Global chemical companies are going through tough times. Geopolitical tensions, inflation, sustainability pressures, supply chain disruptions, and demographic challenges greatly complicate its operations. In addition to these problems, European chemical companies face an existential threat. The price of natural gas, the industry's main feedstock, rose 420 percent compared with the average price in Europe between 2010 and 2020. Meanwhile, Asia and North America grew by 105 percent and 50 percent respectively. The rise in global prices is largely due to the industry moving away from lower-cost Russian gas.

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The current level of gas prices is endangering the competitiveness of European chemical companies. Material and Labour costs are increasing across the industry, and margins before interest, tax, depreciation and amortization are falling, although diversified companies are less affected. Some commodity chemical companies have begun reducing or shutting down production capacity in Europe. Moreover, gas shortages could last until 2025. While natural gas prices are expected to decline from current levels, they are likely to remain above pre-crisis levels and remain highly volatile.

As a result, many are wondering whether chemical companies will be able to continue operating in Europe. McKinsey's analysis suggests that many, if not most, will do so. However, the industry's future on the continent may require a fundamentally different strategy and level of execution. In this paper, we examine four intrinsic strengths that European chemical companies can build on and outline short, medium, and long-term measures they can take to remain competitive.

A source of competitiveness for the European chemical companies

While Europe has historically been at a disadvantage in terms of raw materials, Labour costs, and capital, its chemical companies have done well.

Over the 20 years from 2000 to 2020, the total shareholder return (TRS) of the European chemical companies was the same as that of its North American peers and higher than that of its Asian peers (chart 2). Asia's lower cost of capital is driven by higher subsidies overall. The European chemical companies have lagged since 2020 when gas prices began to rise even before Russia invaded Ukraine.

So if the European chemical companies lack structural advantages, why is it doing so well? Can this source of power be harnessed in the future? Europe offers chemical and other companies four inherent advantages that are hard to replicate: ingenuity, scale and stability, diversity, and sustainability.