European Industry Faces up to Future

Managers in the european chemical industry need no reminder that 2003 was a difficult year. But they will take heart from the annual economic conference of the European Chemical Industry Council (CEFIC) in Brussels earlier this month, which predicted a modest recovery this year and next.

However, they will gain no particular pleasure from the results of a study commissioned by CEFIC to give a long-term perspective for the chemical industry in Europe. The study, "Chemical Industry 2015," indicates that, without urgent action from industry and governmental authorities alike, the industry faces a bleak and uncompetitive future.

To help shape the action, CEFIC debuted a proposal to form a Chemical Advisory Group for Europe. The group, said François Cornélis, chairman of CEFIC's Council on International Trade & Competitiveness and chairman of Atofina, would include all major stakeholders: European and national authorities; trade unions; and representatives of the chemical industry and its customer industries, including automotive, electrical, electronics, and pharmaceuticals.

There was at least one indication that the proposal seems likely to be welcomed by the other potential partners. It certainly would be embraced by the European Commission (EC), said Philippe Busquin, commissioner for research and one of the conference speakers. "I agree completely with this proposal," he said. "We are ready to work with this."

The group's main objectives, Cornélis said, would be "to set a clear and agreed vision for the European chemical industry--Horizon 2015--and to develop a common, measurable action plan." He pointed out that other industries, such as aerospace, textiles, shipbuilding, and pharmaceuticals, have already begun working with the EC to analyze their business environment and the policy measures that will improve their competitiveness.

The CEFIC study, Cornélis noted, was spurred in part by the statistic that, since 2002, Europe is no longer the largest chemical-producing region in the world: Asia's share of production has grown to 33%, edging out Europe's 32% share. The U.S. has a 26% share of global chemical production. Moreover, during the past decade, chemical industry employment has decreased by 16% in Western Europe, to 1.7 million people, and by 40% in Central and Eastern Europe, to 1 million.

Supported by global macroeconomic models, the CEFIC study outlines four business scenarios that may face the industry: sunny, cloudy, rain, and storm. The world market share of the European Union, as a subset of Europe, is expected to decline from 28% at present to 23% by 2015 in the best scenario, supported by annual growth of 2.3%, and to 16% in the worst, marked by an annual drop of 0.6%.

The different scenarios feature macroeconomic and political environments that enhance or discourage the industry's competitiveness and profitability. In his discussion, Cornélis singled out energy and logistics. For example, "the cost of logistics is on average 30 to 50% higher in Europe than in the U.S." And despite a European Union program for liberalization of energy markets, the contract electricity price--critical to an energy-intensive industry like chemicals--has doubled in the past four years, with additional costs from local taxes, limited transport capacities, and "green" electricity subsidies.

The purpose of the study, said Klaus Heinzelbecker, a BASF market strategist who helped conduct it, was not to make a forecast of which of the scenarios is most likely. "It is to help think things through: What are the driving forces important in shaping the industry? You cannot predict what will happen 10 years into the future. The whole exercise is to understand what could happen and be prepared to work to get to what you would like to happen."

The enlargement of the EU, with 10 new countries joining in May, was taken into account in considering markets and growth, Heinzelbecker said. However, he noted, although "we see good growth rates, with positive development, the share of the market of the new countries is pretty limited. There is not a very big potential for the chemical industry there as a whole. We have to be realistic in the relationship with the rest of the world," namely Asia.

Cornélis added that the production added by the new countries won't be statistically significant in the short term. "But in human terms, it is very important," he said. "Enlargement will be a real enrichment to our industry."

The EU's draft proposal for chemical regulation--its REACH program covering registration, evaluation, and authorization of chemicals--is one of the factors in the political environment that would shape any possible scenario, CEFIC Director General Alain Perroy said.

"The focus is not on one or another piece of legislation, but REACH will be among the key drivers leading to the different scenarios--part of the business and legislative environment. It is absolutely fundamental to that," he said.-- PATRICIA SHORT