The global focus on chemicals has grown, which might be good news for one of the UK’s most successful sectors, were it not for the regulatory and logistical challenges it now faces.
It took a monumental world event such as the now year-long pandemic to erase the memory of the economic and sectoral significance of last summer’s acquisition by Aramco of its fellow Saudi business SABIC.
The latter, the country’s chemical manufacturing conglomerate, was taken over by the state’s petroleum and natural gas company.
Following that near-US$700 billion purchase, Aramco CEO and president Amin Nasser summed up in an address to the Chemists’ Club in New York in December 2020. The acquisition was described by him as ‘transformational’.
“If you combine our upstream strength and refining capacity of more than 5m bbl/day with SABIC’s chemicals asset base and global presence, it has made us one of the top global chemical players,” said Nasser.
By physically holding stock closer to the point of consumption, our UK-based customers that sell in to the markets of Europe can optimise their supply chain efficiency and make impressive cost savings
Charlie Walker, marketing director, Walker Logistics
Recognising the global shift in emphasis from fossil fuels and the growth in demand for chemical products, Aramco has long been moving to integrate its refining and petro-chemical operations, beginning as far back as 2005 with its joint venture with Sumitomo Chemical Company. Over the next decade, noted Nasser, around half the world’s new refining capacity will be Asian based. Of that, around three quarters will be focused on plastics.
Significantly SABIC, buoyed by recent developments, has itself moved up to occupy second place in Brand Finance’s annual Most Valuable Chemicals Brand, displacing the US leader, Dow.
First place meanwhile fell for the seventh successive year to the German giant BASF corporation. While its brand value along with many competitors, has been dented (if only temporarily) by the Covid effect on economic performance, it retained a brand value of UD$7.3 billion.
REACH-ing out
BASF is a significant player in the UK chemicals market. So, the recent comments by its UK regulatory affairs manager Neil Hollis to the House of Commons will have been heeded sharply by British manufacturers and suppliers.
Talking before the UK and European Union concluded negotiations for post-Brexit trade, Hollis offered a distinctly gloomy outlook, predicting the disappearance from this country of previously available chemicals.
“To put it bluntly, the chemicals that are available across the UK and EU will remain on the EU market but will disappear from the UK market. I’m afraid there’s no positive spin on this one.”
A particular source of concern is the implication of British withdrawal from the European chemicals database, REACH. While consensus in the industry and Government favours aligning any new domestic regime with that of the chemicals industry’s largest trading partner, the process represents a logistical, financial and bureaucratic nightmare in order to achieve what is largely a matter of duplication.
Hollis put it bluntly: “The additional registration costs that a UK REACH will bring is estimated to be £1 billion across the industry and will bring no tangible value to enhancing safety from chemicals. It will disadvantage UK industry with respect to global supply chain competitiveness.”
One should not underestimate the robustness of the UK chemicals sector, of course.
It has shown itself adept at harnessing automation and digitalisation to develop the agility required to meet the increasingly refined demands placed upon it.
AkzoNobel’s groundbreaking collaboration with Siemens created a state-of-the-art £100 million factory in Ashington [pictured], connecting the entire manufacturing process horizontally and vertically and allowing for end-to-end digitalisation.
This not only permits more sophisticated batch output and efficient production but also allows the company to better meet regulatory and sustainability requirements – a process that predated lockdown.
At the end of 2020, a year dominated throughout by the pandemic, lockdown and restraints on business, the industry performed well.
The Chemical Industries Association (CIA) business survey for December reported a second successive quarter of expansion.
Between a half to two thirds of firms surveyed reported sales growth, more than a quarter more said business had held up and experienced no change. And the majority of these cohorts reported either no fall or an actual increase in domestic sales, at a rate very closely mirrored with exports. And the highest growth or stable performances were recorded for EU exports.
On top of this, four out of 10 firms said they had increased production levels and new orders.
