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The farcical reality of force majeure declarations in Europe

With over 40 declarations of force majeure having been made over the past four months alone, the European polymer producing industry is fast losing the trust of and any credibility it may have had with its European customers. Plastics processors across Europe have been forced to shut down production lines andraw material prices have soared to record highs due to materials shortages.

Making matters worse is the fall of the euro against the dollar, which makes it less attractive for the world to export to the Euro zone, while the high import tariffs on a number of commodity plastics from the Middle East make it expensive to import from there. And the end is not yet in sight.

Calling into question the legality of the force majeure situations at the various plants, the European Plastics Converters trade association (EuPC) recently established the Alliance for Polymers for Europe in order, as EuPC President Michael Kundel put it, to “bring all forces together to fight this unjustified situation.”

“After months of low oil prices the petrochemical industry appears to be clawing back margins in the polymer value chain by stopping some crackers in Europe one after the other,” he said.  “This situation is very serious, risking future customers for raw material producers and raising several antitrust concerns.”

An increasing number of trade associations, users, OEMs and brand owners have brought pressure to bear on the EU authorities, who are now starting to examine these force majeure situations more deeply. Also, the new Alliance is also initiating a study on the aging of polymer sites in Europe, together with industry and independent experts, to gain more insight into conditions at the polymer production sites in Europe. According to existing market intelligence, some sites had more than 11 force majeure declarations in two years and the situation is not improving.

Moreover, in a collective statement released by a number of European trade associations, it was argued that in many of the cases, the lack detailed information provided by the raw materials producers in question leaves “many open questions”.

Feelings are running high, as affected companies, whether implicitly or explicitly, accuse raw materials producers of deliberately shutting down production to keep prices high, invoking force majeure as an excuse. “A complete farce,” snorted one converter, who declined to have his name mentioned, fearing his polymer supply would be cut off completely.

But according to most analysts, the main problem appears to be that for years, European petrochemical plants have been running at 75-80% of their production capacity, with maintenance also geared to this production level. Even when EuPC Managing Director Alexandre Dangis cited the need for polymer producers in Europe to invest “current margins in the ageing European production sites in order to maintain a credible European polymer base,” producers seemed unmoved. In their view, abundant supply elsewhere and the high costs of production in Europe would make any such investment simply unprofitable.

The consequences were foreseeable: when demand rose, the plants were simply not able to keep up the pace, with as result one outage after the other.

Yet in that case, to what extent does the force majeure clause—a standard clause in supply contracts that frees parties from meeting their contractual obligations in the event of circumstances beyond their control—truly apply?  Are outages due to inadequate levels of maintenance and investment to be considered an Act of God? Or are we actually talking about an Act of Shareholder, as EuPC so bluntly asked in its most recent statement?

Meanwhile, European plastics processers are caught between a rock and a hard place: the soaring prices and uncertain supply of thermoplastics endanger not only production, but in some cases the companies’ survival. And those who are keeping their production lines going are finding it difficult to pass on the increased costs of materials to their customers, reducing margins in some cases to the point where it makes no sense to keep the machines running.

The new Alliance is offering affected processors help in various ways, including providing assistance to companies in requesting the suspension of certain EU import duties to relieve the current shortages on polymer. Operating as a European coalition, it will conduct a search for more material to be imported from modern production sites outside the EU and examine the possibility to set up group purchasing platforms.

It will also discuss potential legal assistance for companies that have no other option but to seek legal action against their polymer suppliers due to what EuPC refers to as “erroneous” force majeure declarations. Legal advice will be taken as regards contractual obligations.

TAGS: Materials
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