The chemical industry in Italy: situation and outlook August 2017 For information: Centro Studi Federchimica Phone 02/34565.337 - Mail aei@federchimica.it A good start in 2017 for chemical industry in Italy, thanks to improved domestic demand and new momentum for exports During the first part of the year chemical production in Italy has shown robust growth (+2.5% during January-May 2017 compared to the same period of 2016) largely in line with European average (+2.8%). Prices also increased (+2.5%), after the drop suffered in 2016 (-1.5%). In particular, industrial domestic demand is continuing its recovery, which involves not only the automotive sector but also other important customers sectors, such as leather and furniture; purchases of chemical intermediates are benefitting from less cautious attitude, sign of better confidence among customers, also thanks to the overcoming of relevant sources of uncertainty (stabilization of Emerging Countries and reduction of anti-european forces); moreover, inventories have been gradually normalised, following destocking over the course of 2016 when the collapse of oil price generated expectations of reduction in chemical sales prices. After a sluggish 2016, Italian chemical exports are regaining impetus (+11.8% in value during the 2017: a good start for chemical industry in Italy Production (indices 2007=100 in volume) 110 105 100 95 90 85 80 75 70 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 1 European chemical industry Chemical industry in Italy Manufacturing industry in Italy Production % change January-May 2017 (in volume, on the same period of previous year) Chemical industry in Italy +2.5% EU chemical industry +2.8% Manufacturing in Italy +1.3% Improvement of domestic demand Less caution in customers purchases more confidence no more expectations of lowering prices Chemical exports are regaining momentum Strong and widespread growth by product and area Italian chemical exports in January-May 2017 (annual % change, in value) Total chemicals Intra-EU Extra-EU Basic chemicals and fibers Fine and specialty chemicals +9.0 +11.8 +11.0 +12.9 +14.4 Good performance in European comparison Source: Istat Chemical exports of main European producers (% change 1 quarter 2010-2017, in value) Spain ITALY Germany Belgium France UK 0 20 40 60 Source: Istat, Eurostat
first five months of 2017 after +1.8% in the previous year), seizing the opportunities arising from a general improvement of global demand. Exports are on the rise in the European market (+11.0%) and even more in extra-eu countries (+12.9%), showing strong increases in China (+31.8%) and Russia (+19.8%), while more moderate ones in the US (+6.3%). Growth concerns all sectors: after the 2016 contraction, basic chemicals exports have returned to growth (+14.4%), while fine and specialty chemicals exports which showed significant increases also in the previous years have accelerated (+9%). Since 2010, in terms of chemical exports, Italy is performing better than all other major European producers (except for Spain). Chemical industry is the third manufacturing sector in Italy in terms of exports, following machinery and transport equipment. Upward trend in raw material costs, with shortages and soaring prices in some value chains In 2017 basic petrochemicals prices are recovering from the low points of 2016 (ethylene +6%), in line with oil price. In recent months prices showed a downward trend again, but price collapses are not expected, because oil is likely to stay around 50$ a barrel during 2017-2018. Indeed, on one hand, prices above 50$ reactivate shale oil production, creating the basis for new price decreases; on the other hand, prices under this level are not sustainable for long period because they would result inevitably in bankruptcies of highly indebted US shale oil producers or in greater cuts in OPEC production. In specific chemical value chains, strong increase in raw materials prices % change of raw materials prices in 2017 (July 2017 compared to 2016 average) oil ethylene formic acid 0 10 20 30 40 50 60 European supply rationalized to restore profitability Ratio between olefins and oil prices in Europe 25 20 15 10 5 Some chemical value chains such as varnishes and adhesives are suffering from shortages of important raw materials with consequent strong price increases of around 30% and in some cases reaching peaks of 50% or more. MDI titanium dioxide TDI Source: ICIS, EIA, Camera di Commercio di Milano, Prometeia 0 Annual average 1997-2007 Annual average 2008-2014 Annual average 2015-2017 Closures of most polluting Chinese productions Force majeurs These tensions derive from a combination of factors: following the crisis period (2008-2014), European productions penalized by the high cost of energy have been considerably rationalized in order to restore profitability and, as a consequence, supply faces difficulties to keep abreast with demand during recoveries; stricter environmental requirements in China have led to production closures in a phase in which also Asian demand has re-gained momentum; this is complemented by specific cases of force majeure, such as the still limited storage capacity resulting from the severe fire which occurred in Germany at the end of 2016. 2
