Major Industry Trends
With the number of “useful” chemical compound molecules approaching 10,000, and with chemicals playing a huge role in so much of what modern societies use, eat, clean, manufacture, and do each day, it might be thought that the global chemicals industry should be set for perpetual boom times. In fact, however, as the European Chemical Industry Council (Cefic), the body representing the European chemicals industry, observes in a report titled “Horizon 2015: Perspectives for the European chemical industry,” things are not looking particularly encouraging for the sector, at least in Europe (see www.cefic.be).
The Cefic report sketches out the probable future of the sector to 2015, and one of its themes is that the European chemicals industry, which historically included the largest group of chemicals producers on the planet, is in danger of falling behind rival produces in Asia and the Americas, and is already trailing behind its “sister” industry, the pharmaceuticals sector.
While it is not always easy to separate the two sectors, Cefic argues that over the past decade or so, trends in pharmaceuticals and chemicals have “decoupled.” “There is a strong asymmetry between the two sectors, with regard to the growth of output, trade surplus and employment. [Our] analysis shows that growth in chemicals output is lower than in pharmaceuticals,” it says.
Even outside the EU, although the global chemicals trade surplus is still increasing, it shows considerably less dynamism than the growth in pharmaceuticals outputs around the world. Moreover, the number of persons directly employed by chemicals is falling dramatically, while employment in pharmaceuticals continues to show what Cefic calls “an encouraging increase.”
Whereas the chemicals sector output grew at an average of 2.8% from 1996 to 2001, manufacturing output generally grew at 2.9%, and pharmaceuticals output grew at an average annual rate of 5.5%, Cefic says. It makes the point, too, that if one strips out pharmaceuticals-related growth from general chemicals growth, the picture looks even bleaker, as the share of EU pharmaceuticals trade surplus in the total chemicals surplus (which includes pharmaceuticals) has grown considerably, from 23% in 1990 to 40% in 2002.
According to Cefic, this “decoupling” between pharmaceuticals and chemicals is the result of a number of factors. These include the introduction of different technologies, changes in downstream markets, approaches to innovation, and changing shareholder expectations.
The chemicals sector itself breaks down into bulk chemicals and fine chemicals, and into a further category of petrochemicals and plastics. In 2002, total world chemicals production (excluding pharmaceuticals) was worth around €1.3 trillion, with the EU’s share of that being €360 billion, followed by the USA (25.6%), and Asia (33%).
A report by Deutsche Bank Research on the Asia chemicals industry cites a turnover figure for the global chemicals industry for 2007 of €2.3 trillion, which represents a global annual growth of 5%. However, Deutsche Bank finds that Asia’s growth averaged 6% (China 15%), while Europe averaged just 4%. It expects global chemicals turnover to continue to grow by 4.5% to 2020, to around €4 trillion. However, by 2020, the Bank expects Asia’s share of the world chemicals market to have risen to 38%, up from its current share of 31%.
Cefic points out that with EU enlargement, the EU’s share, currently 28% of global production, is set to rise, as many of the East European accession countries have their own chemicals industries. However, it points out that closer inspection shows that the EU’s position is actually eroding. A decade ago, the EU’s share was 32%, or 4% higher than today.
The main reasons for the decline are slow demand growth in Europe, versus high demand growth in Asia, and particularly in China, compounded by increasing imports into the EU from Asia and the Middle East, creating pressure on prices and margins. The internationalization of trade, with customer industries moving manufacturing out of Europe to low-wage economies, is also a contributing factor, as is regulatory arbitrage, with Europe constituting a highly regulated zone, versus Asia as a less highly regulated zone, and therefore a more favorable location for manufacturers. The problem for the European industry, as Cefic notes, is that as it declines, less budget is allocated to R&D, and, as the sector thrives on innovation, spending less on R&D would accelerate the decline and erode the industry’s skills base in Europe.
Another issue for the European sector is that the Asian region’s rate of industrial production growth is outpacing that of much of the rest of the world, creating a very strong demand for a wide range of chemicals. Moreover, Asia’s greater focus on agriculture, manufacturing, and durable goods creates a more chemicals-intensive demand than developed economies, where the service sector plays a much larger role. Add to this the importance of the electronics, electrical, and textiles sectors, plus construction, leather, and plastics processing, and the result, again, is very strong and sustained demand for chemical products.
The question posed by Cefic, given all of the above, is whether Europe could still be regarded as a growth area for chemicals to 2015. Its answer, following an extensive modeling exercise, was that only in the most optimistic scenarios could the growth rates of the whole chemical industry be expected to outstrip GDP growth in Europe. The more likely scenario is that growth in demand will lag behind GDP growth, and could even become negative. If this happens, it would mean a major structural change.
“This would entail major consequences for the European chemical industry, but also, because of the leverage effects from raw materials supply and innovation, for European industry as a whole, and therefore on the whole European economy,” the report warns.
Market Analysis
In their latest report on merger and acquisition (M&A) activity in the global chemicals sector, accountants, PricewaterhouseCoopers (PwC), argue that the overall health of the global chemicals sector is tightly correlated with the state of the US and global economies. As global demand has slumped, chemical companies around the world have seen idle plants, job cuts, and falling order books.
There has been some relief as feedstock prices have declined in 2009 (to March), and are now off the record highs seen in 2008, but these price declines have not been sufficient to counterbalance the fall-off in order volumes. Companies have struggled to rationalize their production capacity as the downturn has deepened.
