Struggling industry eyes green success

Chemicals companies are hoping that going green will help them get back into the black. Lorraine Mallinder reports.

The European chemicals industry is currently under intense pressure to perform. Once it was an international success story, but it now faces growing challenges from emerging economies in the Middle East and Asia. Add to this the burden of compliance with chemicals legislation REACH and the steady loss of research talent, and the outlook looks fairly pessimistic. The emergence of the green economy, however, could turn out to be the industry’s saviour.

Back in 2002, according to the Dublin-based European Foundation for the Improvement of Living and Working Conditions, the EU15 countries, the US and Japan between them accounted for two-thirds of global chemicals production. All these economies have since suffered a slide in production, with the EU’s share of the global pie having fallen from 32% to 28%. Conversely, Asian countries’ share of the world market has almost doubled since 1990 to 24% in 2002.

Alan Eastwood, economic adviser at the UK Chemical Industries Association (CIA), downplays the decline, explaining that the challenges faced by different sub-sectors of the industry vary significantly.

The bulk chemicals sector, specialising in so-called commodity chemicals such as ethanol, which are sold on global markets, has largely moved outside the EU. "Commodity chemicals are generally energy-intensive and expensive to transport," says Eastwood. "The factors for success are access to competitively priced feedstock and proximity to markets. That has led to new production taking place near or in Asia because that’s where other manufacturing industries are growing the fastest."

Future profitability, at least in the short to medium term, probably lies in the speciality chemicals market, specialising in pharmaceuticals and branded products such as perfumes. "Here, you’re talking high-value chemicals, where the energy content is less important," says Eastwood. "You have the means of differentiating prices and transport costs are less expensive. You can supply worldwide from one manufacturing base."

Still, relying on current markets is in no way a safe strategy for the long-term survival of the industry. Globalisation and capital mobility have upped the stakes of the game. Increasing foreign investment flows into booming markets like Asia and the Middle East mean that the European chemicals industry will have to maintain a brisk pace of innovation to retain, never mind build, market share. Outside demand for existing EU-produced chemicals will only last as long as capacity under construction comes on stream and technological advances will allow foreign competitors to leapfrog their way to greater economies of scale. EU businesses will thus have to become more knowledge-driven to survive.

All of which makes industry extremely nervous about the implementation of EU chemicals safety legislation REACH, which entered into force across the bloc last month. The law, which aims to phase out the use of hazardous chemicals by 2020, requires companies rigorously to test chemicals registered with the European Chemicals Agency - at substantial cost. Small- and medium-sized companies in particular may find it difficult to maintain their competitiveness in a cut-throat global market. The European Commission has set up a high level group on the competitiveness of the European chemicals industry to examine, among other things, the challenges posed by REACH. Its first meeting will be held in September.

"That’s going to be a huge thing to swallow over the next ten years," says Eastwood. "After the first ten years, it shouldn’t be too bad, but it will require a lot of effort and divert research and development efforts. You have to make sure the public is happy with what you’re doing, so we can see it’s ultimately to our benefit. But it’s all down to how it happens, whether everything goes smoothly or whether it ends up in a huge car pile-up."

Assuming that REACH will not devastate the EU chemicals industry, as doomsayers are wont to predict, the green economy seems to be where the future lies. Working with other industries, says Eastwood, the chemicals industry has a role to play in supplying the non-metallic sheets that will make planes lighter and greener, in producing materials for the construction of photovoltaic solar cells and in helping to create homes that are better insulated.

Martina Bianchini of Dow Chemical Company, a US multinational, which is working on creating energy-efficient processing technologies agrees that the future is green. "Some have said our industry’s intense appetite for fossil fuels disqualifies us somehow from being part of the solution," she says.

"On the contrary, no one in the world is more intensely aware of the need, ultimately, to reinvent our dependency on oil and natural gas than we are. In other words, we will lead the way on energy transformation because we have to."

The EU’s role in creating a greener chemicals industry will also depend, however, on its ability to nurture and retain the talent needed to develop the technologies. Experienced chemicals workers have been leaving for the US and Japan in recent years, perhaps after the high costs of industry restructuring sucked capital away from research budgets. "It’s a chicken and egg situation," says Eastwood. "Companies say there are no graduates, while young people say there are no jobs." The financial services industry by contrast, he says, is a huge enticement for anyone who is numerate.

Chemicals companies are hoping that going green will help them get back into the black. Lorraine Mallinder reports.