Who is responsible for shaping chemical markets?

At a dinner with journalists, BASF chief executive Kurt Bock made a comment that caught my attention. ‘When you’re the market leader,’ he said, ‘you also have to take the lead in adjusting capacity.’

Bock was talking about BASF’s decision to cut caprolactam production by 20% at its integrated site in Ludwigshafen, Germany. BASF’s caprolactam is predominantly aimed at export to Asia, where there is significant overcapacity owing to what Bock describes as ‘overconfidence’ – lots of new producers entering the market, on the assumption that demand will grow quickly enough for them all to profit. Demand hasn’t kept pace, which pushes down prices and hence profit margins for everyone.

BASF is fairly confident that its production costs are lower than many other producers. So competition theories would suggest that it could sit back and, as Bock puts it, ‘let the other guys bleed, and at some point they will get tired and do the right thing’. But that, he adds, can be agony.

Instead, the company has decided to shoulder the financial burden of closing or reconfiguring its plants, in an effort to ‘send a signal to the market that when times are tough you have to do something’, rather than sitting around wondering who’s going to move first. That decision, Bock says, comes from BASF’s amassed corporate experience. And since BASF will still be producing 400,000 tonnes/year of caprolactam in Ludwigshafen, sacrificing some volume to improve the profit margin on the rest is probably worthwhile.

But that idea of major producers being responsible for guiding behaviour in the wider market got me thinking. The strategy depends somewhat on other producers following BASF’s example. Surely there’s a limit to how much of that kind of responsibility companies are prepared to take on.

Figures from the American Chemistry Council (ACC) suggest that for the last few years, global production capacity across the whole industry has been growing steadily at 2.5–4% per year. But demand growth has not kept pace, so more of those plants are sitting idle (capacity use dropped a couple of percentage points from 2013–16). This trend is set to continue, according to the ACC’s forecasting – particularly in the US, with hundreds of new plants planned to capitalise on shale gas feedstocks.

Those broad-brush figures obviously hide geographical and sector-specific trends, particularly in cyclical basic chemical markets. But the indication is that oversupply is going to become a more common problem. Will this be an opportunity for existing market leaders to flex their muscles, or for new leaders to emerge?