Germany has long been a global heavyweight in the chemical industry, ranking first in Europe and fourth worldwide in terms of production. The industry accounts for over 10% of the country's manufacturing output and employs nearly half a million people, with 60% of the workforce based in 40 chemical parks (see figure 1).
One distinctive feature of the sector in Germany is the concept of chemical parks – site operators offering a comprehensive range of shared services and infrastructure at a single location to support chemical production activities. These services include, but are not limited to, energy supply, logistics, waste disposal, water treatment, maintenance and emergency response.
Chemical parks are deeply integrated in the value chains of many German industrial companies. As such, they have an impact on the reliability and resilience of industrial production across the country, influencing the supply of critical goods such as medicine1.
By offering shared infrastructure and services, as well as strong research and development (R&D) capabilities, chemical parks enable their tenants to reduce costs, increase yield and get products to market faster.
In recent years, the commercial model of chemical parks has come under pressure due to rising costs and stricter climate regulations, raising concerns about their future business model. Addressing those challenges has become urgent given the growing interest of private equity (PE) investors, who have the potential to provide the capital needed for the major investments the sector requires.
In this article, we explore these issues in more depth and offer recommendations for overcoming them.
Balancing costs and investment
Heavier cost structures have damaged the competitiveness of the German industry, especially in energy-intensive industries such as chemicals.
The expansion of production capacities in low-cost countries, particularly China, now the world's largest exporter of chemicals, has intensified the pressure. Chemical production in Germany has declined 21% since 2018 — a sharper drop than in basic metals, automotive or mechanical engineering. Many established players are considering relocating operations to more economically favorable regions.
Production index of the German chemicals industry
As a result, the investment climate for infrastructure and development has deteriorated, affecting the technological capabilities and know-how available in German chemical parks. This contrasts with a boom in infrastructure projects in China, where investment levels exceeded Germany's by more than tenfold in 2022.
Chemicals investments in China, EU and Germany [€ bn.]
The five largest German chemical parks emit as much CO2 as the city of Berlin2, making EU climate regulations a major challenge for the industry. Decarbonizing one of the world's most carbon-intensive industries requires a complete overhaul of firms' energy supply strategies as well as significant capital investments. This has been further complicated by the high cost of capital available today and businesses' constrained cash flows.
Three pillars of transformation
To safeguard their competitiveness in this complex environment, and remain attractive to potential investors, chemical park players must be guided by the following three pillars:
Some of the levers that can be used to drive progress across each of the above pillars include:
Cost reductions
- Adopting lean principles to minimize waste, reduce lead times and enhance process efficiency, including renegotiating energy prices.
- Conducting regular energy audits to assess and improve park efficiency, focusing on intelligent processes and resource management.
- Over time, these improvements will attract more customers, enhance space utilization, and generate liquidity for further investments from additional cost savings.
Service model extensions
- Exploring new cooperation models and service offerings, including partnerships with businesses aligned with green transitions, to generate additional sources of revenue while enhancing cost competitiveness. and resource management.
- Supporting non-chemical parks service providers in integrating into the ecosystem can also improve market orientation.
- Fostering collaborations between start-ups and established operators can drive innovation and sustainable growth within the chemical park environment.
Resource efficiency
- Adopting circular economy principles and optimizing processes to lower energy and resource needs, including better utilization of waste heat and implementing digital twins.
- Integrating electrical heat generation for managing peak loads.
Green transformation
- Enhancing resource efficiency, adopting more sustainable materials as well as minimizing, capturing or offsetting polluting by-products.
- Transitioning to renewable energy sources like wind, solar or biomass and using bio-based raw materials instead of petrochemicals.
- While these initial improvements may require significant investment, successful optimization can attract investor funding for more substantial technological upgrades.
Managing unavoidable pollution
- Enhancing resource efficiency, adopting more sustainable materials as well as minimizing, capturing or offsetting polluting by-products.
- Transitioning to renewable energy sources like wind, solar or biomass and using bio-based raw materials instead of petrochemicals.
- While these initial improvements may require significant investment, successful optimization can attract investor funding for more substantial technological upgrades.
Private equity: a catalyst for change
Significant investments will be needed to drive efficiency and green initiatives in the chemical park sector across all these levers. But given the central importance of low operating costs for their tenants, operators are limited in their investment possibilities without external investors.
Private equity investors can therefore act as catalysts for transforming these businesses by providing:
Capital infusion: Private capital can be deployed to modernize infrastructure, logistics and safety systems in chemical parks. PE funding can also facilitate investments in CCS, CCU, hydrogen infrastructure, renewable energy and electric transportation that may exceed current investment capacities for park operators, especially given the uncertainty around future premiums for green chemicals.
Transformation know-how: Beyond financial resources, PE investors offer expertise in operational optimization, helping chemical parks streamline processes, reduce costs and improve performance. Their experience in implementing sustainable practices is also crucial in the transition to greener operations.
Access to strategic networks: Another crucial contribution of PE investors pursuing buy-and-build strategies is their ability to create and leverage strategic networks. These networks can connect parks operators with start-ups and R&D centers.
How regulation can support chemical parks – and their tenants
Affordable and reliable utilities are essential for maintaining cost-effective production and attracting businesses reliant on consistent input supplies. To support that, regulators must provide stability in their frameworks, particularly in areas such as:
Energy prices: German chemical parks have seen a 200% rise in gas prices between 2020 and 2023, and despite several fiscal measures to mitigate these increases, energy prices remain high compared to international standards. The problem is compounded by the current unbalance in the German power system, with renewable energy sources located far from demand locations.
Green subsidies: Net-zero targets are placing a heavy burden on German chemical parks, requiring them to invest significantly in green technologies amid intense international competition. Regulators should provide positive incentives, such as subsidies for cleaner technologies, to help offset these expenses, as well as ensure the successful launch of the Carbon Border Adjustment Mechanism (CBDA) program in 2026.
Footnotes
2. https://www.wwf.de/fileadmin/fm-wwf/Publikationen-PDF/Klima/dirty-dozen-englisch.pdf
Originally published 16 October 2024.
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