Adapting to changing circumstances will be a key requirement for the chemicals sector, post-Brexit. The question is whether government can prove similarly agile, reports Brian Attwood.
Back in 1749, the launch of John Roebuck and Samuel Garbett’s factory manufacturing sulphuric acid in Prestonpans, Scotland marked the birth of the UK chemicals sector.
Fast forward almost 270 years and, together with pharmaceuticals, chemicals account for an estimated 15% of the UK’s total manufacturing output and 18% of exports.
It is a position that has been hard won and harder to maintain in recent decades as the UK and wider European market has faced increasingly stiff competition globally.
As the European Chemical Industry Council (Cefic) notes, significant efficiencies have seen EU global chemical sales grow in real terms. Yet, more pertinent, Europe’s worldwide market share more than halved in the 20 years to 2015.
About half of our membership trades heavily with the EU. The other half are saying: ‘we buy rest of the world, we sell rest of the world’
Peter Newport, CEO of the Chemical Business Association (CBA)
Now preparations for Brexit have added a new challenge for the UK industry, with the prospect of reduced access to the vast European internal market and the onset of a host of trading implications.
It is no secret that a large part of the industry, both manufacturers and distributors, favoured remaining.
In the run-up to the referendum Stan Higgins, chief executive officer of the North East of England Process Industry Cluster (NEPIC), had warned the industry faced “a ‘Brexit’ threat to its European exports”.
This was echoed by his counterpart in the Chemical Industries Association (CIA), Steven Elliott, who stated that exports worth £50 million-plus annually could be vulnerable to the implications of redrawing long-running trade agreements.
Further concern was expressed in an independent report referenced by the Institution of Chemical Engineers (IChemE), that the loss of free trade agreements could produce an export decline of 14% for the industry, making it the hardest hit UK sector.
Different angle
Not everyone, though, views EU withdrawal as a negative. Peter Newport, CEO of the Chemical Business Association (CBA), whose members include distributers and traders but also manufacturers and blenders, explains why opinions vary on the matter.
“It all depends on the markets we have. About half of our membership trades heavily with the EU, selling substances into Europe and mixtures. They would like to see very close, if not seamless, alignment with current and ongoing EU regulation because, without it, they may not be able to sell.
“The other half are saying… ‘we buy rest of the world, we sell rest of the world. Some of the [EU] regulations are burdensome, bureaucratic, costly. We see this as a significant opportunity to follow a different path’. ”
For those UK businesses that do not export, the downside of withdrawal may seem less apparent. These businesses, Higgins has emphasised: “need to be reminded that they sell locally into supply chains that are funded by exporting.”
Life support
NEPIC, whose cluster organisation represents the largest industrial sector in the region and accounts for 50% of the UK chemical industry, has been a consistent advocate for such an approach to be reflected in government industrial policy – one that integrates the needs of all industry sectors and operates along supply chains.
The lack of such a strategy in recent years is, of course, cited by NEPIC for the loss of the UK’s only ethylene oxide plant back in 2009.
Closure of the Dow Chemical Company’s Wilton site had an impact that went beyond the loss of 70 jobs, leaving a host of downstream buyers forced to import the surfactants needed for a range of products, factories shut or moving, and the effects felt along the supply chain.
Judging by the overtures to business and regional development in the first two months of this year, the May administration appears to be listening.
[Businesses] need to be reminded that they sell locally into supply chains that are funded by exporting
Stan Higgins, CEO, NEPIC
Highlights of the recently proposed industrial strategy include: support for nuclear, low carbon-emission, the life sciences and IIoT; an overhaul of technical education and skills development; challenge funding for robotics; smart energy and improved mobile network tech; and infrastructure development with emphasis on regional development.
The question is to what degree this will practically address the immediate and Brexit-related challenges to the chemicals sector and how soon.
Newport encapsulates the issue as a matter of agility – how nimbly can manufacturers, distributors and government adapt to changing circumstances?
“Distributors are relatively flexible. Even [for] those that have the warehouses, the tank farms, the level of investment is a lot less than it would be for chemical manufacturers.
“Manufacturers have got a fixed investment with a reasonably fixed capacity and you’re always looking to run your plant at maximum capacity to minimise the costs of operating, to maximise the profit.”
