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Unified Europe Offers Problems, Markets for Chemical Industry Integration of East into West would create more powerful bloc, provided trade disputes and investment hurdles can be cleared Patricia L. Layman, C&EN London urope—from the Arctic to the Mediterranean, from the North Atlantic to the Urals. Home of roughly 800 million people. A population varying widely in standard of living, from the highest per-capita income to abject poverty. Home to 48 countries, many of which seem to want to self-fragment even further than they have over the past two years, and to a monetary system that has shuddered to a halt on the road to a single European currency. In short, a political nightmare to integrate. A politician's nightmare, however, can be a dream for marketers and market suppliers, such as the chemical industry. Assuming the current recession that is plaguing Europe is only temporary, optimists see the opportunity to find markets, eventually, in raising the general standard of living for people. There is also the opportunity for the chemical industry, as East is integrated into West, to become an even more powerful bloc, augmenting North Sea feedstocks and energy sup-
E
plies with the vast resources of Siberia. The long-term result: an industry capable of competing internationally not just against traditional rivals in the U.S. and newer ones in the Middle East, but against what many Western marketers see as the real threat for the future, companies in the Far East. In the short term, however, trade disputes between Eastern and Western Europe are disrupting markets and profitability, particularly in basic chemicals. These market disruptions are occurring at the same time as Eastern European governments and authorities work to bring Western capital into their countries to modernize plants and processes. And while the record of the Western world's investment in Eastern Europe's chemical industry remains somewhat sluggish, efforts are proceeding speedily to bring the chemical trade associations in Eastern Europe that have been formed into the European chemical industry community under the aegis of the European Chemical Industry Council (CEFIC). How well this can be done will control the speed at which the countries' chemical industries upgrade and integrate into those of Western Europe.
Henkel-Palma's detergent plant in the Slovak Republic
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As Blanka Kalinova, a member of lesser extent, nuclear at 5%, and hythe trade directorate at the Organizadroelectric at 2%. Former Soviet Union holds tion for Economic Cooperation & The Central European countries, huge natural gas reserves Development, put it in the OECD in particular, and now the non-RusObserver in August, trade liberalizasian countries of the former Soviet tion is one of the major tasks for Union are highly dependent upon Central and East European counRussia for energy and, in the case of tries. Facilitating this is an inflow of the chemical industry, for feedstocks. direct foreign investment, "which in This is expected to continue, particuaddition helps spread technical and larly because countries of the former management know-how and fosters Soviet Union have some 40% of the an extension of the private sector." world's proven natural gas reserves, OECD 15 according to the BP review, an Getting that elusive foreign investcountries amount that nearly matches the rement, however, is proving a someserves held by the Middle East. times frustrating task for countries in Total natural gas reserves Eastern Europe. Just as in the U.S., Alternatives to total dependence in 1992 = 138 trillion cubic meters they must embark on a "beauty conon natural gas and oil do exist—for a Organization of Petroleum Exporting Countries, b Organitest with tax incentives and other fiexample, Poland and what used to zation for Economic Cooperation & Development. nancial and social incentives to lure be Czechoslovakia and East GermaSource: British Petroleum companies to invest. So Eastern counny have a lot of coal. Nuclear power tries are finding they are in competiis the other nonoil/gas alternative, tion with countries around the world but poor design and maintenance in bidding for investment funds from Western companies. have left their legacy in potentially unsafe plants. The governments of the newly emerged democracies face a dilemma: Much of the first flush of chemical investment in Central shut down plants whose safety is suspect, leaving total deand Eastern Europe has been in the downstream end of the pendence on Russian oil and gas, thereby depleting precious business. For example, detergents and chemicals producer hard currency reserves, or keep plants