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Chemicals Industry


Major Industry Trends

In December 2013, at its ninth ministerial conference in Bali, Indonesia, the World Trade Organization (WTO) signed the first ever global trade facilitation deal, unanimously voted in by all 159 member countries. The deal was welcomed by Cefic, the European Chemicals Industry Council, (link is: http://www.cefic.org/PressReleases/Statement%20by%20Cefic%20WTO%20Agreement.FINAL.pdf) which points out that by simplifying, modernizing, and harmonizing trade procedures the agreement reached in Bali will usher in a new era of faster, cheaper exporting. Chemical exports are vitally important to the European economy, so the Bali “package,” as it is known, will be a tremendous boost both to the sector and to the European economy in the years to come, Cefic said.

The accord will go through a ratification process by the national parliaments of WTO member countries in 2014 and will need approval from two-thirds of members, but Cefic said that progress to date was very encouraging. The global trade in chemicals, it points out, was worth €2.15 trillion in 2012, with total trade between the European Union and the rest of the world reaching €238 billion. Barriers to export that generate delays can hold up industrial production schedules and increase the costs of chemical producers and users by forcing them to hold extra buffer stocks or by extending the transit times for chemical shipments, Cefic points out, so the Bali agreement, if ratified, will be hugely positive for the sector.

With the number of “useful” chemical compounds approaching 10,000, and with chemicals playing a huge role in so much of what modern societies do, make, and consume each day, it might be thought that the global chemicals industry would be set for perpetual boom. In fact, however, as Cefic notes in a report titled “Horizon 2015: Perspectives for the European chemical industry,” (correct link on Cefic is: http://www.cefic.org/Documents/PolicyCentre/Horizon_2015_Is_the_European_chemical_industry_losing_its_global_leadership.pdf) before the Bali accord things were not looking particularly encouraging for the sector—at least not in Europe.

The Horizon 2015 report notes that the European chemicals industry, which historically has included the largest group of chemicals producers on the planet, is in danger of falling behind rival producers in Asia and the Americas, and is already trailing behind its “sister” industry, the pharmaceuticals sector.

Chemicals Not Matching Vigorous Pharmaceuticals Growth

While it is not always easy to separate the chemicals and pharmaceuticals sectors, Cefic argues that over the past decade or so trends in pharmaceuticals and chemicals have become “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 European Union, although the aggregate of trade surpluses attributable to exports of chemicals is still increasing, the sector shows considerably less dynamism than the growth in pharmaceuticals 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 output of the chemicals sector grew at an average of 2.8% from 1996 to 2001, manufacturing output in general 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 the EU pharmaceuticals trade surplus in the total chemicals surplus (which includes pharmaceuticals) has grown considerably, from 23% in 1990 to 40% in 2002.

The most recent figures from the European Commission (published in 2007) show that the manufacture of pharmaceutical preparations and basic pharmaceutical products was the principal activity of around 4,500 businesses in the 27 member states. The sector employed 611,000 people and generated in the region of €73.7 billion.

According to Cefic, the 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.

Global Trends in Chemicals Sector

The chemicals sector itself breaks down into bulk chemicals and fine chemicals, and into a further category of petrochemicals and plastics. According to the latest figures (February 2013) from the United Nations Environment Programme (UNEP), which publishes an annual report, “Global chemicals outlook,” despite Europe’s flagging performance the global industry has grown dramatically over the last three and a half decades. Global output from the sector has soared from US$171 billion in 1970 to over US$4.1 trillion in 2013 (the Independent Chemical Information Service ICIS puts the figure at US$4.97 trillion). “The shift in production from developed to developing countries is underscored by China, which today is the largest consumer of textile chemicals, with 42% of global consumption, and South Africa, where spending on pesticides has grown by close to 60% since the late 1990s,” UNEP says.

However, UNEP points out that although chemicals are major contributors to national and world economies, their sound management throughout their life cycle is essential in order to avoid significant and increasingly complex risks to human health and ecosystems, resulting in substantial costs to national economies as well as considerable individual suffering. The exact number of chemicals on the global market is not known, but under the European Union’s chemicals registration regulation REACH (Registration, Evaluation, Authorisation and Restriction of Chemicals, in force from June 2007) some 144,000 chemical substances have been registered, which UNEP says provides a reasonable guide to the number of chemicals traded globally.

According to the Organisation for Economic Co-operation and Development’s (OECD’s) “Environmental outlook to 2050,” annual global chemical sales doubled over the period from 2000 to 2009, with developing economies increasing their share of global output while the share of OECD member states continues to decrease. The latest figures reported by Cefic for 2013 (see the online digital report at http://asp.zone-secure.net/v2/index.jsp?id=598/765/42548) show that global chemicals turnover in 2012 amounted to 3,127 billion euros, marking a significant recovery in the chemicals industry. Global sales for 2012 were up 12.8% by comparison with 2011, substantially up on the average for the past decade of 7%. The recovery is largely due to significant growth in China’s chemical sales, up by over 72% on the prior year and constituting some 57% of global chemical sales.

