The United Kingdom (UK) is Europes fourth largest chemical economy, after Germany, France and Italy. It accounts for 8% of the European Unions (EUs) $900 billion overall chemical production and 12% of extra-EU chemical export sales.1 In world terms, the UK is ranked tenth (with China, the US and Japan holding the top three places), and is the source of about 2% of global chemical production.
Domestically, the chemical sector is one of the most important segments of the UK manufacturing industry, accounting in 2010 for 14% of the nations manufacturing gross value added and 1.3% of the total UK gross domestic product (GDP).
In 2010, the country had chemical sales of $73 billion (excluding merchanted goods), with significant contributions from practically all industry sectors. The recent global recession has left its mark, however. Over the decade to 2010, the only sector to have recorded a positive growth rate was pharmaceuticals, and even this sector has seen a reversal in the last two years (to the end of 2011) with sharp falls in local production. Detergents and cosmetics have held their own, and have bucked the general trend with strong growth in 2011. Commodity chemicalspetrochemicals, plastics and basic inorganicsdid well until 2008, and these chemical sectors have severely suffered since then. Dyes and fibers have long felt the contraction of European textiles markets, while fertilizer output has also declined as domestic markets have shrunk. Pharmaceuticals accounted for 45% of the UK industrys gross value added in 2010.
The UKs primary chemical trading partners are in Western Europe, with the rest of the EU-27 accounting for 55% of exports in 2010. Total export sales in 2010 to the EU were $43 billion, balanced almost exactly by imports from those countries. By comparison, exports to North America were $13.5 billion, and imports from there were $7 billion. Overall, the UK enjoys a healthy trade surplus from chemical activities, with global exports of about $78 billion and imports of $66 billion generating a positive trade balance of $12 billion in 2010, as shown in Table 1.
Production volumes showed steady growth in the 1990s, rising by an average 3.2%/yr from 1990 to 2000, but slowed to 2%/yr from 2000 to 2008. Output has fallen sharply over the past three years. Growth was entirely the result of surging exports, which increased at over 6%/yr in real terms in the 1990s, and averaged over 5%/yr from 2000 to 2010. Imports, however, grew even faster during the 1990s, at around 7%/yr, and at a similar rate to exports of just over 5% in the latter 10 years. It is difficult to reconcile the strong export volumes with the weak production volume statistics since 2008. Moreover, at a detailed sector level, official data note that exports, in some cases are exceeding the value of local production, even in cases where it is improbable that it would make sense for imports to be re-exported.
The UKs undoubted success in international markets is due in part to the countrys ability to contain production costs. Over 5, 10 or 15 years to 2007, UK chemical output prices fell in real terms, as they also did in Continental Europe; whereas, in the US, this was not the case. The sharp oil price increase saw a marked increase in real prices in 2008, and depreciation of the sterling caused further real-term increases in 2009, but normal service was resumed in 2010. Expressing prices in current dollars, fluctuating exchange rates saw the UK at its most competitive within Europe in the mid-1990s, and at its least competitive around 2000. Against the US, however, it enjoyed its greatest advantage around 2000, and once again in 2010 as depreciation played its part.
The successful containment of production costs can be attributed to substantial and consistent improvements in productivity. Over the 10 years to 2007, chemical industry output grew by 28%, while output per employee grew by 71%, an average improvement of 5.5%/yr. Production increases were achieved with fewer employees, thus reflecting improvements in technology and automation. Since the output peak in 2007/2008, despite falling output, labor productivity has still edged ahead. In 2010, the UK industry employed approximately 150,000 workers at manufacturing sitesa third fewer than a decade earlier.
Current trends and forecasts
Any current discussion of the present state of the industry and its short-term outlook is inevitably clouded by major uncertainties over the course of the global economy, not least in the neighboring eurozone, as well as energy prices both in the world as a whole (oil) and in the UK specifically (gas and electricity, including the effect of various extra costs imposed as a consequence of an aggressive unilateral climate-change policy). The fall in North Sea hydrocarbon output has tipped the UK from a net gas exporter to a net gas importer. Both spot and forward prices have, in recent years, regularly reflected nervousness over security of supply, although recent expansion of LNG import capacity has eased the position.
Output of chemicals, excluding pharmaceuticals, has had a difficult time since 2007, with current UK output levels still almost 20% below the peak levels achieved in early 2008. The current year began with many clouds hanging over the European continent, the UKs main market. Apart from problems of sovereign debt, there are worries over consumer debt, high unemployment and consequent weak final demand. Coupled with banks inability or reluctance to lend, and stabilizing commodity and oil prices (which removes any incentive to buy in advance of immediate need) there has been pressure along supply chains to free cash by reducing inventories. This, in turn, has resulted in falling production across Europe at the end of 2011.
In 2012, very low year-on-year growth is the best that can be expected, both in the UK and in the EU at large. As mentioned earlier, UK pharmaceuticals production, for many years a growth driver, has also wilted within the last two years. Some major pharmaceutical companies are facing loss of patent protection on major drugs and now are forced to look for manufacturing economies and to possibly outsource part of their production. New UK Patent Box legislation promises, however, to give tax advantages to companies exploiting their intellectual property within the UK, and it is hoped that this will help to counteract the lure of both low Irish tax rates and cheap Asian production locations.
The UK continues its quest to improve performance in manufacturing efficiency and innovation for new products. Expansions in bulk and commodity chemical production are mainly occurring in locations where feedstocks and energy are cheap, such as in the Middle East, or close to centers of demand growth, principally Asia. Major UK sites are seeing investment such as waste-to-energy plants, like Ineos chlorvinyls £400 million project at Runcorn. The £200 million world-scale low-density polyethylene unit at Wilton, Teesside, begun by Huntsman and now owned by Sabic, is in full operation. Wilton has seen closure of an ethylene oxide (EO) unit and of nylon fiber production, but it will gain a new 200,000-tpy PET plantas well as more waste-to-energy developments.
The UK government is actively assisting industry to develop new technologies. The Chemistry Innovation Knowledge Transfer Network, for which the government provided initial support, is now well established.
In 2009, UK R&D investment for the chemicals industry totaled over £5 billion, of which pharmaceuticals accounted for over £4.4 billion. For chemicals excluding pharmaceuticals, the figure was equivalent to around 1.8% of saleswhich nevertheless compares well with the most recent figures quoted by CEFIC (European Chemical Industry Council), which puts the EU average at about 1.5% in 2008although the US ticked up to 2.1%, and Japan is at 4.1%. HP
1 EU-25 plus Switzerland and Norway, 2010. Estimated sales of own production, i.e., excluding goods resold without further processing.