the sector's fragmentation and a lack of coordination between companies at all production levels.

Companies like Petrochemical Holding GmbH, a Vienna-based company owned by Austrian businessman Iakov Goldovskiy, are an exemplary case of how to resurrect a struggling industry from its ruins.

The company revived the petrochemicals sector in several Eastern European countries, such as Hungary, Lithuania and Russia, by purchasing and consolidating assets throughout the supply chain to develop a highly efficient petrochemical operation.

If Europe fails to adjust, leaders in the petrochemicals space are bound to move their operations overseas in an attempt to realise their plans for the sector, not least because similar approaches could also benefit other petrochemical markets.

The Middle East and North Africa are ideally situated for this approach, with major development opportunities and the ability to offer an end-to-end process. Should the European market not change, expert companies will inevitably explore new opportunities in these regions for their new ventures.

Despite the challenging market conditions, European petrochemical companies should look inward to consider areas for improvement. Europe needs to move quickly to avoid being left behind, and vertical integration may be the solution it needs to unlock its potential.