Chemicals - visions of the future
This article builds on the discussion in the first article on the trends and drivers likely to shape the future of the sector and the challenges it faces in the era of globalisation. In particular, it looks at issues related to employment, innovation, EU regulation - notably the REACH proposal - and the factors influencing relocation of client industries away from the EU. The article also explores four alternative scenarios for the chemicals industry in the light of the main pressures on it, and concludes that the most optimistic one is unlikely to be realised.
As one of the largest and internationally most successful of European industries, the chemicals sector is capital-intensive and that has made it appropriate for its production to be located in mature industrialised countries. In the era of globalisation and capital mobility, however, this is no longer true for the manufacture of commodities and consequently there is very substantial foreign investment in chemicals production in the booming markets of Asia. Because 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 currently face the challenge of providing conditions that promote a more knowledge-driven industry with a sound basis for production in Europe.
Trends and drivers of change
The second article of three in this series discusses the main factors influencing the present and future of the chemicals industry, looking particularly at:
- employment, with a particular reference to the brain-drain of young talent;
- the importance of innovation;
- the two main obstacles the sector now faces (relocation of client industries away from the EU and the deferred take-off of biotechnology in Europe);
- the effects of high energy prices and environmental targets on the industry’s prices and competitiveness;
- the challenge from Middle Eastern producers in basic chemicals and from Asian producers in commodity chemicals and, increasingly in the future, in speciality chemicals;
- the effects of EU regulation, notably the REACH proposal.
In conclusion, this feature examines four alternative scenarios for the chemicals industry in the light of the main pressures on the industry, and reckons that the most optimistic scenario is unlikely to be realised.
Table 1 summarises the sociological, technological, economic, environmental and political (STEEP) factors affecting, or expected to affect, the European chemicals industry sector.
|Trends and drivers||Possible future of chemicals industry|
|Working time models||Flexible working time arrangements are becoming increasingly important for attracting qualified labour.|
|Chemicals as a career choice||Chemicals faces a long-term brain-drain as the young choose other careers.|
|Decreasing research and development (R&D) expenditure||R&D expenditure as a proportion of total sales in the EU has been decreasing since the late 1990s.|
|Relocation of chemicals manufacture||Relocation of production sites to non-EU locations leaves fewer downstream clients to stimulate technological advances in the chemicals industry.|
|Challenges from biotechnology||The deferred take-off in biotechnology means that the European chemicals industry lacks an important driver of innovation.|
|Energy intensity||Increasing energy prices could damage the EU chemicals industry competitiveness further.|
|Emissions trading||In combination with absolute emissions reduction targets, the already high energy prices are likely to increase further.|
|Globalisation||Increasing competition from new economic powers, such as China.|
|Energy intensity||Public policy is towards reducing energy intensity, which will bring challenges to the chemicals industry.|
|Emissions targets||Absolute emissions reduction targets of 20% by the year 2020 will bring challenges to the chemicals industry.|
|Environmental awareness||A shift towards environmentally friendly products is forcing the industry to verify the safety of existing and future products (REACH).|
|Legislation||Legislation could force unrecoverable costs on the chemicals industry (REACH).|
|Decline of the chemicals industry||The EU chemicals industry has launched a common initiative for a sustainable chemicals industry.|
|Unfavourable political environment||Can be countered by a better representation of the common views of the industrial stakeholders in political decision-making.|
Assessment of major trends and drivers
Part-time employment, sabbaticals, etc. have become important tools for companies to attract highly qualified applicants, in particular to tap into the full potential of the female labour force. The adoption of new patterns of working time has, however, been far from uniform across EU Member States. Within the EU15, the southern Member States lag behind the others. They are roughly on the same level as the new Member States, where the share of part-time employees ranges between 2% and 4% of all employees.