going, taking the Henkel has committed about $45 million to the detergents, chance that they will continue to operate with no problem, cosmetics, and adhesives markets in Central Europe alone; while trying to upgrade operations and safety standards. Unilever and Procter & Gamble have followed closely behind. Beyond energy and petrochemicals, however, come other Investment in more basic chemicals, however, has been less interests of the chemical industry. Karl-Heinz Becker, senior frequent. Countries pressed to come by hard currency will vice president with responsibilities for Eastern Europe at export whatever they can, particularly commodity chemicals. Lonza in Switzerland, looks at the issue through the lens of The result is the fear of many Western investors that if they specialty chemicals. "Those products closer to 'mass' are were to put money into ventures, acquisitions, or new getting fierce competition from Eastern countries. The techprojects, the product would come back to haunt them. nology was transported by Western European companies at However, as domestic demand grows, enterprises and coma time when no one expected the Iron Curtain to fall. Now, panies will have to invest. One positive aspect is that any increit has fallen, and countries' needs for hard currency are trement of investment will reduce pollution; incremental investmendous"—hence the drive to export. ment first will upgrade technology, then lead to the scrapping of units in the worst condition and a gradual rise in performance On the other hand, he adds, "closer to fine chemicals, standards. "Whether you get to water treatment plants in 10 there is less competition—at this moment. We are trying to years, I don't know," says one Western chemical executive. "But evaluate our options: The Eastern European countries do the processes will be cleaner." not have yet the technology or equipment. But they are so geared to becoming competitors, they are helping their A chemical company in Eastern Europe that survives can do pharmaceutical and agricultural industries back to serving one of two things—produce for the domestic market or export, national needs." He sees the next line of competition coming points out Paul Arwas, a consultant with Arthur D. Little Inc. in during the next three to four years from the lower rungs of London. 'To be global in major commodities, you need a lowchemical specialties—bulk products for vitamins and nutrition, cost position, which usually means good access to feedstocks. In for example. "When the opportunity comes, companies will get Central Europe, clearly that is not the case. The [countries of the] the most modern equipment—they won't have to go through Commonwealth of Independent States will be the ones that do what we have had to," Becker says, in making the initial process have access to gas feedstocks, and they may be driven by exdevelopments, environmental modifications, and so forth. ports. The other countries with no comparative feedstock advantage will be in more specialty areas, more domestic or reFurthermore, as new processes, plant, and equipment are gional markets." installed, maintenance will be important, predicts Terry Baker, a principal at consultants Chem Systems in London reCertainly natural gas and oil in Eastern Europe, particularly sponsible for its Eastern and Central European studies, who in Russia, are abundant. Some of these supplies go to domestic has recently completed a report, "The East European Chemifuel consumption. For example, in what it terms non-OECD cal Industry, Restructuring for Eastern Europe." Companies Europe—the former Soviet Union and tfte Central European in Eastern Europe "bought the best when they bought, but countries, as well as Cyprus, Gibraltar, and Malta—British Pethey never upgraded or debottlenecked," he explains. "The troleum, in its 1993 Statistical Review of World Energy, notes system never gave the funds to make the continual improvethat natural gas accounted for 40% of energy consumed in 1992. ments that we take as a matter of course in the West." That was followed by coal at 27%, oil at 26%, and to a much 14
SEPTEMBER 13,1993 C&EN
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NEWS FOCUS
