Opinions expressed by Digital Journal contributors are their own.
With the European Central Bank warning that the US-China trade war could see European markets suffer, now is the time for Europe to take advantage of new market opportunities and opt into nearshoring manufacturing processes, to combat reliance on Chinese suppliers.
Currently, China is the world’s top manufacturing country, with 31% of the global market. Europe has struggled to diversify away from a reliance on China as geopolitical tensions rise and the region remains concerned over economic dependencies deepened during the COVID-19 pandemic.
Nearshoring, the process whereby a company moves parts of their production to locations close to their markets to minimize supply chain disruption, has proved successful in emerging markets like India, Korea, and Vietnam who have adapted to new geopolitical and economic contexts to meet new business demands. Advantages range from shortened transportation distances to reduced cultural barriers between links in the supply chain, to better risk management procedures owing to closer proximity.
This type of manufacturing is exemplified by the petrochemicals industry, where close proximity of manufacturing plants to oil and gas extraction is a clear benefit. The production of petrochemicals begins with oil and gas feedstocks, which are then refined into products such as ethylene, propylene, butadiene and benzene, all of which are used to make products from sportswear and medicines to car seat belts.
Globally, it is estimated that the petrochemicals industry will be worth $900.91 billion USD by 2032, and petrochemical producers currently contribute €155 billion to European GDP. As such, there are more products, and more money, to be made by streamlining petrochemical production.
Making plastic bottles, for example, involves the distillation, cracking, and repolymerisation of oil and gas feedstocks to plastics that can be injection-moulded into preforms. These preforms can then be shipped and expanded by having hot air blown into them at bottling plants.
In the case of petrochemicals especially, the first priority of reducing manufacturing costs must be to reduce the pipeline expense, followed by efforts to reduce the shipping costs associated with moving preforms from production to plant.
Iakov Goldovskiy is the founder of Austrian investment holding company Petrochemical Holding GmbH and a renowned proponent of vertical integration in petrochemical supply chains. An investor in numerous projects in the petrochemicals sector in Hungary, Poland and Lithuania, among others, Goldovskiy is well placed to outline the potential benefits of nearshoring.
“Integrated approaches to manufacturing, like nearshoring, make a great deal of sense for an industry like petrochemical production. Reliance on expensive pipelines to transport the raw materials required can be significantly reduced by closing the distances between plant, resource, and to an extent, where the products are used.”
“Eastern Europe in particular has a lot to benefit,” said Goldovskiy. “They are a prime candidate for nearshoring due to the relatively cheap labour force and proximity to European markets.”
Other industry experts have already recognised the need for change in the petrochemical sector, especially as the sector has heavily influenced the production of a wide range of goods, ranging from medical equipment and car seat belts, to clothing and thermal insulation, to name a few.
Dr Fatih Birol, Executive Director of the International Energy Agency, noted on the future of petrochemicals that “our economies are heavily dependent on petrochemicals, but the sector receives far less attention than it deserves … especially given the influence they will exert on future energy trends.”
As Europe looks to diversify away from reliance on US and Chinese supply chains, nearshoring may prove key to answering the question posed by recent geopolitical tensions between East and West. Given the significant productivity gains the petrochemicals sector can reap by integrating its supply and manufacturing processes, the industry is a prime candidate in Europe for nearshoring, as Iakov Goldovskiy explained.
The petrochemical industry is far-reaching in its impact, from plastic preforms to everyday use items, and it will no doubt be heavily influential on the European and global economies as global markets re-adjust to changing circumstances. Petrochemicals has a strong record of maintaining production even in the face of global change and geopolitical uncertainty, and near-shoring can support this resilience.
