Chemicals sector - challenges, policy issues and the future
The third and last article in this series reviews major policy issues and challenges facing the chemicals industry sector, by analysing their timely, geographical and structural impact on the industry, as well as the gender dimension. In particular, it looks at the REACH proposal, forces driving the decline of the European chemicals industry and aspects of the unfavourable political environment.
In the present era of globalisation and capital mobility, chemicals manufacture moves to the booming markets of Asia, which profit from substantial foreign investment in chemicals production. As commodities have a substantial share in the product portfolio of the chemicals industry, the European industry has to accelerate its pace of innovation to stay in the lead. Economic policymakers for their part face the challenge of providing conditions that promote a more knowledge-driven industry with a sound basis for production in Europe. If this challenge is not met, the decline in chemicals employment will become even more pronounced in Europe.
Major policy issues and challenges
The proposed Registration, Evaluation and Authorisation of Chemicals (REACH) legislation is the biggest challenge currently faced by the European chemicals industry. REACH follows pressure from national governments, the European Commission and environmental agencies to review the current chemicals legislation, which does not cover substances put on the market before 1981. This has allowed hazardous chemicals to remain in circulation and an evaluation of current legislation (published in November 1998) concluded that the regulatory system was failing. Work on the development of a new integrated and coherent EU chemicals policy, which adequately reflects the precautionary principle and the principle of sustainability, resulted in the REACH legislation, proposed by the European Commission in 2003.
The draft REACH legislation led to a dispute between the industry and the Commission, which has lasted for two years. The legislation is now being considered by the European Parliament and the Council of the EU for adoption under the so-called co-decision procedure. In its current form, REACH would require companies to register some 30,000 substances with the new European Chemicals Agency. Companies would have to demonstrate that the chemical substances they use cause no harm to humans or the environment. The ultimate aim is to phase out hazardous chemicals from circulation by 2020.
The immediate impact of REACH is on the EU and its chemicals companies. It will bring unity in legislation between countries in the single market, while preserving high levels of environmental protection. The impact of REACH in the 10 new Member States is expected to be less than in the EU15. Because the chemicals sector in the new Member States relies heavily on imports of chemical compounds from the EU15, the new rules will have very limited impact on the competitiveness of chemicals companies. However, the rules may cause problems to importers.
Major chemicals-exporting countries are also expecting REACH to affect their industries as suggests, for example, an impact analysis by the Australian Bureau of Agricultural and Resource Economics ( 763kb, Abare, 2005). The REACH legislation would reduce Australian exports of key mineral products to the EU because it covers primary raw materials. However, the impact would be partly mitigated by the diversion of exports to other fast-growing markets, most notably China. The study also concluded that the new legislation could lead to the relocation of metals-processing from the EU to Asia.
Initial studies on the effect of REACH, commissioned by the chemicals industry, reported a loss of competitiveness and jobs in the industry as a whole. However, two recent reports suggest that the REACH proposals will hurt the chemicals industry less than was previously feared, although the effect will still be significant. There are also reports that the industry may even benefit from the stricter environmental regulation.
A 2005 impact assessment based on a case study approach ( 1.62Mb), written by KPMG and funded by the industry, argues that REACH is likely to impose ‘significant’ one-off costs on companies (KPMG, 2005). In one case examined, costs were expected to amount to 20% of annual turnover. Despite the high costs involved, the report suggests that the new legislation is unlikely to force companies to abandon the production of critically important chemical substances. It points out that businesses could reduce costs through collaboration with other companies or by rationalising their product portfolios.
The Commission funded report, looking at the Implementation of REACH in the new Member States ( 756kb), assessed its impact on the chemicals industry in these countries. It concluded that the legislation will have a very limited impact on the competitiveness of chemicals companies, but may cause problems to importers.
The impact of the new legislation is likely to be greater on small and medium-sized enterprises (SMEs) than large chemicals companies. The data that companies will have to submit to support their claims about the safety of the chemical substances they use requires costly and complex testing. These costs are more difficult to absorb by a smaller company. A proposed, and crucial, amendment to REACH advocates lighter data requirements for 17,500 substances, more than half the total, and the introduction of a principle of ‘one substance, one registration’. In its current form, REACH will demand the registration of all chemical substances even if they have already been registered by another company. If accepted, this amendment would substantially reduce the burden of registering chemical substances.
