View from City Road: BP acts, Europe wrings its hands

About two years ago British Petroleum exacerbated Europe's chronic overcapacity in petrochemicals by opening a new, albeit highly competitive, ethylene plant in Scotland. It has now become the first in Europe to wield the knife by shutting down its least efficient plant.

Europe's petrochemicals industry has lost billions of pounds over the past five years because of massive structural changes and excess capacity.

BP is sceptical about the impact of its move on industry overcapacity. Only last month the petrochemical industry turned its back on a proposal to set up a pounds 250m compensation fund to tempt producers to rationalise.

The failure of the plan has, as BP forewarned, led it to put its own house in order and stem unacceptable losses. In petrochemicals as in steel, it is once again the British who have led the way at their own expense, while European state- owned producers wring their hands and do nothing.

Baglan Bay's closure represents a reduction of less than 2 per cent in Europe's installed petrochemical capacity. That compares with a minimum 1.5 million tonnes capacity that needs to be taken out before there is any chance of regaining a balance in supply and demand.

Although the Baglan Bay move will cost BP pounds 200m in its 1993 figures, it represents eventual annual savings running into tens of millions of pounds.

The closure also means that BP's polyetheylene business is likely to become profitable this year, leaving just one of its six chemicals divisions in the red.

At this stage in the European economic cycle, BP's chemical activities are still short of achieving an adequate return on a pounds 1bn-plus capital base. But the problem is small compared with the severe costs that BP's feet-dragging European rivals and/or taxpayers inevitably face and have merely postponed.