Europe’s chemical industry at a crossroads for transforming value chains

The chemical industry in Europe, seen as a global powerhouse, is facing a critical juncture. In order to meet the EU’s ambitious Green Deal targets, the industry will need substantial investment estimated at over €2 trillion by 2050, according to analysis by Roland Berger.

Though the need for more investment is clear, Europe has been struggling to attract that capital. In fact, Europe’s share of global chemical industry investment has dropped significantly over the past two decades. Meanwhile, the high cost of materials and energy are mounting more pressures on the sector and its competitiveness.

Europe’s chemical industry at competitiveness and sustainability crossroads

There has also been intensifying competition from the US, China, and the Middle East, further challenging Europe’s position. A complex regulatory environment and public skepticism towards industrial activities are also hindering project development, leading to cancellations and postponements.

Europe falling behind

The report from Roland Berger reveals a consistent decline in Europe’s share of global chemical investments over the last decade. It shows that while investments in Europe have increased somewhat in the past several years, they have not kept pace with the growth of investments in the rest of the world.

To address these challenges, Europe has been implementing regulations to level the playing field. But in many cases, these regulations can backfire for a number of reasons.

For example, this was seen in the market for production of blue or green low-carbon ammonia. High energy prices meant that European producers faced a significant cost disadvantage, which ended up resulting in more ammonia being imported from Russia. Meanwhile, investments for low-carbon ammonia are diverted to the US.

The report found that stagnating demand, more regulation, and supply chain issues all put a significant strain on the European chemicals industry. The result was a negative chemical trade balance, with Europe’s chemicals production down by around 20% in the last two years.

Since 2021, the EU has been a net importer of chemicals, meaning that it has been left behind by the chemical industry in China, for example. Other regions are getting ahead because they are investing in future-proof value chains and driving investments that secure their value chains.

Some reason for optimism

Despite these challenges, there are still some opportunities in Europe’s chemical value chains. Resilient value chains, like that of the chloralkali industry, benefit from strong local markets and integrated infrastructure.

Disrupted value chains, like the industry around plastics and specialty surfactants, require adaptation and innovation to capitalize on green transformation. Value chains that are more broken up may see production shift elsewhere while downstream processing remains in Europe.

There are also some value chains that are expected to grow driven by strategic autonomy demands. One example is the battery industry: In order to be less dependent on foreign production and manufacturing, European stakeholders are heavily investing in European production of automotive batteries.

“With Europe’s industry facing both unprecedented pressure and a formidable transition, different value chains will be in flux. Policy makers and industry both need to act in creating investment certainty, driving rigorous innovation and identifying new opportunities,” said Erwin Douma, senior partner at Roland Berger.

Some of the backdrop to Europe’s current situation includes geopolitical instability, like the wars in Ukraine and the Middle East, as well as the destabilizing effect of changing West to East supply chains. Things will likely continue to be seriously turbulent going forward, with tariffs from the Trump administration hitting EU industries.