As a major energy consuming industry, chemicals have suffered from extremely high costs due to Russia’s invasion of Ukraine, and the consequent pressures on the global economy and key customer industries.
Chemical output in the EU27, for example, fell over the first eleven months of 2022, according to Cefic, the European Chemical Industry Council, with production 5.1% below the same period in 2021. This decline was not reflected in the remainder of the manufacturing sector, especially within the chemical sector’s major customer groups, like automotive, which actually grew by 4.4%. Pharmaceuticals, by comparison, grew by 13.6% over 2021 levels, outperforming all other manufacturing sectors. Overall, EU27 manufacturing output grew by 2.3%.
With recent decreases in energy prices, particularly for oil, however, there has been some improvement in the outlook of European chemical producers. The Euro price of oil saw a major fall in December 2022, down 14.8%, following a drop of 5.5% in November. This is a more marked decline, due to an appreciation of the Euro against the dollar, compared with the 11.4% fall in the dollar price in December and the 2.1% fall in November.
This foreign exchange differential had a significant impact on the UK chemicals sector, with a recent business survey of its members by the UK Chemical Industries Association (CIA) reporting a sharp decline in exports to the EU by 53% of respondents. Half reported failing demand from domestic and non-EU markets in Q4 2022.
As CIA Head of Economics, Tom Warren pointed out: ‘The fact that more CIA members reported a fall in sales in between the third and fourth quarters of 2022 than did between the first and second quarters of 2020, which was the height of the pandemic, shows how challenging the end of last year was for chemical manufacturers.’
The downturn was not unexpected, however, only its severity, as CIA CEO Steve Elliott noted: ‘We knew we were heading for challenging times, but the extent of contraction is worse than feared.’
But while accepting global economics have played a major role in the UK industry’s problems, the UK Government also came in for criticism from Elliott. ‘As an industry, we stand ready to deliver growth and deliver net zero for the UK, but we cannot do that while the policy framework kills off any incentive for manufacturing investment in out country. When a typical UK chemical business not only has to report on 17 different climate change measures, before even trying to compete with a far more attractive US investment climate driven by the Inflation Reduction Act, why would companies want to place money into the UK?’
‘On a positive note, it is good to see that [CIA] members are expecting some upturn in the economic climate later in 2023, so all the more reason to help chemical businesses grab those future opportunities by establishing a far more competitive investment climate and simplifying an often-tortuous policy and regulatory framework,’ added Elliott.
This slight note of UK optimism is also echoed in the European industry. In December 2022, the Economic Sentiment Indicator (ESI) rose for the second time. Although it still remained below the long-term average.
Business confidence in the European chemicals sector picked up slightly for the second time since February 2022, said Cefic. This was driven by a ‘strong uplift in the production expectations of managers, however, this was partly offset by a further slight deterioration in managers’ assessments of the current level of overall order books and piling up of stocks of finished products,’ said Cefic.
Cefic believes that within the EU27, managers in the chemicals sector perceive stock levels as too high, compared with normal levels, due to a second wave of stockbuilding during the last 10 months of 2022. This is reflected in the external trade environment where Cefic says there was a ‘rapid loss of momentum’ over the period March to September 2022. Two key drivers are believed to be behind this negative trend of exports and import volumes: the recession in Europe and weak development in China.
In terms of the value of EU27 exports and imports, imports exceeded exports over the period March to August when the situation reversed; however, the data for the period January to October show a trade deficit of around €1.7bn in 2022.
So while there are no signs of an end to the Ukraine conflict, the world does appear to be coming to terms with a new reality. Energy costs are unlikely to return to pre-war and even pre-pandemic levels and the double impact on chemicals from energy and raw material costs will continue.
While European chemical producers appear to be relatively comfortable with the outlook the UK industry is looking to the Government for new approaches to improve competitiveness. And that includes following through with its plans for a greater emphasis on scientifically-based industries and research.
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