The chemicals industry has also been suffering from a long-term brain-drain as experienced workers have left and the young choose other careers. The attractiveness of the chemicals industry as a career choice has been declining since the 1990s. Many chemicals companies are working to improve matters. BASF, for example, is among the most active of the leading global chemicals companies when it comes to fostering an understanding for chemicals. The company runs ‘Kids Labs’ at schools, which allow children to learn more about the chemicals that surround them at home. 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.
Research and development (R&D) is particularly important for the chemicals industry. 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.
Traditionally, the EU has been a technology leader, but some of this has been lost during the 1990s to the United States (US). The share of research and development (R&D) expenditure as a proportion of total sales has remained constant in the US and Japan since the mid-1990s, but in the EU the share has shrunk.
One explanation for this trend could be the enormous effort that the European chemicals industry has put into restructuring in order to remain competitive. After completing their restructuring programmes, companies might shift more resources back to R&D. However, this is likely to be an optimistic view. EU companies face higher costs and generate lower profits than their foreign counterparts. The gross-operating surplus of EU chemicals companies is only half that of those in the US.
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 removed many industries that used to take advantage of technological advances in chemicals. For example, the textiles industry has to a large extent shifted its production to Asia, and the development and manufacture of feedstock for textiles is expected to follow. 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. Examples of this are liquid crystals for television screens (Merck KGaA) and substrate for computer memories (Bayer AG), both of which are manufactured in Asia.
The second challenge to innovation in the European chemicals industry comes from the deferred take-off in biotechnology. European biotechnology has relied too much on processes that have been around for a long time, such as the fermentation of foodstuffs and beverages, and it is also a small industry in Europe. Its total workforce amounts to no more than 3% of the numbers employed in chemicals.
The chemicals industry accounts for around 12% of the EU’s total energy demand according to the European Chemical Industry Council’s review 2004-2005 ( 563kb; CEFIC, 2005). Energy is not only a major cost in the processing of chemicals, but gas and oil are also used for the manufacture of many chemical products. In 1998, a comparison of energy prices and efficiency in the EU and US chemicals industry ( 228kb) highlights that energy prices in the EU are roughly one-tenth higher than in the US. This turns out to be a disadvantage for production locations in the EU because chemical products are sold into the global market and higher energy prices cannot be passed on to clients.
Furthermore, EU and national environmental policies aim at reducing emissions by 20% by 2020 and thus rely heavily on emissions trading as the means of allocating scarce resources. This is likely to lead to further increases in Europe’s already high energy prices. Energy is therefore likely to become a constraint on the EU chemical industry’s growth and its price competitiveness will continue to deteriorate. Since the early 1990s, the energy intensity of the EU chemicals industry has reduced because of structural change in the industry, which has led to the relocation of the more energy-intensive processes away from the EU. Tough emissions regulations have also encouraged this relocation. European production has thus been based on imports from countries with less strict emissions regulations.
Traditionally, most of the world’s chemicals production has been carried out in the advanced industrial countries. Thus, the EU15, US and Japan accounted for two-thirds of global chemicals production in 2002. However, they are losing out to Asian countries, where output has soared from 13% of global production in 1990 to around 24% in 2002 (see CEFIC review 2004-2005 563kb). Meanwhile, the EU share has fallen from 32% to 28%, the US share from 27% to 26%, and the Japanese share from 12% to 10%.
Despite the high level of investment in new capacity in Asia, domestic supply of chemicals has not kept pace with demand. European exports of chemicals to China grew at double-digit rates between 1995 and 2002 (see European competitiveness report 2004, p.270 1.75Mb), which mostly contributed to the improvement in the EU trade balance for chemicals. However, Asian demand for imported chemicals is likely to last only until the capacity under construction there comes on stream. Furthermore, the new chemicals plants in Asia incorporate the latest production technology and are much bigger than plants in the EU, and so they will enjoy far greater economies of scale. When these plants are operational, the flow of chemicals commodities is expected to be from Asia to Europe.
