Europe’s commodity chemical sector has again entered a downturn. Opportunities for arbitrage mean that chemical prices around the world are increasingly set on a global basis. The crisis in Asia therefore spread quickly to other regions and produced an international slump, sharply cutting global demand and prices for most petrochemical products, including all of the major plastics—notably polyethylene, polypropylene, and polyvinyl chloride. Representing about a third of total chemical sales, these low value-added, cyclical products are used for a wide variety of applications: automobiles, bottles, packaging, and pipes, to name just a few.

The current situation is not likely to improve soon and may actually get worse when new capacity that is already committed or under construction comes on stream in Europe during the next two or three years. Additional pressure is building as Middle Eastern producers aggressively expand capacity with a view to entering new export markets, including Western Europe.

Europe’s chemical industry is ill equipped to face the downturn. Most of its subsectors are fragmented, which leads to recurrent overcapacity and price wars. In both the polystyrene and the polypropylene markets, 15 or more companies compete for European sales. Vivid memories remain of the last downturn, just...