CIA chief executive Steve Elliott [pictured] said in a public statement that the results reflected both the criticality of the industry to the economy and broader society and the hard work of chemical businesses and their workforces: “Our survey also produced questions about the need to get this country’s future global trading relationships right. As one of the most highly regulated sectors, our industry’s regulatory framework needs to be in close step with that of our key export markets to enable continued and increasing access.
“We are relieved there is an agreement on a future trading relationship with the European Union and I hope that the current freight and logistics challenges faced by chemical companies soon start to ease as businesses and authorities become more familiar with the new trading arrangements.”
There remains however, he pointed out, the significant challenge of delivering an effective and proportionate REACH regime in the UK.
An irony not lost on the UK chemicals sector is their hugely significant contribution to the EU REACH database. After their German counterparts, British companies are the largest contributors from any of the Union’s member states.
REACH represents more than three decades worth of work to share the most accurate information on substance-specific data. UK withdrawal from the regime means that the country cannot access EU REACH data for its planned domestic regulatory regime.
While that presents politicians and bureaucrats with challenges, the impact for businesses is all the greater.
As the CIA puts it: “Such an outcome leaves UK chemical companies with not only the ongoing need to respond to the requirements of EU REACH if they are to retain their EU market interests, but also to reproduce duplicate data for UK REACH purposes.”
The potential cost of more than £1 billion will provide very little, if any, benefit and will divert significant amounts of expenditure that could be better spent in future capital and R&D investment, it insists.
Much of the focus is on the deterrent effect of the homegrown UK REACH regulations upon companies in European member states. But it is also forcing British companies to consider too the relative importance of their UK and EU markets.
We are relieved there is an agreement on a future trading relationship with the European Union and I hope that the current freight and logistics challenges faced by chemical companies soon start to ease
Steve Elliott, chief executive, CIA
To put things in macroeconomic terms, the UK chemicals industry is worth well in excess of £33 billion and its exports comprise close to 9% of all exports. Well over half that proportion is made up of exports to the EU.
Which means chemical exports to the European Union will account for a strategically vital 5% of the country’s export value.
Distil that to the level of an individual business and the proportional contribution is likely to be very much greater. They may then need to prioritise between the two markets and question whether producing relatively low volume substances required for the British market is viable from a business perspective. Better perhaps to meet EU REACH requirements in return for access to a 27 state market.
Inevitably that will mean transferring production facilities to European sites, setting up a base and creating separate supply chains – an option followed by the likes of Aston Chemicals which now distributes to the continent via its premises in Poland.
Berkshire-based supply chain and order fulfilment specialist Walker Logistics Ltd, meanwhile, has signed a partnership agreement with Dutch logistics services provider RIF Europe.
This allows Walker to hold stock and fulfil client orders for mainland Europe from RIF’s distribution hubs, close to Amsterdam’s Sciphol Airport. RIF Europe, which is part of the UK-based RIF Group, boasts in excess of 10,000 square metres of total warehousing space.
Braving the minefield
Marketing director at Walker Logistics Charlie Walker explains: “Our relationship with RIF Europe enables us to offer a valuable additional service to our clients. By physically holding stock closer to the point of consumption, our UK-based customers that sell in to the markets of Europe can optimise their supply chain efficiency and make impressive cost savings.”
Walker has integrated its order processing systems with RIF’s, which means that the relationships of the firm’s clients with their logistics provider is unaffected.
Meanwhile, it remains to be seen whether beneficiaries of the European Single Market will continue to maintain existing relations.
These include not only the 27 EU member states but also the outliers in the wider European Economic Area (Iceland, Norway, Liechtenstein and recent EU recruit Croatia).
Much may depend long-term upon some progress on data sharing rules for UK REACH, aimed at reducing duplication of cost. Given that European REACH applications invariably involve information from third parties, the issue does not simply come down to politicians taking a less confrontational approach but also the negotiation of a minefield of intellectual property rights.
The CIA’s Elliott was adamant in his statement about the consequences of failing to ensure the smoothest path for businesses.
“Should standards drop – or should there continue to be an approach that does not recognise or efficiently link to the legal standards we met while in the EU, then prohibitive costs will mean investment in the UK will fall, undoing much of our strong performance to date,” he stated