Another threat to the EU chemicals industry comes from oil-producing countries. Such countries are increasingly investing in the primary processes of the chemicals industry. Joint ventures between Western and local companies are bringing together Western technology with the regional advantages of being near sources of oil. For example, Jubail, a branch of Sabic, which was founded in 1976 to invest in the petrochemicals industry, has a joint venture with Canada’s Acetex to build a $1 billion petrochemicals plant in Saudi Arabia. Sabic has also invested in downstream companies; for example, in July 2002 it acquired the Dutch chemicals group, DSM, along with its production sites in the Netherlands and Germany. In these ways, the chemicals industry is developing cross-border linkages along the value chain, as well as affiliations between companies.
The downstream linkages to client industries are as important to the globalisation of the chemicals industry as upstream linkages. The most obvious example of this is man-made fibres. The move of the textiles industry away from the EU drew the man-made fibres industry with it. There are now manufacturing plants producing and selling man-made fibres in Turkey, North Africa, the Far East and, in particular, China. The phasing out of the Multi-Fibre Agreement (MFA) and the accession of China to the World Trade Organisation (WTO) have reinforced this long-term development.
Although recent restructuring has shifted the focus of the chemicals industry towards low energy-intensity products, chemicals remains the most energy-intensive industry. New process technologies, combined heat and power generation (of electricity and steam), will play an important role in further reducing the energy intensity of the chemicals industry, as well as public policies aimed at reducing emissions. During the 1990s, the chemicals industry shifted its focus towards low-energy processes and became less dependent on fuel imports. This trend is expected to become more pronounced, as the use of biomass and waste as energy inputs is expected to grow by 10% per year to 2030, according to the Commission’s EU-15 energy and transport outlook to 2030 (2003).
The protection of the environment, consumers and workers from hazardous chemicals are institutional aspects of outstanding importance for the industry. Formerly, different national regulations hampered the free circulation of chemicals in the single market. With the principle of mutual recognition, however, products legally marketed in one Member State must in principle be admitted in any other Member State. This institutional framework has made the free movement of chemicals easier within the internal market with the obligation to preserve high levels of environmental protection.
The greatest challenge currently faced by the European chemicals industry lies in the proposed REACH legislation (REACH is an acronym for the Registration, Evaluation and Authorisation of Chemicals). The draft chemicals regulations, proposed by the Commission in 2003, require companies to register some 30,000 substances with a new organisation called the European Chemicals Agency. Companies would have to demonstrate that the chemicals they use cause no harm to humans or the environment.
Two recent reports suggest that the REACH proposal will hurt chemicals businesses, but probably less than previously feared. 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 amounted to 20% of annual turnover. However, the report also says the new framework is unlikely to force companies to abandon the production of critically important substances. It also points out that businesses could reduce costs by joining forces with other companies or by rationalising their product portfolios. The second report, by the Institute for Prospective Technological Studies (IPTS) and funded by the European Commission, assesses the impact of the new rules on the chemicals sector in the 10 new Member States (see Implementation of REACH in the new Member States 756kb, 2005). It concludes that they will have very limited impacts on the competitiveness of chemicals manufacturing companies, but may cause problems to importers.
Major exporters to the EU are concerned about the effects of the new REACH rules. An impact analysis by the Australian Bureau of Agricultural and Resource Economics ( 763kb; Abare, 2005) suggests that they would reduce Australian exports of key mineral products to Europe because they cover 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 rules could lead to the relocation of metals-processing from Europe to Asia.
DG Research and the European chemicals industry have launched a platform for a sustainable chemicals industry (SusChem) which aims 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.
The social partners of the chemicals industry - namely, the European Chemical Employers Group (ECEG), the European Mine, Chemical and Energy Workers Federation (EMCEF) and the European Chemical Industry Council (CEFIC) - have launched a social sectoral dialogue in order to better represent the shared views of the intra-industrial stakeholders in political decision-making. The underlying driver of this initiative was the perception that their interests had not been sufficiently considered (see common press release on 13 July 2005).
Trend and driver linkage
Figure 1: Trend and driver linkage
Source: Institute for Economic Research (Ifo), Munich, 2005.
