East casts shadow over West

New president; familiar themes. BP Chemical's Bryan Sanderson was keen to promote the perennial concepts of competitiveness and reputation at Cefic's annual meeting in Berlin. Addressing an increasingly fragmented industry in a once-divided city, Sanderson called for a united front.

'There can be very few aspects, if any, of today's lifestyle that are immune from the influence of the chemical industry,' Sanderson pointed out. 'And yet for all that apparent integration, we somehow remain outside. Too often, we seem to stand apart, poorly perceived, frequently misrepresented.'

This isn't just a matter of the now-familiar public distaste for, and distrust of, the industry, Sanderson pointed out. The chemical industry is one of the most heavily regulated in the world, and Europe's companies cannot compete if they are hampered by more excessive regulations than those in, for example, the US and Japan.

Sympathy vote

'However strong the asset base and however good the management and operation of those assets, without a level playing field compared with our major competitors, we can only hope to be partially successful in sustaining our relative performance,' Sanderson warned. The industry has to put across its case to national and European governments for 'sympathetic' regulations which 'takes account of commercial realities and which listens to the legitimate concerns articulated by the chemical industry,' he said. But the industry has to earn the right to be taken seriously by legislators, he added and it can only do that by behaving responsibly and 'creating a positive and constructive track record.'

Western Europe is still the largest player in the global chemicals industry, with about 28 per cent of the total $1500 billion turnover. But its future success depends not only the high quality of research and assets, but also in the perception of Europe as a good place to invest, said Sanderson. 'Frankly, there have been times in the past when I have questioned whether there is sufficient determination in Europe to achieve these objectives.'

But the signs are hopeful, Sanderson noted. The chemical industry is changing faster than ever, he said, with increasing polarisation into four segments: basic petrochemicals; specialities; life sciences; and inorganics. Companies are focusing more and more sharply on what they see as their core competencies, sometimes with surprising results, such as ICI's metamorphosis into a specialities company and Hoechst's insistence that its future lies in life sciences.

Moreover, there is consolidation within each sector, reducing the overall number of players (see chart, left). In the ethylene and polyethylene markets which are now bigger than the refining markets, Sanderson pointed out producer numbers fell by 40 per cent between 1980 and 1990, and the trend is continuing. All these changes are likely to enhance the competitiveness of European firms, and of Europe as a region.

It can't come a moment too soon, however. Europe's companies already lag dangerously behind America's, which benefit from lower feedstock, operating, capital and labour costs; larger and, generally, newer plants; and better infrastructure, particularly pipelines. 'Financial returns in Europe have historically been around 6 percentage points below those in the US,' Sanderson commented.

And the situation with regard to operators in Southeast Asia could soon be even worse. According to Cefic's latest economic bulletin, the trade surplus with Asia plummeted at the end of last year. With much of the region still in turmoil, it's difficult to forecast the exact impact of the crisis on Europe, notes Cefic's economics panel; however, a halving of the 1997 surplus will reduce volume growth from European operators by one percentage point (see chart, right).

The problems may come from the Asian companies' and governments' response to the crisis. 'The historical reaction in phases of downturn is protectionism,' Sanderson warned, and the situation certainly seems to support this trend. Reform of the regions' economies is likely to include massive cutbacks in healthcare spending, which will affect Western drugs firms. Demand for polymers and basic chemicals will fall, reducing opportunities for imports. Moreover, the currencies in the region will be devalued, which will make it easier for them to export. Life could soon be extremely uncomfortable for European chemical companies, Sanderson concluded.

The situation in Europe is itself hardly favourable. The industry is at the end of the 'inventory cycle'; the chemical firms' customers have high stockpiles and order books are low. Chemicals volumes are expected to grow by a little under 3 per cent this year; two points down on last year. The brunt of the slowdown is likely to be borne by the fibres, synthetic rubber and perfumes and cosmetics sectors, Cefic predicts.