Shadow of competition
When it comes to manufacturing costs, energy and feedstocks remain central. Europe, including the UK, has a substantial disadvantage competing with both North America and the rapidly developing Middle East.
In the case of the latter, that it is down to oil supply, while the United States’ exploitation of shale gas has been a game changer. The result is that the cost of producing ethylene in Europe was by 2013 triple that for the other two regions.
“If we develop shale properly in the UK (which is a big issue for chemical manufacturers) we have the potential for a low cost feedstock and energy source and may be able to have a resurgence,” says Newport.
The problem, he continues, is that investment is likely to be heavily pegged to higher oil prices. While these have rallied recently, increases have come from a low base.
Roger Kilburn, CEO of the Industrial Biotechnology Innovation Centre (IBioIC) – pictured – is sceptical the gap can be bridged, even if lessened.
“Unfortunately, it is unlikely that UK gas prices (and hence energy prices) will ever get close to matching those in the US, even if unconventional gas resources are developed due to the huge gas supply/demand imbalance of our near European neighbours and the high connectivity of the network.
“One of our associate members, Ineos, realising this problem, has decided to import cheap US shale gas in the form of ethane into their Grangemouth facility in Scotland to give them US cost economics in the UK.”
Ineos’ recent 15-year ‘take or pay’ contract with their suppliers had the net effect of securing the future of Grangemouth for the period – an advantage that very few other European petrochemicals sites boast, says Kilburn.
Ethane piped from Grangemouth will supply the company’s plant in Hull, while Saudi chemicals firm SABIC has also announced plans for shale gas supply to Teesside.
“The chemicals sector either locates its manufacturing close to its feedstock or close to its end markets. As the consumers of chemicals (mainly polymers) moved to Asia, so the chemical industry has similarly migrated,” says Kilburn.
Specifics vs brushstrokes
For Kilburn, industrial biotechnology provides a potential feedstock; being low value and bulky, it is relatively expensive to transport, increasing the value of proximity to manufacturing.
“By way of analogy, look at the aggregates industry. If there is a major road project and there is not a quarry nearby, often a new quarry will be established as the cost of moving aggregates makes up a significant part of their total cost.”
NEPIC, while supportive of the need to shift emphasis from fossil fuels, has stressed the need to commit to the optimisation of UK shale and coal assets, along with the remaining North Sea oil and gas reserves.
The chemicals sector either locates its manufacturing close to its feedstock or close to its end markets. As the consumers of chemicals (mainly polymers) moved to Asia, so the chemical industry has similarly migrated
Roger Kilburn, CEO of the Industrial Biotechnology Innovation Centre
Sustainability and the European regulatory regime provide further headaches for an industry seeking to maintain access to the EU market while simultaneously growing its extra- European activities.
“One of the pillars of sustainability is the ability of companies to operate, and if they can’t afford to operate and if their costs bases are so high, they can’t support sustainability,” warns Newport.
However, there may be limited scope for manoeuvre when selling to Europe from beyond its internal market.
Britain, says Kilburn, “will need to trade with Europe whatever the outcome of Brexit, so will need to adhere to these standards. Also the UK has a strong history in developing and adhering to sensible, robust standards which is a key selling point for inward investment.”
Costly barriers
Yet the European Commission’s Cumulative Cost Assessment study for the EU chemical industry last summer estimated regulations imposed an annual cost of around €10 billion for six key chemical subsectors and 12% of the value added.
The problem is not restricted to Europe. Last month’s Economist cites research that suggests differing regulations mean that current EU exports to the USA face non-tariff barriers that would be equivalent to a tariff of 20%. Its evidence was based on the chemicals sector.
Tariff-free access to Europe – a key demand from sector leaders including the Chemicals Industries Association – raises a further issue given that sectoral deals are normally illegal under World Trade Organisation law.
With these variables beyond the capacity of HM Government to control, if not influence, Westminster’s role in securing the domestic energy base on which the UK chemicals industry depends will be paramount, argues NEPIC.
There is an obvious alignment between the broad brushstrokes of the May industrial strategy and the specific remedies – manufacturing clusters, supply chain integration, materials symbiosis, direct support for industry – proposed by NEPIC.
Yet, as the loss of Dow Chemical’s Wilton site illustrates, government approaches to supply chain economics frequently lack the very agility that challenging times demand.
