View from City Road: Something must give in chemicals

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The Independent Online
It is doubtful whether the answer to the chemical industry's overcapacity lies in a new idea floated yesterday in Rome by Sir Denys Henderson, ICI's chairman.

Overcapacity, which may be as high as 20 per cent in ethylene, a petrochemical building block, is caused partly by low demand but largely by the successful efforts of profitable South-east Asian producers. They have substituted their own production for local imports of European origin.

The Association of Petroleum Producers in Europe wants the European Commission to approve a pounds 220m fund to help pay the costs of shutting down 1.5 million tonnes of ethylene capacity. Efficient producers, including ICI, may baulk at subsidising inefficient European colleagues, especially those in the state-owned sector.

One way around the problem has been asset exchanges among producers. A freshly demerged ICI recently swapped its Europe- based nylon business for Du Pont's US acrylic interests. Such swaps do not cut capacity as such but they take one player out of the market. A marginal player finds it hard to shut down his one remaining plant; more dominant producers are not so inhibited.

Sir Denys took this idea a step further yesterday. Joint ventures between two companies already exist. But drawing on his experience as a non-executive director of RTZ, Sir Denys put forward the mining model of multi-party joint ventures where one company acts as sole manager.

A drawback with this is that it is likely to appeal only to other quoted chemical companies (particularly German ones), leaving the state-subsidised Italian industry to reap any benefit in improved prices. Something clearly has to give and market forces may finally prevail in a savage shutdown of capacity and job losses. Worldwide bulk chemical production is three times the size of Europe's. This means that Europe, which is where producers are in trouble, will bear a disproportionate amount of the cutback.