In 2018 chemical industry in Italy will expand, but at a more moderate pace A robust increase in chemical production in Italy is expected in 2017 (+2,5%) as in the second part of the year the improvement in Italian and Forecasts for chemical industry in Italy global demand will continue, but inventories normalization has 2016 % change in volume already been completed. billions of 2017 2018 Production activity will be supported by strong increase in exports (+5.0% in real terms, whereas imports will grow by +2.7%) and by consolidated domestic demand (+1.5%). Chemical production in Italy is likely to continue its recovery also in 2018, but at a more moderate rate (+1.4%), on account of a less favourable macroeconomic scenario. Domestic demand 58.6 Imports Exports Production Source: Federchimica Chemical exports will be dynamic (+3.5% in real terms) thanks to a still positive global and, especially, European chemical demand (even though Chinese growth will be less lively and automotive sector will be heading for a physiological slowdown) and thanks to the ability of Italian chemical companies to operate successfully on foreign markets, despite possible upward pressures on the /$ exchange rate in the second part of the year, related to the incoming, albeit gradual, normalization of the European monetary policy. Chemical domestic demand is expected to increase at a moderate pace (+1.1%), but it will not strengthen as Government will necessarily be engaged in a gradual debt reduction path, in order to avoid risks of financial instability and some important costumer sectors will remain weak (in particular, construction). 34.6 27.5 51.6 1.5 2.7 5.0 2.5 Domestic demand and exports of chemicals (indices in volume, 2007=100) 120 110 100 90 80 70 2007 2009 2011 2013 2015 2017 exports domestic demand 1.1 2.5 3.5 1.4 Advanced positioning of chemical industry in the face of Globalization and Industry 4.0 challenges Apart from short-term factors, economic growth is driven by two macro factors: openness of markets and technological development. In the years to come openness of markets will largely depend on the new forms that Globalization will assume; and technological development will be driven by implementation of Industry 4.0. It s worth to analyse the profound and pragmatic meaning of Globalization and Industry 4.0 and possible implications for chemical industry and its business customers. 3
Globalization and implications for the chemical industry Globalization consists not only in the internationalization of markets, but also in a drastic shortening of time needed to transfer information, knowledge, technologies and capital. Globalization brings outstanding benefits (and opportunities for companies) because it increases economies of scale and specialization advantages; it stimulates productivity growth through technological transfer in Emerging Countries and international competition; it enhances income and consumption in Emerging Countries, turning them into large export markets; it makes available good-quality intermediate and consumer goods at low prices. Globalization also entails risks, because it creates winners and loosers. A very quick technological transfer leads productivity to be rapidly levelled among Countries and this generates structural crisis, delocalization, unemployment and pauperisation of middle class in Advanced Countries. Traditional manufacturing sectors in Italy (major costumers of the chemical industry) have been particularly hard hit, because they had to face directly increased competition from Emerging Countries, enjoying lower labour costs as well as social and environmental standards. These effects together with the crisis have shown limits to the self-regulating ability of the economy and have fuelled populism and protectionism (in form of regulatory barriers more than duties). Paraphrasing words written more than 25 years ago by Michael Porter In the global market, not only companies but also Nations are exposed to competition : exactly because the majority of competitiveness factors inside companies can be easily developed everywhere, external and country-specific competitiveness conditions become decisive in business location choices. Chemical industry is a clear example as its competitiveness is heavily affected by external disadvantages in Europe and in Italy, such as the high cost of energy and the regulatory framework (long waiting times and uncertainties for authorizations are particularly critical in Italy). Industry 4.0 and implications for the chemical industry Industry 4.0 identifies a potential new revolution based on a set of technologies now available at affordable prices and with high reliability related to the Internet of things (IoT), i.e the ability of Internet to connect not only people, but also things and machines. National Governments and economic operators show mounting interest in Industry 4.0, because it can help enhancing global growth and avoiding the secular stagnation, i.e. a persistent slowdown due to a combination of structural factors (population ageing and absence of new technologies that boost productivity); regaining competitiveness against low-cost competitors. As for previous technological revolutions, the impact on employment is somewhat ambiguous because on one hand, technology could replace humans in certain activities; on the other hand, it will create new employment opportunities by enhancing growth and generating new markets and new tasks. If Industry 4.0 will be successfully implemented, both at company and at national level, positive effects on employment will probably exceed negative ones. The application of technologies of Industry 4.0 will represent a real revolution and will generate all its benefits in terms of productivity, only if it will be accompanied by equally significant organizational changes. Indeed, the effective management of manifold possibilities of interaction and of plentiful information requires 4
