German Chemical Parks opportunities challenges and Trends for investors
17 November 2022
17 November 2022
Chemical parks in Germany have become an interesting investment opportunity in recent years, but they are yet to receive the full focus of infrastructure investors. Thanks to their long production history, the long-term site users and highly professional park operators who are responsible for site management, chemical parks offer stable production conditions and infrastructure-like cash flows. Park operators offer a comprehensive range of site services and reliable infrastructure for chemical production companies, resulting in a high level of customer satisfaction and long customer relationships.
While chemical parks are used by chemical companies' site users, they are also attractive to a number of other tenants from different sectors (particularly services). When it comes to site selection, Germany has an advantage due to its central geographical location and very good infrastructure. A set of challenges chemical park operators must meet are to do with the increased and more complex requirements of globally operating chemical companies as they reduce costs and address sustainability issues. The sale of the large park operator Currenta and three sites by Bayer and Lanxess in 2019 has brought movement into the market and further park operators (e.g., Infrareal and sites operated by Dow Chemicals) have been put up for sale since then. This trend offers new opportunities for investors. The following article examines some of the opportunities, challenges and trends for investors in chemical parks.
he concept of chemical parks in Germany developed in the 1990s. Originally, chemical parks were used and operated by only one or a few large chemical companies that owned all the various production facilities on a chemical site and the park infrastructure was operated by that chemical company or group of companies. Since the 1990s, however, chemical parks have diversified as new users come to the sites. In that transformation process, former single-user parks became multi-user parks. As a result, the park operators had to deal with and provide infrastructure and service operations to a number of different chemicals companies using the site. To manage the risks associated with operations, also including potential environmental liability due to historic site contaminations, the original owners began to outsource logistics and utility services, thus giving rise to new types of service providers, the so-called chemical park operators. Self-contained parks with site users on the one hand and independent park operating companies on the other came into existence in the German chemical industry. Today, chemical parks are businesses combining chemical manufacturers, raw material and utility suppliers, including in particular electricity, steam and gas, waste, and other infrastructure, as well as service providers and logistics network services. Except for chemical manufacturing these businesses are usually offered by the park operator in an efficient and effective manner to meet the needs of the chemical companies as park users.
Chemical parks usually offer through the park operator a comprehensive range of products and services tailored to the specific needs of chemical production companies as park users.
Central to the park operator concept are the chemical-specific infrastructure and services provided as independent professional site services by the park operator. Services such as wastewater treatment, thermal treatment of production residue, emergency services, industrial safety, environmental services, analysis and testing services, rail dispatching, and product storage are usually available at chemical parks. Chemical park operators will also support chemical companies using the park with a number of investment planning and construction services, including permit applications. Due to the park operators' long-standing relationships and cooperation with public authorities, they can support new park users with permit procedures from the very beginning. The park operators are generally also responsible for emergency and safety management, including the fire department (either through their own fire brigade or an arrangement with a local fire brigade, provided that strict reaction times can be kept to). This also includes monitoring and compliance with relevant environmental laws, and in particular the management of historic site contamination which usually exists at the sites due to their long operating history often dating back to before WWII.
A reliable and competitively priced power supply is a key element in the operation of a chemical park. Chemical parks are safeguarded by the provision of several supply lines. Most chemical parks operate their own onsite power plants to secure the supply. The same applies for the uninterrupted supply of steam.
A chemical park must have excellent logistics networks, i.e., good connections from road and rail to waterways and pipelines. Nowadays, major chemical parks are interconnected through an advanced network of pipelines transporting raw materials.
Chemical production sites outside of chemical parks are rarely permitted in Germany. Their establishment would require long lead times. Chemical production companies prefer to locate in chemical parks where the specific infrastructure and services are offered as independent and professional site services by the park operator. Another advantage is that costs for infrastructure and services are shared between the various park users, thus enabling competitive cost structures. With the offerings of the park operating companies through the entire chain of supporting tasks the chemical production companies can fully concentrate on their production and become more efficient.
Services by the park operator are usually provided on the basis of long-term contracts with stable, asset-backed cash flows which is one of the main drivers for infrastructure investors in park operators. In addition, chemical parks are open to tenants along the entire chemical value chain, from raw material producers to processors and finishers to manufacturers of end products. Last but not least, thanks to Germany's advantageous geographical location in Europe, German chemical parks are attractive from a logistics and transport perspective.