Once the REACH legislation is adopted, it is clear that companies must focus more than before on developing new material and technical possibilities. At present, chemical substances put on the market before 1981 enjoy a competitive advantage because they have not incurred the costs of data collection and can therefore be sold at a lower price. By the same token, they do not have data about their risk potential. REACH will create transparency between producers, suppliers and their customers. Users of chemical substances will be in a position to choose substances with the lowest risk potential. It is envisaged that this will provide better prospects for innovative companies to develop and market replacements for old chemical substances. The new chemicals policy, therefore, has the potential to strengthen the competitiveness of EU chemicals companies in the increasingly sensitive world market.
REACH has the potential to change the general public image of the chemicals industry as it will phase out hazardous chemicals from circulation. As a result, companies must focus more strongly on developing new materials and technical processes, and to demonstrate their safety before they are registered with the European Chemicals Agency. However, the effect of REACH (the protection of the environment, consumers and workers from hazardous chemicals) will be shared equally between the genders.
Decline of the European chemicals industry
The EU has traditionally been the technology leader in the chemicals industry, but some of this has been lost to the US during the 1990s. As noted in first article of this series on chemicals, while the share of R&D expenditure as a proportion of total sales has remained constant in the US and Japan since the mid-1990s, the share has been shrinking in the EU. At the same time, the attractiveness of the chemicals industry as a career choice has been declining and the chemicals industry has suffered from a brain-drain as experienced workers have left and the young have chosen other careers. For the EU to have a sustainable chemicals industry, it must tackle the decline in both these areas.
DG Research and the European chemicals industry have launched a common initiative for a sustainable chemicals industry (SusChem). It is organised as a European technology platform to bring together researchers from industry and academia to stimulate innovation in the private sector. The focus is on dynamic high-tech areas such as biotechnology and materials technology, but it is also to concentrate on the identification of institutional constraints on innovation. Its aim is to pursue a holistic approach, taking into account the views and objectives of all stakeholders.
Many chemicals companies have also been working to improving the reputation of the chemicals industry. BASF, for example, is among the most active of the leading global chemicals companies, running ‘Kids Labs’ at schools which allow children to learn more about the chemicals that surround them at home and to develop an interest in chemistry. Similarly, Air Products, a global supplier of chemicals, industrial gases and equipment, sends ‘science ambassadors’ to schools and organises workshops at universities where undergraduates can get hands-on experience.
The EU chemicals industry is expected to be under pressure from four sides:
- Asian, and in particular Chinese, chemicals companies are increasingly taking over the production of low-cost commodities. The comparative cost advantage will spread to increasingly more sophisticated chemicals products, eroding the market for EU chemicals.
- The Middle East’s oil and gas-rich countries are poised to increase their presence massively in the global market for basic petrochemicals. Industry experts estimate that 50% of total global new ethylene capacity will be built in the Middle East. The region’s ethylene production has trebled since 1990 and is expected to double again by 2010.
- Product innovation and customer-specific solutions are vital for success in the speciality chemicals sector. Saturation of markets and commoditisation are real threats. Furthermore, new regulatory policy from the EU (e.g. REACH) and the lack of a real industrial policy could further erode competitiveness.
- A continued fall of the US dollar against the euro would considerably hurt the competitiveness of the EU chemicals industry, not only in the US dollar area but also in Asia since most Asian currencies are closely tied to the US dollar.
Research and development (R&D) is particularly important for the chemicals industry, especially in the EU where the high cost base makes price competition difficult. Technological advances not only benefit the industry itself, but also feed into many downstream industries because its products are often intermediate goods in the production chain. This role makes the chemicals industry important for a country’s competitiveness in terms of innovation.
There are at present two main challenges to innovation in the European chemicals industry. The first is the structural change in other manufacturing industries. Relocation of production to non-EU locations has meant that many industries that used to take advantage of technological advances in chemicals have gone, or at least shrunk (such as the textiles industry). Although the EU remains a leading supplier of high-tech intermediates, these too are likely to move in time as the chemicals industry in Asia becomes more sophisticated and the market for end-products grows. In most cases, basic research has remained in the EU, but the adjustment of intermediates to customer needs is carried out elsewhere.
The second challenge to innovation in the European chemicals industry comes from the deferred take-off in biotechnology. EU biotechnology has relied too much on processes that have been around for a long time, such as the fermentation of foodstuffs and beverages. It is also a small industry in the EU, amounting to no more than 3% of employment in chemicals. The next wave of innovation is expected to come from biotechnology or nanotechnology, but the EU platform for the sector is small.