Germany sets the model for European unification For the German chemical industry, unity came early. The first tentative steps came in 1988 when the East German chemical association, the Landesverband Ost, was formed in Halle, center of the Chemical Triangle of Bitterfeld, Leuna, and Buna. The Landesverband, in turn, established a liaison with the West German chemical association, Verband der Chemischen Industrie (VCI). Then in 1990, VCI joined with Landesverband Ost, with the eastern German group becoming one of VCI's free-standing regional groups. It has helped bring into the fold of VCI the enterprises in the so-called new states, those brought in from the former East Germany. When the Landesverband was formed, there were roughly 120 member companies; this has dwindled to about 90, as many folded or have been bought out. "These member companies are closely integrated within VCI," notes Gregor Disson, of VCI's legal department. "They have access to committee levels, from top to bottom, in principle, at least. Whether it is practicable for them to participate in all the committees is a different question. But they have the option." The Landesverband, with a secretariat of about 20 people in Halle, coordinates an exchange of experts at various levels and currently has two of its specialists from the east working at VCI in Frankfurt. "What we do from Frankfurt," adds Disson, "is respond to different needs, for example in environment, taxation, and so on." VCI sponsors such events as information days and workshops— about the legislative situation both in Germany and in the European Community, for example. "And we get feedback from companies there about what is most relevant to them and how we can assist them." Other links include basic services
new states constantly fell. On average, the number of staff was 69,400, down 44% from 1991. However, in 1992, investment in the chemical industry in the new states Category Old states New states reached $1.76 billion. Of that, two $3.8 $96.9 Chemical sales thirds was invested in privatized com($ billions) panies, 80% by Western investors. In2.8 56.3 Domestic cluding investment in companies 1.0 Foreign 40.6 owned by the Treuhandanstalt, the 69,400 585,000 Employees German government authority charged $1.1 $24.0 Salaries ($ billions) with privatizing former East German 20.2% 25.1% government-owned properties, the inSalaries as % of sales vestment rate in the eastern German chemical industry was six times as high Note: 1992 data. Source: Verband der Chemischen Industrie as that in the old states. Alex Fôller in VCI's business and statistics department points out that such as an economic data bank for the many of the Treuhandanstalt firms have chemical industry, to which the eastern been sold—about 80% of the chemical companies can respond and contribute. firms. However, measured by total numThe data bank is helping VCI get a ber of employees, the industry has been better picture of the economic devel- only 55% privatized: the largest enterprisopment of the chemical industry in the es have not yet been privatized. new states. For the time being, it is still Huge differences exist among special an unsatisfactory picture. sectors of the industry. Companies in As VCI pointed out in its 1992 annu- some are very competitive and are peral report, the development of the total forming better than others, both ecosales of the chemical industry in the nomically and environmentally. All, new German states, including trade however, have been facing the problem and nonchemical sales, for example, "was of a collapse of previous markets in not satisfactory." At the end of the year, Central and Eastern Europe—the former sales of just under $4.59 billion had been East Germany's trading bloc. recorded, a drop of 10.5% from 1991. Moreover, most comSales, prices, output off in both panies in the chemical western and eastern Germany industry in East Germany were running at a loss. Old states New states The share of the gross toJan.-May May Jan.-May May 1992-93 1992-93 1992-93 % change 1992-93 tal payroll in total sales was 25%, unchanged -3.5% -14.9% -8.0% Chemical sales -7.4% from the year before. -7.6 -9.0 0.9 8.8 Domestic That remains 5% higher -6.7 Foreign -7.1 -15.8 -28.0 than the corresponding -0.7 0.1 -2.6 -2.5 Prices rate in the "old" states of -23.9 a -32.2 b Production -5.5 -5.3 West Germany. a April 1993. b January-April 1993. And during 1992, the Source: Verband der Chemischen Industrie number of staff in the chemical industry in the
German chemical industry at a glance
Those conditions have ended, he believes. In fact, he observes, "centers of innovation moved from Western Europe to the U.S. a few decades ago. I wouldn't be surprised to see that move to Central Europe in a few more decades, in 20 to 30 years' time. Eastern Europe has a skills base, and Western companies are cutting back on what they are doing. And it may be that the U.S. and Western Europe will regulate themselves out of business." Thafs truly long-term thinking, however, beyond the current, immediate efforts of governments to come together into a Pan-Europe. 16 SEPTEMBER 13,1993 C&EN