Chemical parks are used on the basis of lease agreements between the park operator and the site users. Due to zoning restrictions and, in many cases, special integrated and rather rare park facilities (such as, e.g., coker facilities), site users are often tied to a park resulting in a strong commitment of site users to the chemical park. Long-term contracts offer a long planning horizon and a stable business model for the park operators. Typically, site use agreements are for ten-year periods or longer.
he potential tenants in a chemical park are not necessarily only players the chemical industry[?]. Chemical parks are open to all companies along the entire chemical value chain from raw material producers, processors and finishers to manufacturers of end products. In addition to the chemical industry, chemical
parks offer opportunities for other industries. The combination of a safe production environment and a highly qualified services and workforce also makes the site very attractive to companies from areas such as alternative energies, electromobility, green chemistry, polymer electronics, recycling, storage technologies, structural materials and water technologies. By outsourcing lower-level business processes to service providers in the park companies can redesign their business models and focus on their core competencies.
Chemical parks in Germany benefit from logistics networks ranging from road and rail to waterways and pipelines with Germany being an important crossing for other European transport. Germany is located in the heart of Europe, and the short distance to Central and Eastern European countries of the European Union opens up many sales opportunities.
Many German chemical parks are interconnected, supplied with raw materials through a network of pipelines. A well-developed pipeline network makes investments attractive for the chemical supply sector since [site-internal ?] pipeline systems enable highly efficient logistics.
Chemical park operators face certain challenges. Park operators must meet the increasing and more complex demands of globally active chemical companies. Moreover, securing a reliable and competitive utility supply at stable prices is crucial for the production of chemicals at chemical parks. In addition, globalisation is leading to increased competition between chemical parks as they seek to attract international investors.
Chemical park operators must meet the increased and complex requirements of global chemical companies. The basic prerequisite for future competitiveness is an infrastructure that is geared to a comprehensive and customer-oriented service portfolio. Site operations must be organised in a flexible and cost-efficient way. Operational excellence in park operations is crucial and the park operators have to continuously align with the key investment criteria of global chemical producers. This requires continuous capital expenditures in the park infrastructure. Otherwise, plant closures or relocations might result in the triggering of domino effects not only for downstream products but the entire production chain and site users.
One of the biggest challenges chemical parks are currently facing involves the rising energy costs with regards to the usually energy-intensive companies in chemical parks. The companies at chemical parks depend on reliable electricity supplies at competitive prices. Supply uncertainties and future cost increases are very likely to have an immediate effect on the company's production. The same applies for more stringent regulation which makes the companies inflexible. The energy intense production in Germany is burdened by higher energy costs compared with many competitors abroad, also caused by the energy transition pushed by the German government, the European emission trading system (ETS) and national energy taxation. In order to achieve the ambitious climate targets, it is likely that energy costs will continue to rise even further in the near future. The costs of grid expansion, the necessary reserve power plants, energy storage systems and the further expansion of renewable energies will have to be borne by the consumers.
Chemical companies as well as park operators have to undertake significant efforts to cope with the increasing standards for environmental protection. These provisions affect in particular emission control regulations for exhaust air and noise, waste disposal, historic contamination and waste water treatment.
German law contains strict and far-reaching liability regimes for violations of environmental laws and the park operators as responsible parties for the operation of the park infrastructure will often times be the subject of authority action. Heavy fines and environmental remediation action can be the consequence, next to negative publicity in case of accidents. In serious cases an immediate halt to production processes can be enforced to prevent further damage.
Investors in chemical park operators will need to be aware of these potential environmental liabilities, and should diligently assess potential risk areas before making an investment decision. Furthermore investors need to be aware of historic contamination issues existing at many of the chemical park sites, and which often date back to the time even before WWII, when many of the German chemical park sites were first used. In fact, one of the reasons the original site users created the park operators was to shift liability for historic contamination to the park operators who nowadays usually manage historic contamination at the sites centrally [towards the authorities for all site users?].
Contractual arrangements between site users and park operator are therefore particularly relevant in this regard and need to be carefully reviewed. It should also be noted that even though the contamination situation will often be known to a large degree, unknown contamination may still arise and it may be difficult to allocate "new" contamination to certain users. Thus, the liability regime for environmental contamination in a share purchase agreement for a park operator is typically a point of detailed discussion.
As a chemical producer Germany faces a number of challenges. The competitive disadvantage caused by high energy prices (oil, gas and electricity) compared to the USA, the Middle East and also a number of emerging markets has been addressed above. Chemical companies in Germany and the EU must comply with regulations regarding European emissions trading which has strict benchmarks for installations and emission reduction requirements. As long as there are no comparable efforts in the energy and climate policies worldwide, competitive disadvantages could be overcome by relief or exemption of chemical companies from certain restrictions, thus ensuring the continued use of German chemical park sites and site services provided by park operators.
The German chemical park operator concept offers attractive investment opportunities. Chemical parks allow the production of a large range of chemical products on one site - from basic commodity chemicals to high-value specialty chemical products. For small chemical companies, including start-ups, chemical parks offer with their full service and supply approach an ideal environment for their business. However, continuous investments in the park infrastructure will be required in the future to maintain a modern, competitive, and interconnected production base for chemicals, and the transition to renewable energies and availability of conventional energy sources will continue to play a central role for park operators.