However, PwC argues that recessions allow companies with good balance sheets to make acquisitions that will define their business once the global economy picks up. PwC also found that chemicals CEOs as a group are more worried than in many other sectors about the possible impact on their businesses of the global liquidity crisis. PwC’s 12th annual survey of global CEOs found that more than two-thirds of chemicals CEOs thought that financing costs would increase significantly, and that they would have to delay earmarked investment.
The industry is highly capital-intensive, with long product lifecycles, and the typical response of the sector to a downturn, PwC says, is to fine-tune the allocation of capital investment, rather than, as is common in some other sectors, to rethink their business model. This means that R&D spend across the sector has remained strong during the recession, as new products are seen as absolutely critical to a chemical company’s long-term viability. Surprisingly, PwC found that deal activity actually increased in the chemicals sector in the fourth quarter of 2008, and the total of 869 deals completed in the sector globally, through the whole course of 2008, was higher than the total in 2007 (760 deals). What kept the M&A scoreboard ticking over during the global downturn was a large number of small and mid-sized transactions, PwC says. The volume for deals greater than US$50 million was actually lower in 2008 than for 2007 (83 deals versus 124 deals).
Regulatory Trends
The global chemicals industry has long been aware that the production and use of chemicals can have an adverse impact on both human health and the environment, and there have been a host of initiatives over the years aimed at developing coherent, industry-wide support for best practice standards on the use, production, transportation, and safe disposal of chemicals.
The industry’s “Responsible Care” program has been in existence for close to two decades. As the International Council of Chemical Associations (ICCA) observes, some 15 years ago, just a handful of countries had launched Responsible Care programs in their chemicals sector. By 2002, the program had been adopted by 47 countries worldwide.
In 2009, the United Nations Environment Programme (UNEP) will hold its second international chemicals management conference in Geneva, Switzerland. The UN has been pushing for the global adoption of its strategic approach to international chemicals management (SAICM) since 2002. The SAICM concept and framework was endorsed by the World Summit on Sustainable Development in 2002, and by many global conferences since.
There is little argument against, and almost universal support for, the UN goal that, by 2020, chemicals across the world should be produced and used in ways that minimize significant adverse effects on human health and the environment (known as the Johannesburg Plan of Implementation).
SAICM objectives are grouped around five headings: risk reduction; knowledge and information; governance; capacity-building and technical assistance; and, lastly, illegal international traffic—the last being a continuing problem in the sector.
The UN’s argument has a number of strands to it. The increased use of chemicals frequently accompanies economic development, and chemicals can play an important role in the improvement of living standards, including in relation to disease eradication, safe drinking water, and the alleviation of hunger. At the same time, the sound management of chemicals is essential for environmental sustainability, which, in turn, is a prerequisite for sustainable development as a whole.
UNEP says that there is increasing recognition, at the level of national governments, and by national chemical producers, of the importance of the sound management of chemicals in meeting the internationally agreed goals of the Millennium Declaration, and of the potential for exposure to toxic substances to undermine development, health, and poverty-alleviation investments.
“Many people living in poverty have weakened immune systems, leaving them more vulnerable to diseases caused or exacerbated by toxic substances and many lack knowledge of toxic substances in their community. Inadequate living conditions often leave them exposed to hazards of toxic substances and many work in occupations, such as agriculture and mining, which constantly expose them to harmful substances. Chemical exposures can also interfere with primary education by impairing children’s physical growth and emotional development, and, in the case of metals such as lead and mercury, can have serious and irreversible adverse effects on children’s mental development,” UNEP warns.
The ICCA set up the Responsible Care Global Charter in 2006, for companies and national associations to sign up to, as part of meeting the sustainable development challenge. Cefic itself is an enthusiastic supporter of the charter.
In addition, the EU has a chemicals policy called REACH (Registration, Evaluation, and Authorization of Chemicals), which became applicable in law on June 1, 2007. REACH makes businesses responsible for the chemicals they use, and the onus is on them to show that these chemicals are safe in the way that they are being used. It also streamlines and improves the previous legislative framework on chemicals for the European Union.
The thrust of REACH is to encourage the replacement of hazardous chemicals with safer ones, and to act as a stimulus to businesses and the chemicals sector to research and develop safer products.
The United Nations has a globally harmonized system, called GHS, for identifying hazardous chemicals, and to convey information to the public and to users about these hazards, through standard symbols and phrases on packaging and labels, and through safety data sheets. GHS originated with the World Summit on Sustainable Development, held in Johannesburg in September 2002. This encouraged countries to implement GHS as a harmonized basis for providing consistent physical, environmental, and safety information on hazardous chemical substances and mixtures.
On December 16, 2008, the European Parliament and the Council adopted a new regulation on the classification, labeling, and packaging (CLP) of substances and mixtures, which aligns existing EU legislation with the UN’s GHS regime. CLP was published in the Official Journal on December 31, 2008 and came into force on January 20, 2009. The deadline for substances to be classified according to CLP is December 1, 2010, and for mixtures, June 1, 2015. The CLP Regulations will ultimately replace two earlier directives, the directive on the classification, labeling, and packaging of substances, and the directive on “preparations.” However, chemical companies are being given a period of time to make the transition. The deadline for substance reclassification is November 30, 2010, and for mixtures, May 31, 2015.
Companies
The ICIS Top 100 Chemical Companies includes all chemical firms around the world with sales greater than US$2.5 billion. The full table can be downloaded as a PDF from www.icis.com.
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