VERBAND DER CHEMISCHEN INDUSTRIE e.v. Statement to the press by Mr Marijn Dekkers, President of Verband der Chemischen Industrie (VCI), 22 July 2016 (Check against delivery) Ladies and Gentlemen: I would like to welcome you on behalf of the VCI. First of all, I will speak about the current business developments in our industry. Next, I would like to give you an appraisal of the competitiveness of the chemical industry location Germany. Business situation and outlook After a good start in 2016, the chemical-pharmaceutical industry suffered a setback in the 2nd quarter. All in all, chemical business remained without dynamics. Production stagnated. There was practically no change in capacity utilisation (83.5 percent). At the same time, producer prices continued to fall (-2 percent). This brought a clear drop in sales to 90.4 billion euros or a decline by 3.5 percent which equally impacted domestic and foreign business. Employment fell slightly by 0.5 percent to 444,000 staff. Unfortunately, this is not good news. The outlook is not really promising, either. We are facing several factors that pose challenges for our member companies: The persistent growth weakness in emerging markets. Very low dynamics in global trade overall. The worldwide investment boom is nearing its end. Mainzer Landstraße 55 60329 Frankfurt E-Mail: presse@vci.de Internet: www.vci.de/presse Telefon +49 69 2556-1496 Telefax +49 69 2556-1613
High volatility of stock prices, raw material prices and exchange rates. These are not good framework conditions for solid growth. Moreover, there are geopolitical uncertainties. Also, the forthcoming withdrawal of Great Britain from the EU is likely to have negative effects. But here, it is too early for an appraisal at the current stage. At the same time, the effect of special factors is wearing off: Last year, the devalution of the euro gave a boost to the German economy. But this one-off effect is not going to last much longer. The same applies for the oil price. Since its strong decline in 2014 it rather moved sideways and has been back on the rise since early 2016. For this year as a whole, we are forecasting a price range between 40 and 60 dollars per barrel. Against this backdrop, the business expectations of chemical companies are barely optimistic for the 2nd half of the present year. For the overall year 2016, the VCI is now expecting a minor production increase by 0.5 percent. With further falling prices, we are anticipating domestic and foreign sales to drop by 1.5 percent to around 186 billion euros. At the same time, production costs are rising: Raw materials and energy are becoming more costly, remunerations are climbing too. The current collective bargaining agreement provides for an increase by 5.3 percent in two phases over the next 24 months. In consequence, profits are under growing pressure; margins are becoming smaller. Is this a reason to raise the alarm? Perhaps not in the short run. The chemicalpharmaceutical industry in Germany still holds a good position in an international comparison. At least, when taking a superficial glance at the facts: In 2014, Germany advanced to rank 3 in the ranking by sales of chemical industry locations. Behind China and the USA, but ahead of Japan. Since then, we have been able to further consolidate this position. Germany has been the world champion of exports for more than a decade. The foreign trade surplus for chemicals has been growing continuously. With a share in sales of ca. 25 percent we are by far the major chemical industry location in Europe. 2
And the share of chemical value creation in the overall economy is twice as high in Germany as in Great Britain, France or the United States. This sounds good. We are still acting from a position of strength. But the emphasis is on still. Because in the long run, there are more and more doubts whether Germany can defend its position as a chemical industry location. We must make sure not to lose our competitiveness. Several developments highlight that this danger is real. COMPETITIVENESS AT RISK: Global changes in chemical business Global chemical business is currently undergoing considerable changes. Low energy and raw material costs have brought enormous location advantages for some countries. Production capacities for organic basic chemicals and polymers have been expanded massively in the USA and in the Middle East. This is about incredible investments, and this development is not yet completed. You will know the example of Saudi Arabia where a huge, highly modern complex of chemical plants is currently being built for 20 billion dollars. This is a challenge for production locations in Europe. Moreover, the past years have seen a major investment boom in emerging markets, mainly in China. At present, the People s Republic is still a net importer of chemical inputs. But new production plants have clearly improved China s trade balance in chemistry (2011: -46 billion euros; 2015: -29 billion euros). Regarding capacities, we see a clear increase globally while growth of the global economy has slowed down, and the demand for chemicals has dropped accordingly. This has given rise to overcapacities in parts of the chemical business and to shifts in trade streams. As a result, especially producers in Japan and Europe have come under pressure. How are these changes felt in Germany? A growing export surplus is usually a sign of good competitiveness. But appearances are deceptive. Our exports did not keep up with the dynamic foreign demand. German producers have lost market shares. The same applies at home in Germany where the demand has barely risen while imports particularly in the 3
basic materials sectors have increased vigorously. Excluding the pharma business, the foreign trade surplus is on the decline. A recent VCI study carried out jointly with Prognos shows that the global chemical business will continue to develop dynamically. But we should take care that German companies are not left behind. A look at the various sectors of our industry shows that this is an acute problem already today: Excluding the pharma business, the foreign trade surplus of chemistry is already falling. For the first time since long, there has even been a foreign trade deficit in petrochemistry. In the polymer business, too, there is the threat of a worsening trade balance. Tearing value chains These are signs of alarm that cause concern beyond the individual sectors. Because the great strength of the chemical industry in Germany is still! that this industry covers whole value chains. Where links of this chain break away, other segments are impacted too. Let us take the example of the polymer business: This is where partly global overcapacities were observed in the past years. That was due to weaker economic growth in China, the shale gas boom in the USA, and the breathtaking building of new production plants in the Gulf region. Therefore, some European producers had to cut their productions or even shut down entire plants also in Germany. In the past five years the production of polymers in Germany dropped by 500,000 tonnes per year. What does this mean for other segments in the value chain? A lower polymer production comes with a falling demand for inputs from petrochemistry a segment which is already under strong competitive pressure. This means that the problems in polymer production multiply. In the past five years the production of petrochemicals in Germany fell by 4 million tonnes per year this is a marked decline by 6 percent. This example shows: Weaknesses in individual segments pose a threat to value chains in their entirety. If Germany is no longer attractive enough as a location for individual polymers, further closures of production plants are threatening. That would have negative impacts on suppliers, not only in this industry. Downstream industries would be affected too. Finally, the integrated structures of production and innovation in German industry (the so-called Verbund ) would be weakened overall. 4