qualified workforce, training, organizational flexibility, interdisciplinary teams and participatory organizational models, closer relations along value chains. It s necessary to underline some specific features of the relation between Industry 4.0 and chemical industry. Very briefly, technologies of Industry 4.0 aim at turning discontinuous production processes into continuous ones, through a dialog between digital and physical elements. Chemical industry due to its nature is a process industry and, as a consequence, has anticipated many of the innovations related to Industry 4.0. This doesn t mean that there won t be relevant effects, but that chemical industry is likely to face an accelerated development trend more than a real revolution. In particular, as a producer of intermediate goods, chemical industry will be heavily affected by changes that will take place in all customer sectors; it will have a crucial role in specific areas such as new materials for 3D manufacturing; new technologies will affect not only the production process but also other operations in which chemical companies are more similar to typical manufacturing companies (logistics, distribution, maintenance, marketing and sales); the impact will be greater for more manufacturing chemical sub-sectors, such as specialty chemicals and consumer chemicals; new technologies will provide flexibility to basic chemical plants without loosing productivity and, vice versa, in fine chemical industry it will provide increasing productivity without loosing flexibility (with the transition from batch to continuous production processes). Industry 4.0 applied to the chemical industry will improve safety and lower environmental footprint make possible to customize products at low prices (specialties with the same productivity as commodities) increase the value incorporated into products and services, enhance competitiveness and create opportunities for national productions. Positioning of chemical Industry in Italy Chemical industry in Italy enjoys an advanced positioning towards challenges of Globalization and Industry 4.0. Partnership between the chemical industry and Industrial Districts, which is already an Italian strength, is becoming even more relevant especially in terms of product innovation (behind the success of Italian products there is often an innovative chemical substance or formulation). Italian chemical industry is consolidating its specialization in those products which were originally developed for Made in Italy (auxiliaries, additives, varnishes, adhesives, etc.) or which represent the idea of beautiful and well made typical of Italy (detergents and cosmetics). Indeed, trade surplus in fine and specialty chemicals in 2016 reached a record value of 3,2 billions of euros and it is likely to further increase in 2017. Research activity necessary to avoid productivity levelling involves not only large groups, but more and more many small and medium enterprises: in fact, at European level, Italy is only behind Germany in terms of number of chemical companies with in-house R&D activity (about 680). A major presence of foreign-owned companies with a share on employment (31%) which is three times Italian manufacturing average and close to European average should not be seen as a worrying underselling of Italian assets, but as the capacity of doing well chemical business in Italy. Their share in terms of exports and R&D is even more significant. 5
Almost all medium-large Italian chemical groups have production facilities abroad in order to catch opportunities for growth and specialization, in some cases outsourcing commodities production while focusing on specialties and innovative products in Italy. This is not mere relocation: indeed, about 60% of such companies increased global sales, but also succeeded in defending employment in Italy despite the collapse of domestic demand. Chemical industry in Italy can count on high qualified workforce: 19% of employees are graduates (almost twice as high Advanced positioning in the face of Globalization and Industry 4.0 Synthetic index of competitiveness (index total manufacturing =100, year 2014) Pharmaceuticals Beverages CHEMICALS Machinery Other means of transport Electrical appliances Plastic and rubber Metallurgy Leather Paper TOTAL MANUFACTURING Electronics Other manufacturing industry Automotive Food Textile Furniture Metal products Wearing apparel Non metallic minerals Printing Wood Repair of machinery 166.7 127.4 123.9 119.7 116.0 111.4 108.6 105.8 104.0 103.7 100.0 101.0 100.9 100.4 94.7 91.2 88.2 87.4 87.1 80.6 62.1 55.2 54.2 Main competitiveness strengths Value chain partnership Specialization Productivity as manufacturing average) and 42% of blue-collars are specialized workers. The sector, moreover, invests strongly in training, which involves every year 43% of employees compared with a manufacturing average of 26%. Organizational models are also advanced and they are based on participation and involvement of workers in order to prevent and overcome possible conflicts deriving from organizational changes. High qualified workforce, significant tangible and intangible investments, advanced organizational models make the chemical industry one of the sectors with the highest productivity: added value per employee is about 60% higher than manufacturing average. R&D Internationalization Qualified personnel Training Participatory organizational model Source: Istat Such an advanced positioning is confirmed also by the synthetic indicator of structural competitiveness calculated by Istat (Italian national statistical office): chemical industry ranks third among all Italian manufacturing sectors. 6