Scenarios for the chemicals industry
The last few years have seen a ‘decoupling’ of pharmaceuticals from other chemicals. Whereas output in pharmaceuticals grew by a healthy 5.5% per year over 1996-2001, output in the rest of the chemicals sector grew by only 2.8% per year over the same period. Because pharmaceuticals is a relatively small part of the chemicals sector, the growth rate for chemicals as a whole was only 2.9% per year.
This decoupling has come about for a number of reasons, including the introduction of different technologies, changes in downstream markets, growth perspectives, drivers of success, approaches to innovation and changes in shareholder expectations.
The European Chemical Industry Council (CEFIC) has developed four alternative scenarios for the future development of the chemicals industry in its 2004 study on 'Chemical Industry 2015: Roads to the future' (CEFIC, 2004):
- Sunny- a revitalised EU chemicals industry, with increased innovation and customer orientation;
- Cloudy- a focused EU chemicals industry, strong in high-end products and sustainability;
- Rain- an EU chemicals industry with no confidence in the European market;
- Storm- a shrinking EU chemicals industry, not able to compete with imports.
These scenarios were based on a major study that involved over 150 chief executive officers (CEOs) and experts in the chemicals industry. The assumptions made in the scenarios are outlined below.
- The Sunny scenario sees a positive market situation and a highly favourable macro/political environment. These are supplemented by positive efforts by the industry to optimise downstream relations. The overall result is continued growth in the chemicals industry sector.
- The Cloudy scenario assumes that the chemicals industry is facing a very weak market. However, in contrast to the Storm scenario, the macro/political environment is very favourable to the industry, encouraging it to take strong initiatives to improve its overall situation. Despite the weak market, the industry is able to enhance its competitiveness and profitability.
- The Rain scenario supposes that despite a positive market position and a still acceptable macro/political environment, the industry fails to seize the existing opportunities and to carry out the required actions. This failure results in the deterioration of competitiveness and profitability.
- The Storm scenario presumes a very weak market accompanied by a very discouraging macro/political environment. Even if the chemicals industry tries to fight the bad market conditions, there is no chance of overcoming the restraints in the macro/political environment and the result is a rapid loss of global market share.
Evaluation of the scenarios
The EU chemicals industry is expected to be under pressure from four sides:
- Asia, and in particular China, is 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.
Of the scenarios outlined above, only the Sunny scenario would result in growth rates similar to gross domestic product (GDP) forecasts. However, in light of the pressures just described, the assumption of a positive market seems unrealistic. It is clear that the EU chemicals industry is facing a difficult market and will continue to do so in the foreseeable future.
In the Rain and Cloudy scenarios, the pressures just described will work towards a gradual slowing down of EU chemicals production. Although growth would probably not match GDP forecasts, it is not expected to turn negative. Rather, the chemicals industry adjusts to market conditions in a supportive macro/political environment.
The Storm scenario projects a sharp reversal of the former growth in the EU chemicals sector into decline. The industry will rapidly lose share in the global chemicals market.
The EU chemicals industry is highly globalised, exporting more than 25% of its production outside the EU. The industry cannot compete on price. This advantage is enjoyed by Asian and Middle Eastern producers. Because these countries are also in the process of building new production capacity on a large scale, they also tend to have the additional advantages of newer technology and bigger economies of scale. The EU chemicals industry is therefore likely to lose market share to other regions, especially in the less refined chemicals.
The European chemicals industry faces high tariffs in some parts of the world. The Chemical Tariff Harmonisation Agreement harmonised import tariffs in the EU and main OECD countries at a low level. However, many key emerging markets retain high tariffs, putting EU exporters of chemicals at a disadvantage.
Regulation, such as the forthcoming REACH legislation, could also become a burden if EU chemicals producers are forced to adhere to much higher safety standards than their competitors. If the regulations involve higher costs, they can put an industry at a disadvantage compared to its competitors.
