View from City Road: Chemical reaction has a way to go

The merger of the Dutch company Akzo and Sweden's Nobel Industrier to form a high-ranking, pounds 2.5bn-a-year European chemicals giant will not, in itself, do much to rid the industry of the pressing problem of over-capacity in bulk chemical products such as ethylene.

It will certainly ease pressure on the individual companies. Combining the two neatly dovetails their respective product portfolios and takes the new grouping further downstream into paints, industrial coatings and speciality chemicals and materials.

The further downstream chemicals companies are, the further away they are from the rising tide of Third World and eastern European bulk producers. This new competition has eaten into both the domestic and traditional export markets of European producers.

But the bulk over-capacity problem remains. Later this month the Association of Petroleum Producers in Europe, representing the region's 31 producers of ethylene, will seek to gain European Union approval for a pounds 225m fund to close down surplus plant.

If the European Union's permission is not forthcoming, it will undoubtedly catalyse British Petroleum, a prime sufferer, into taking tough action with its heavily loss- making chemicals activities - especially at its Baglan Bay site in South Wales - some time in the new year. Hard decisions cannot long be delayed.