With an annual turnover of more than £40 billion, the chemical and pharmaceutical industry is a critical part of the UK economy employing approximately 140,000 people directly and supporting another 500,000 jobs in the UK, many in the North of England and Scotland.
Though its origins pre-date the Industrial Revolution, the 18th and 19th centuries saw a huge increase of both the variety and quantity of chemicals being produced. Driven by industrial demand and aided by the invention of new processes, this meant by the 1920’s large conglomerate chemical firms had been established, notably IG Farben in Germany, Rhône-Poulenc in France and ICI in Britain.
Worldwide sales in the 10 years to 2015 doubled from €1,622 billion to €3,534 billion, largely due to emerging markets. The European share slumped from 28.2% to 14.7%. Not surprisingly, in the same period China surged from 11.6% of world sales to a staggering 39.9%. The growth in EU28 sales in this 10-year period has been a relatively modest €61 billion from €458 billion to €519 billion.
The EU chemicals sector is undoubtedly suffering from a degree of stagnation; the production rose by just 0.6% between 2010 and mid-2016. Causes of this include increased regulation and new legislation impacting on the profitability and competitiveness of EU producers.
Rising energy costs have also had a huge impact on EU producers, an example of which is the production of ethylene. At 150 million tonnes per annum, this is the world’s most commonly synthesized organic compound. Cheap energy in the US allowed its price to be held at US$ 230/ton in 2015, compared to US$ 512/ton in Europe.
Increased regulation has also been an important factor within the EU. A prime example is the REACh regulations, an EU led programme to reduce the amount of toxic and hazardous materials used and produced in the region. Widely regarded as ‘overkill’ legislation, the associated red tape has also encouraged production to migrate away from the EU, especially to the Far East.
That said, great strides have been made in Europe to improve energy efficiency in the chemicals industry. Since 1990, chemicals production has risen by 78% while energy consumption has fallen by 22%. In the same period there have been massive reductions of more than 60% in greenhouse gas emissions.
Now that many countries worldwide have undertaken similar environmental commitments, the economic advantage that huge producers such as China may have had through a lower regard to environmental concerns, may now start to reverse. The aggressive new US stance on the environment may be designed to gain economic advantage for their domestic chemicals industry. Hopefully that’s ‘fake news’.
The UK and Brexit
Steve Elliot, chief executive of the Chemicals Industries Association, openly admitted that leaving the EU was not something the great majority of its members wanted, but feels that this ‘resilient industry… can prosper in this new situation’.
In common with so much of UK industry, it is the lack of certainty that’s so destabilising. Adverse exchange rates, which occurred so rapidly following the vote in June, continue to have their effect. This has been exacerbated by the steady migration of a large proportion of production out of the UK over the last 20 years. This has made imported materials more expensive. Shortages of product within the UK have also helped push prices up; this is unlikely to change any time soon.
Nevertheless, the EU is still a hugely important sector for this industry and it is going to remain a key export destination which is why the forthcoming negotiations with the EU are so critical to this industry.
Opinion as to the future is divided. Some see bleak prospects for the next five years while others feel that the recent improved market performance is not an illusion and a genuine indicator of future growth for the sector.
What can ERA offer?
Whatever the impact of Brexit, or other factors outside your control, ERA can achieve savings on what you pay for Chemicals. Busy businesses do not always have the time to compare the market as we can. Even something as commonplace as Sodium Hypochlorite (bleach), purchased in huge quantities and assumed not to be worth re-sourcing, can be more competitively sourced.
Over specification of grades can add significantly to costs. Have delivery options been discussed with your suppliers, perhaps changing from IBC storage to pump-over in to storage tanks? Has a long-standing relationship with a favoured supplier really been tested through a tender process? Are delivery costs reasonable – are you sure you know what reasonable looks like? Has your supplier been challenged over pallets and IBCs charges?
There is no time like the present to revaluate your chemical supplies – you simply cannot assume you’ve got the best value without actively testing the market.
For more information, contact us.
Article by: Peter Randall