The European Community, with 12 member countries at present, is in various stages of processing applications for membership from another eight countries—Austria, Finland, Norway, Sweden, Switzerland, Cyprus, Malta, and Turkey. Some of these are already in the European Economic Area established in May 1992 by the EC and the members of the European Free Trade Association. For now, the Eastern European countries are waiting. They have not applied yet for membership, but their intentions to do so are clear. With at least six of the countries—Bulgaria, the Czech Republic, Hungary, Poland, Romania, and the Slo-
As those markets collapsed, sales and trade guarantees for Eastern European sales have dwindled or in many cases disappeared, and exports have dropped nearly to zero. That affected the chemical industry not only in eastern Germany, but in the western part of the country, as well, Fôller notes. As VCFs 1992 annual report observed, "The restructuring process in the new German states has been hampered by the virtual collapse of trade with Eastern Europe and the recession in the old German states. The decline in production that began in mid-1992 worsened toward year's end. Contrary to original expectations, 1992 saw a fall in chemical production of almost 16%/' By comparison, in manufacturing as a whole, production decreases were only an average 2.3%. "The crisis in Eastern European countries was the main reason for the fall in chemical sales in the new German states/' VCI adds. For example, the loss of exports to countries in the new Commonwealth of Independent States alone was just shy of $300 million, and that amount could not be compensated for by sales into Western European markets. As a consequence, chemical sales by the new states in 1992 were only $3.82 billion. Of that, $2.76 billion came from domestic sales and the remainder from sales outside Germany. Starting from a small base, however, percentages of improvement can be quite large. And that may be the outlook for the industry in the new states. According to Gunter Rexrodt, German federal economics minister, exports will lead revival of the German economy next year, despite the strength of the deutsche mark. In the annual summer assessment of German economic prospects by his ministry, he predicts a growth of 1.5% for West German gross domestic product in 1994, compared with a decline of the same amount this year. In eastern Germany, on the other
German chemical industry trade with Central and Eastern Europe is down Chemical exports
Chemical imports
First quarter
First quarter $ Thousands
1992
1993
$ 106 $ 1,131 Estonia 681 1,664 Latvia 5,849 2,180 Lithuania [58,468] 36,859 Former Soviet Union3 8,594 Ukraine 11,776 Belarus 0 Moldova 35,170 Russia 2 Georgia 0 Armenia 0 Azerbaijan 2,925 Kazakhstan 0 Turkmenistan 0 Uzbekistan 1 Tajikstan 0 Kyrgyzstan 89,872 62,275 Poland [81,081] 105,489 Former Czechoslovakia** 60,152 Czech Republic 20,929 Slovak Republic 26,739 Hungary 36,438 5,688 7,465 Romania 2,882 6,343 Bulgaria 36 38 Albania TOTAL
$286,456 $244,831
%> change
1993
1992
574 484 $ 962% $ 1,979 937 -59 3,120 460 168 350,636 [173,307] [59]
-31 [-23]
-27 -24 -55 -7
% change
19% 111 578 [-51]
150,935 123,781
37,284 10,328 451 118,687 242 111 1,989 2,132 192 1,873 0 18 191,536 [119,275]
hfl
91,052 16,612 13,930 281
101,379 17,896 99,963 19,346 18,232 1,352
10 17 31 381
-15% $749,108 $ 628,685
7
-16%
Note: Totals may not add because of rounding, a One country through April 1992; split effective May 1992. b One country through December 1992; split effective January 1993. Source: Verband der Chemischen Industrie
hand, he says the expected 5% recovery this year will accelerate to 6.5% next year. The growth will be fueled by construction, the communications industry, and vehicle manufacturing—important markets for the chemical industry. Whatever the growth prospects, however, the integration of Landesverband and VCI seems strong and shows
vak Republic—the EC has negotiated Europe Agreements/' which set out timetables for phasing in free trade in industrial goods over a 10-year period. The Europe Agreements succeeded the earlier trade and cooperation agreements the EC had with the Comecon countries, prior to the breaking up of that pact in early 1991. Most trade categories are covered, with only a few special categories, including steel and textiles, that will remain liable to duties. The preamble to the agree ments recognizes that the ultimate objective of the associated countries is to become members of the EC, and association should help them attain that objective.
promise of remaining that way. For example, some specialty federations allied to VCI have already held meetings and assemblies in the new states. VCI is following suit: Next year, it will hold its general assembly in Dresden for the first time. As far as the chemical industry is concerned, Germany is, indeed, a unified nation once again.