New patterns of working time, such as part-time employment, sabbaticals and other flexible work practices, have become an important tool for companies to attract highly qualified applicants, especially female workers. However, the adoption of these practices differs widely across the EU. Within the EU15, the southern Member States and the new Member States lag behind the others, and this limits their potential to attract women into the labour force. Although flexible working hours would widen the pool of labour for the industry, the overall attractiveness of chemicals as a career choice has also to be addressed.
Unfavourable political environment
According to survey results, public opinion of the chemicals industry has been deteriorating since the 1990s. Crucially, this has meant that the political environment for the chemicals industry has also deteriorated. In addition, because the public forms the electorate of the politicians, public opinion can act as a strong catalyst for regulatory initiatives, which do not necessarily create a favourable business environment.
This situation finally led to pressure from national governments, the European Commission and environmental agencies to review the current chemicals legislation that did not cover substances put on the market before 1981. An evaluation report of the chemicals legislation was published in 1998, which led to the REACH draft chemicals legislation in 2003, which is currently debated in the European Parliament.
The world market is becoming increasingly sensitive to environmental issues. This is especially true of the developed countries and particularly the EU. The chemicals industry has traditionally been associated with high energy intensity and emissions, and has therefore been subject to regulation to varying degrees. The EU displays a disparity in environmental regulation, with the northern Member States being stricter, or in advance of, the southern Member States and the new Member States.
Meanwhile, competitors located in countries in Asia and the Middle East are faced with less strict regulation than their EU counterparts, particularly after the launch of REACH. Competitors in the US also have a ‘better’ political environment than the EU, although public opinion in North America is strongly against the industry.
Public opinion tends to use generalisations, which means that the perception the public has of the chemicals industry applies to the whole sector. Currently, the chemicals industry suffers from low public esteem which is due largely to the contribution that chemical substances have made to the rise in allergic illnesses and to the damage some chemicals cause to the environment. Public opinion, however, must not be underestimated as a powerful ‘driver’ of the business environment. Because the public forms the electorate of the politicians, public opinion can act as a strong catalyst for regulatory initiatives, which do not necessarily create a favourable business environment.
Furthermore, public opinion can also affect the industry’s competitiveness with regard to the labour force. If an industry does not appeal to job-seekers, talented young people will go elsewhere and, as a result, an industry can suffer from a brain-drain when experienced workers leave and there are few qualified young people to replace them.
Surveys of public opinion have repeatedly shown that the public views the chemicals industry as a health hazard. A survey by Eurobarometer in 2002 ( 80kb) in the EU15 countries found that 93% of Europeans believe that chemicals have a negative effect on health. Few surveys are concerned with the difference of opinion between males and females. However, when differences in opinion between males and females have been published, they have been statistically insignificant.
All links accessed on 8 December 2005.
Abare, Economic impacts of the EU REACH legislation, May 2005, available at: http://www.minerals.org.au/__data/assets/pdf_file/8900/EU_REACH_Legislation.pdf ( 763kb).
CEFIC, Cefic Review 2004-2005. Trust and partnership: Towards a new vision for Europe’s chemical industry, European Chemical Industry Council (CEFIC), Brussels, 2005, available at: http://www.cefic.be/Files/Publications/Cefic_Review_2004.pdf ( 563kb).
CEFIC (ed.), Chemical Industry 2015: Roads to the future, European Chemical Industry Council (CEFIC), Brussels, 2004, available at: http://www.cefic.org/Templates/shwStory.asp?NID=472&HID=427
CEFIC (ed.), ‘Energy prices and efficiency - A comparison of the EU and the US chemical industries’, Economic Bulletin, November 1998, available at: http://www.cefic.be/Files/Publications/energy11.1998.pdf ( 228kb).
KPMG, REACH - Further work on impact assessment: A case study approach, Executive Summary, April 2005, available at: http://www.eeb.org/activities/chemicals/REACH-IA-Substance-withdrawal-KPMG-conclusions.pdf ( 1.62Mb).
SusChem, European Technology Platform for Sustainable Chemistry, available at: http://www.suschem.org/content.php?pageId=2479&lang=en&PHPSESSID=0ae28842bb455fffd68114764181cb6c