Chemical industry faces tough rivals

Date: 18/04/1996

By Tim Jones

THE EU chemical industry must fight constantly to upgrade its technological and cost edge in the face of stiff competition from Asian and US producers, warns a new report from the European Commission.

The long-awaited communication on competitiveness in the chemical industry is expected to be adopted by the college of Commissioners next Wednesday (24 April), in time to be debated at the next meeting of EU industry ministers in May.

European chemical producers are undergoing a period of fierce competition as prices on many products dip and companies are forced into tough measures to keep production costs down.

When the Commission published its report on how EU governments and industries could enhance competitiveness in general, Industry Commissioner Martin Bangemann asked for a supplementary inquiry into the chemicals sector.

The communication makes the same kind of recommendations for the sector as for industry in general.

Measures should be taken to develop industrial cooperation, while at the same time ensuring genuine competition between companies. Regulatory conditions should be ideal for so-called 'intangible investment', or those non-plant assets of a company with a value, such as patents, trademarks and goodwill.

The European Chemical Industry Council (CEFIC) is hopeful that the report will provide the basis for all future EU regulation in the industry.

Once the communication is agreed by the Commission, the industry believes it will be able to discuss all future proposals with an eye on the competitive conditions spelt out in the report.

“It is certainly true that the paper will be used by those both inside and outside the Commission against legislative proposals they do not like, such as the CO2 tax,” said an official.

The proposal for a tax on carbon dioxide energy has been trundling through the EU's legal process for five years. Vehement opposition to the principle of having a harmonised tax at all, its legal base and its potential effects on the European petroleum, petrochemicals and car-making sectors have combined to bog down the negotiations.

The Commission report examines the effects on the industry of high energy costs, legislation and measures to protect the environment, but also considers how new areas of innovation such as biotechnology should be nurtured.

“The first thing we can do,” said an official, “is make sure that the biotechnology directive gets through the Parliament.”

New proposals for legislation to give harmonised protection to biotechnological discoveries have been sent to the Parliament after the first version was rejected two years ago.

All these measures are intended to help an industry which is a key employer in the Union as it copes with the recent downturn in demand in Europe and growing international rivalry.

Production of chemicals slowed down in 1995 and growth this year is only expected to be about 2&percent;.

Exports will also be hit as consumption dips in America and previously rampant Asian demand comes off the boil.

As with so many areas of European industry, the chemicals sector is paying the price of investing heavily in extra capacity in the late Eighties, an expansion which reflected its belief that the demand boom would continue.

Since the capacity increase was heavy, the fall has been equally severe.

Companies' plans to invest in new plant have been put to one side and jobs shed right across the sector.

Investment spending was slashed by 30&percent; between 1990 and 1994, and is expected to be 20&percent; below the 1990 level by the end of this year.

According to the CEFIC, some of this reduction in investment is the result of a diversion of projects to locations outside Europe to offset high exchange rates and production costs. It also reflects the need for firms to rebuild their financial positions and avoid unwarranted expansions of capacity.

Over the past six years, the chemical industry workforce has been cut by 250,000 - nearly 14&percent; of total employment in chemicals in Europe.

This may not be the end. “There is still a great deal of restructuring to do if the industry is to be competitive,” warned a recent CEFIC study.

Prospects are still not improving. The return which companies can expect from selling their products compared with the amounts they have to invest to produce them remains very weak.

Between 1990 and 1994, product prices at the factory gate in western Europe rose just 2.5&percent;, far below the general rise in consumer prices over the same period. During this year, chemicals prices are expected to rise by less than 1&percent;.

The Commission communication comes up with few solutions to the problems of the industry and falls well short of the kind of radical coordinated petrochemical capacity reductions proposed by parts of the industry in 1993.

But a Commission official said: “Chemicals is one of Europe's most important industries and the way it is handling its competitiveness problem could be an example to other industries.”