Four of the countries—Poland, Hungary, and the Czech and Slovak republics—have formed the Visegrad Group to coordinate their efforts at European integration. The Visegrad countries are establishing a free-trade zone and are coordinating their efforts in the international political arena. Similarly, the Baltic nations of Lithuania, Latvia, and Estonia have formed a trade group, which in turn has^negotiated trade agreements with the Nordic countries. The EC has put together a number of efforts to help the Eastern European countries march toward market economies and strong democracies. For example, the EC Commission has seSEPTEMBER 13,1993 C&EN
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lected 194 scientific and technology ture reflecting true production or projects for collaboration between the processing costs, transportation, and EC chemical exports to EC and the countries of Eastern and the like. The result is selling prices East Europe up sharply Central Europe, according to Antonio that dramatically undercut Western Ruberti, the EC's R&D commissioner. European prices, a particular prob$ Millions 1992 1991 % change High on the list of projects, whose total lem when the industry is in the midst Chemical $ 1,826 $ 1,813 0.7% value is nearly $40 million, are inforof a recession. Whether that is true or imports mation technology and telecommuninot, there have been shifts in market Total imports 22,773 19,421 17.3 cations. share and prices. In the case of soda Chemical 2,986 2,423 23.2 ash, for instance, marketers in both More central to the community's efexports the U.S., which exports trona-based forts, however, is its PHARE program. Total exports 25,834 21,138 22.2 soda ash to Western Europe, and EastPHARE, an acronym for Poland and Note: European Community trade with Central and ern Europe, argue that their Western Eastern Europe. Source: Eurostat Hungary Action for Restructuring of European counterparts are just fat and the Economy, now includes Bulgaria, inefficient. the Czech and Slovak republics, and One result has been the shuttering Romania. (Former Yugoslavia was inof Solvay's original soda ash plant, in Couillet, Belgium, a cluded, but has been suspended because of the war; East Gerclosure that chairman Daniel Janssen lays squarely on many was a beneficiary of certain early projects, but since Gercheap imports. And BASF's chairman, Jurgen Strube, noted man unification, it is no longer eligible, although it has since last month at a press conference while presenting his firm's been granted regular EC development funds for economically first-half results that "Our business is suffering in some ardepressed regions.) The PHARE budget is $1.25 billion for 1993. eas from the continuing flow of cut-price imports from EastThe European Investment Bank (EIB), another EC institution, ern Europe. Examples of these are fertilizers and caprolacis authorized to invest in Poland, Hungary, the Czech and Slotam, which are being offered at prices well below the EC vak republics, Romania, and Bulgaria, with the EC guaranteeing the loans. Up to the end of 1992, the EIB had approved 17 loans average." for a total of about $990 million. The priorities are renewing and According to Solvay's Janssen, Eastern Europe "is one of developing basic infrastructures—especially those connected to the most difficult challenges we shall face." He sees a martrans-European networks—energy, research, telecommunicaket of hundreds of millions more consumers "who require tion, and environment. our goods and services. We must be able to satisfy them." However, at a conference of the Society of Chemical IndusA third major financing source for Eastern Europe projects try in Lisbon last October, he noted, "Free trade is always a is the European Bank for Recovery & Development (EBRD), question of negotiation: I give you this, you give me that. set up in April 1991 by 54 individual countries plus the EC That is what GATT [General Agreement on Tariffs & Trade] and EIB. The number of members from Central and Eastern is all about. We should move a little more to more liberal Europe had grown from eight to 22, as of the end of March trade—but I didn't mean to give an impression of a world 1993, as a result of the political changes and emergence of of free trade where everyone lives together happily and new countries in that part of Europe. having no trade restrictions at all. We will never have that. Through June, besides a variety of technical cooperation Fair trade does not equal free trade." projects, EBRD had authorized 99 investment projects. Of these, almost 20% are in oil and gas and other energy projects; Ironically, when one looks at overall chemical trade, it is only one—a new carbon-black plant in Hungary—is in the clear that Western Europe benefits far more from trade with chemical field. Among the Central and Eastern Europe bank's criteria is the assumpthan vice versa. In 1992, for tion that the borrower cannot example, chemical imports get funding at a reasonable cost into Western Europe were East Europe's ethylene capacity elsewhere—the projects are down 0.7% for the full year small compared with West Europe's considered politically risky. The from 1991. That decline accelTotal capacity Number of crackers bank does, however, attempt to erated toward the end of the On On bring commercial banks into year, to the extent that in the Operating standby Operating standby Thousands of metric tons projects as cofinanciers. fourth quarter, the drop was 150 1 300 Bulgaria 1 8.6%. Meanwhile, exports of With investment coming in, 450 Czech Republic 1 chemicals from Western Eua concomitant influx of mana240 60 1 1 Slovak Republic rope were up 23% for the full gerial skills will help chemical 420 1 Hungary year, and up 44% in the final companies in Central and East415 2 425 Poland quarter of the year, compared ern Europe market their prod2 340 Romania 3 with fourth-quarter 1991. ucts in a manner Western Euro5,135 Former Soviet Union 29 Averages conceal a wide pean marketers consider "sen312 Former Yugoslavia 3 swing of activity, of course, sible," a development they TOTAL EASTERN 4 7,612 635 41 and the chemical industry anxiously await. EUROPE does point to several prodAs it stands now, Western 18,400 TOTAL WESTERN 53 EUROPE ucts that have been hard hit. industry executives fret that For example, in June, CEFIC their counterparts in the East Source: Parpinelli Tecnon pressed the EC to apply antihave no proper pricing struc18