The US chemicals sector has seen some recovery in demand, driven largely by the cost advantages conferred by low-cost shale feedstocks. US chemical production is expected to rise by 2.5% in 2014 and 3.5% in 2015 according to a report in Chemical Week (see http://www.chemweek.com/lab/Outlook-2014-Looking-forward_57898.html). US chemicals production will grow strongly through the second half of the decade as nearly $100 billion in new chemical investment, announced since 2010, comes online. The report cites the view of Kevin Swift, American Chemical Council (ACC) chief economist and managing director, that shale feed-stocks will enable North America to approach the growth in chemicals output in the developing nations of Asia, the Middle East and Latin America.

Within this, the European Union’s share of global output has benefited somewhat from the EU enlargement process, as many of the East European accession countries have their own chemicals industries. However, in the 2013 report just cited, Cefic points out that closer inspection of the data shows that, even with enlargement, the European Union’s position is still declining. A decade ago the European Union’s share was 32%, well above its current 21.8% share of global output.

Although the flat to marginally positive growth rate of the European Union, compared to the much higher growth in Asia and China, accounts for some of this lost market share, the problems of the European chemicals sector are being compounded by the internationalization of trade, with the sector’s customer industries moving manufacturing out of Europe to low-wage economies. Regulatory arbitrage is also a factor in this shift of manufacturing capability from West to East. There is no doubt that Europe is seen as a highly regulated zone, as against the much “lighter touch” regulation of the sector in Asia. The problem for the European industry, Cefic notes, is that it has to avoid becoming trapped in a downward spiral. As the sector declines relative to Asia, less budget is allocated to R&D, and with innovation being absolutely key to growing market share, less R&D spend simply accelerates the decline and erodes 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, thereby 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 in 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 rate of the whole European chemical industry be expected to outstrip Europe’s GDP growth. The more likely scenario is that growth in demand for chemicals will lag behind GDP growth, and could well contract. 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.

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Market Analysis

The overall health of the global chemicals sector is highly susceptible to the global economic cycle, reflecting the fact that it mainly processes raw materials, and manufactures and supplies intermediates (semiprocessed raw materials) to other manufacturing industries worldwide. Consequently, the global economic downturn that began in 2008 and continued into 2009 had a severe impact on the industry.

However, things began to pick up in 2010, and by June 2011 Cefic was revising upward its forecast for the EU chemicals industry for 2011. This trend now seems to be firming up. PricewaterhouseCoopers (PwC), in a November 2013 report on merger and acquisition activity in the global chemicals industry, points out that the third quarter of 2013 saw a rebound in deal activity in the chemicals sector, with the average deal value increasing some 10% over activity in the second quarter of 2013. “The gain was boosted by a surge in mega-deals (valued at $1 billion or more), including Huntsman’s agreement to purchase Rockwood Holdings’ titanium oxide business for $1.1 billion,” the report said. Deal volumes were highest in the United States, which saw seven deals valued at US$2.2 billion, with those deals alone constituting some 45% of the total deal value for the third quarter of 2013. In all, North America registered 24 deals, valued at more than US$5.5 billion, with half of those deals being “local” (i.e. North American-based).

In Europe some 20 deals were done, valued at almost US$5.2 billion, with more than half of the deals being a result of overseas money looking to invest in the sector. Asia led on deal volume in the first three quarters of 2013, totaling 29 deals, with 19 of these being Chinese deals, 17 of which were local—i.e. Chinese companies buying Chinese firms. A strong pick up in merger activity in an industrial sector is often an early signal of increased production growth to come.

Global Leaders

The cutoff point for the ICIS annual top 100 chemical companies league table was just over US$3.6 billion in sales for 2012. The top company continues to be BASF, with sales of US$95 billion. China’s Sinopec has showed steady growth, moving from 29th place in the ICIS rankings in 2002 to second place in 2012, with US$65 billion sales. Others in the top 10 are ExxonMobil (3rd), Dow Chemical (4th), DuPont (8th), and Mitsubishi Chemical (9th).

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 only a handful of countries had launched Responsible Care programs in their chemicals sector. By 2002 the program had been adopted by 47 countries worldwide.

The United Nations has been pushing for the global adoption of its strategic approach to international chemicals management (SAICM) since 2002. The SAICM concept and framework were endorsed by the World Summit on Sustainable Development in Johannesburg in 2002, and they have been reaffirmed by many global conferences since then.

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 (as stated in the “Plan of implementation” published after the Johannesburg summit).

SAICM objectives are grouped around five headings: risk reduction; knowledge and information; governance; capacity-building and technical assistance; and illegal international traffic—which is a continuing problem in the sector.

The United Nation’s argument has a number of strands to it. An 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 United Nations’ Millennium Declaration, and of the potential for exposure to toxic substances to undermine investments in development, health, and poverty alleviation. In a 2005 discussion paper UNEP warned that:

“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.”

The ICCA set up the Responsible Care global charter in 2006, for companies and national associations to sign, as part of meeting the sustainable development challenge. Cefic itself is an enthusiastic supporter of the charter.

In addition, the European Union has a chemicals policy called REACH (see earlier in the article), 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, the Globally Harmonized System of Classification and Labelling of Chemicals (abbreviated to 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 European Council adopted a new regulation on the classification, labeling, and packaging (CLP) of substances and mixtures, which aligns existing EU legislation with the United Nation’s GHS regime. CLP was published in the Official Journal of the European Union 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.

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Further reading on the Chemicals industry

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