The chemicals industry is essential for sustainable development and growth in the European economy because of its direct and indirect impacts on various parts of the economy. The chemicals industry and its strategies have direct effects on the downstream users of chemicals. The industry is its own largest customer, but other large industrial customers include metals, mechanical and electrical industries, textiles and clothing, paper and printing products, and the automotive industry.
Apart from sourcing products and services from suppliers and producing products and providing services to industries, the chemicals industry also has an important role in enabling innovations in other industries. Chemistry is synonymous with innovation in areas such as aerospace, medicine, hygiene, nutrition, mobility, housing and clothing. New materials developed by the chemicals industry have played a key role in meeting new challenges in the development of society.
The public perception of the chemicals industry seems unaware of the fact that it has been at the centre of economic and social development since the first industrial revolution. It has offered more new products that have improved industrial productivity and raised living standards than any other industry. Although the next wave of innovation may come from elsewhere, perhaps from biotechnology or nanotechnology, the chemicals industry is likely to continue to play a central role in the economy.
The main issue here concerns the low public esteem for the chemicals industry. Public opinion must not be underestimated - it can be a powerful ‘driver’ of the business environment. Because the public also 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. Survey results show that the industry’s reputation has been deteriorating continually since the 1990s. This has also affected the attractiveness of the chemicals industry as a career choice and, as a result, the industry has suffered from a long-term brain drain. When experienced workers leave, there are few qualified young people to replace them.
Public opinion is, therefore, important on two fronts. First, good public relations promote good political relations and may help to reduce the regulatory burden. If the chemicals industry loses its ‘licence to operate’, the industry’s business environment will become very difficult. Secondly, if people do not want to work in the industry, talented young people will seek careers elsewhere. This will affect the industry’s ability to conduct R&D and stay ahead of innovation in other countries.
This article reviewed major trends in the chemicals industry sector (excluding pharmaceuticals) and considered some alternative scenarios for the future development of the sector. While the continuing importance of the chemicals industry to the European economy seems assured, the scenarios are an example of the different prospects that the sector could face in the years ahead. The last article in this series, Chemicals sector - challenges, policy issues and the future, reviews major policy issues and challenges that the sector currently faces, by analysing their timely, geographical and structural impact on the industry, as well as the gender dimension.
All links accessed on 8 December 2005.
Abare (Australian Bureau of Agricultural and Resource Economics), 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 Chemicals 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).
European Commission, ‘Extended impact assessment of the new chemicals policy’, online collection of reports, Brussels, available at: http://europa.eu.int/comm/enterprise/reach/eia_en.htm.
European Commission, DG Enterprise and Industry (ed.),European competitiveness report 2004, Luxembourg, Office for Official Publications of the European Communities, 2004, available at: http://europa.eu.int/comm/enterprise/enterprise_policy/competitiveness/doc/comprep_2004_en.pdf ( 1.75Mb).
European Commission, DG Energy and Transport (ed.), EU-15 Energy and Transport Outlook to 2030, Luxembourg, Office for Official Publications of the European Communities, 2003, available at: http://www.europa.eu.int/comm/dgs/energy_transport/figures/trends_2030/index_en.htm.
ECEG/EMCEF/CEFIC, Chemical Industry Unions and Employers united on REACH, European Chemical Employers Group/European Mine, Chemical and Energy Workers Federation/European Chemicals Industry Council (CEFIC), Brussels, 13 July 2005, available at: http://www.cefic.be/Files/NewsReleases/CeficREACH130705.doc
Institute for Prospective Technological Studies (IPTS), Implementation of REACH in the new Member States, Brussels, European Commission, Joint Research Centre (JRC), April 2005, available at: http://europa.eu.int/comm/enterprise/reach/docs/reach/ipts_report.pdf ( 756kb).
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).
Sabic, company website at: http://www.sabic.com/sabic-www/index_Overview.htm
SusChem, European Technology Platform for Sustainable Chemistry, online information platform, available at: http://www.suschem.org/content.php?pageId=2479&lang=en&PHPSESSID=0ae28842bb455fffd68114764181cb6c