SEPTEMBER 13,1993 C&EN
ficial puts it, "It makes sense only if integration goes ahead with Western Europe." Vladimir Dlouhy, minister for industry and trade for the Czech Republic, argues, "It is starting to appear that the Czech nation may be institutionally and economically prepared for membership sooner than the EC is prepared to receive it The real issue is trade." He made his argument in a letter published in several major newspapers in Europe, including the Financial Times, which is the European equivalent of the Wall Street Journal "The EC and others should accept as a reality," he added in the letter, "that there are sensitive commodities where countries in Central Europe have short-term comparative advantages and that such commodities are neither subsidized nor dumped. Economic recovery is simply stifled if fair trading access is not assured, for trading is really the only long-term effective aid. Ready access to neighboring markets for the Czech Republic is becoming the imperative for the priming of economic growth while at the same time one of its greatest impediments." Despite its disagreements with what it considers disordered trade, however, CEFIC has warmly embraced the fledgling trade associations forming in the east. At its general assembly in Vienna in June 1992, CEFIC took on as associate members the chemical industry associations of Hungary, Poland, and Turkey, and has been holding regular meetings with them on Western industry and association ways. "We will follow the same process for the Czech and Slovak associations," predicts Jean-Marie Devos, secretary general of CEHC. These two associations were voted associate membership this June at CEFIC's general assembly in London. The eventual goal for all of them, although on no definite timetable, is full membership in the council. The only major problems, he says, are "the enormous expectations there vis-à-vis Europe. There are general political expectations, and difficult practical economic expectations." All five of the associations have committed themselves to supporting the international Responsible Care program, as adopted by CEFIC. And, says Louis Jourdan, senior director for environmental affairs, 'If you take the view that Responsible Care is a framework for training, learning how to do things correctly or soundly, then [the associations] will be able to do things okay. They have good people." In fact, the Visegrad chemical associations have already scheduled a seminar on Responsible Care for next April in Hungary. And not only will this help environmental and safety standards, it will be of economic benefit, suggests Devos. "We will all perform together on the same standards. That will help remove distortions caused by environmental spending," he says. "In all these countries, they don't want to hear about some vague Euro union— they want to be members of the EC," he adds. "They realize it is not instantaneous—the structures are so different Workers package adhesives at Henkel Ragasztastechnika facility in Hungary still. But the direction is clear." •
dumping duties to melamine, soda ash, polyvinyl chloride, caprolactam, and fertilizers. The CEFIC position was outlined in a letter from its president, Jacques Puéchal, to Sir Leon Brittan, vice president of external economic affairs for the EC Commission. "In the past, the antidumping instrument has proven to be an effective tool for the chemical industry when attacked by dumped imports. CEFIC has always used the antidumping instrument only in the most serious cases, where terminal injury was imminent," Puéchal says. "CEFIC believes that the commission should continue to apply the antidumping instrument to all cases of dumped imports that cause injury to the community industry irrespective of their origin." The process for gaining antidumping duties has become particularly difficult, CEFIC officials complain. Although the EC Commission can take action immediately, a routine has evolved in which it waits until petitioned by an EC member country to apply duties. That means the industry must first petition one of the member countries, which can deliberate upon the petition, then decide to send it—or not—to the commission. This can take "up to two years between the opening of an investigation and the imposition of provisional measures," CEFIC's letter to Brittan notes. According to CEFIC staffers, some EC member countries resolutely oppose such requests. It is virtually impossible, they say, to get a favorable action from the U.K., Germany, or the Netherlands, while it is easier to convince governments in France and Belgium, for example, to apply for duty relief. To Eastern Europeans, however, arguments such as those of CEFIC are just part of a "fortress Europe" mentality that welcomes Eastern countries with words, but keeps them out with duties. Instead, many Western European governmental authorities are urging Central European countries to rebuild historic trade ties with countries of the former Soviet Union, rather than rely just on the West. That's a sensible suggestion, of course, but, as one Hungarian government of-
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