For this reason, it is essential for us to prevent a tearing of chemical value chains in the individual segments. It is in the interest of industry as a whole that we maintain these value chains as the central element of the chemical industry location Germany. Investment weakness Ladies and Gentlemen: When examining the developments in global chemical business, it becomes obvious that our competitiveness is under a growing threat. There is a need for action. But can we respond adequately at all? Do we have enough scope to become active? Are our companies able to hold their own under global competitive pressure? What about investments and innovations? Unfortunately, there are signs of alarm also in these respects. There are not enough investments in Germany generally. This reserved investment attitude is particularly unsettling in the chemical-pharmaceutical industry. Even though business is going well all in all and financing costs are lower than in many previous decades, there is an investment shortage domestically. The gap between investments at home and foreign investments is widening more and more. Meanwhile, foreign fixed asset investments by German chemical companies exceed their domestic fixed asset investments by 1.5 billion euros per year. This means that Germany is no longer attractive enough as a location for chemical plants. Companies find much better framework conditions in other regions. By contrast, the chemical industry location Germany is suffering under a number of negative factors: high energy costs and an energy policy which is not particularly conducive to industry, neglected infrastructures, and an administrative practice critical of industry. Moreover, fiscal incentives for research are lacking in Germany. Many chemical nations support the R&D efforts of companies in this manner. So far, Germany has only project promotion. Therefore, the negative developments of the past years could last. The less is invested here at home, the faster will we continue to lose in competitiveness. Better framework conditions for investments are vital for the chemical industry. This means: reliable political requirements and competitive costs. 5
Obstacles to innovation Stronger competition calls not only for investments in modern fixed assets, it also calls for more innovations: new products and production processes as well as new business models. With its research and investment spending of 10.5 billion euros per year most recently, the German chemical industry ranks among the strongest research locations globally. Here, the pharma sector accounts for the largest share of just under 60 percent. This emphasizes that there is a will to innovate. Unfortunately, too many obstacles remain for a fast and successful way of ideas from the laboratory to product launches on the market. The topic of innovation has been in the focus of my VCI presidency right from the beginning. Thus, the VCI presented last year an innovation study carried out by the advisors Santiago and the Cologne Institute for Economic Research (IW Köln). This study identifies, firstly, internal obstacles to innovation in the companies: the lack of clear-cut investment strategies, too much complexity, too little courage for disruptive innovations, and an insufficient innovation culture. But the external obstacles weigh at least just as heavily: excessive bureaucracy and regulation, a shortage of qualified personnel, too few incentives for research and development and, last but not least, a lack of societal acceptance. Obviously, these points impact not only chemistry and pharma but industry generally in Germany. The ability to innovate is the key to more competitiveness. We need more innovations to permanently secure growth, prosperity and employment in Germany and across Europe. FOR A MORE INNOVATION-FRIENDLY POLICY I find it deplorable that the ongoing debates about the future of the EU as good as never address research, technology and innovations. It is discussed on what Europe should spend more funds. But where can the money come from if our companies do not earn it in global competition? We need a policy that is conducive to innovations and does not stand in their way. Therefore, we speak for introducing an innovation principle in European legislation. This would contribute to the EU s regulatory processes giving more 6
consideration to promoting innovations so that the chances of new technologies are considered just like potential risks. At the national level, an innovation check could be introduced for regulation in Germany. Such a step would prevent unnecessary bureaucratic hurdles. Even before adopting new pieces of legislation, it could be examined whether they are innovation- and consumer-friendly. Of course, yet more needs to be done to strengthen Germany as a location of innovation. I have already mentioned fiscal incentives for research and development. Almost all industrial nations have introduced such incentives, and they are partly expanding them. Only Germany is still taking a reserved attitude which is misplaced. At least, now the chamber of German parliament representing the federal states the Bundesrat has called upon the federal government to introduce a fiscal research incentive in the form of a research premium on R&D staff costs. This step was taken at the initiative of the federal states of Lower Saxony and Bavaria. It is worth noting that such a premium should be available for all companies engaged in research in Germany, also for large ones. It would make a strong incentive to invest even more in research and development. The situation is comparable for venture capital. Here, too, other countries are much more attractive. Germany has many capable founders. But quite often, the big money is lacking to turn start-ups into lastingly successful businesses. It is highly deplorable that the federal government is not launching a venture capital act in the present legislative period, either. Ladies and Gentlemen: German industry alone cannot make Germany a world champion in innovation. We need support from the political arena. We need to work as one, and we need to make sure that there is a good societal environment: for an innovation culture that combines openness and curiosity with courage and confidence so that ideas can become innovations. That would be good for the chemical-pharmaceutical industry, for the whole economy, and for this country. 7
Contact: VCI Press Dept. Phone: +49 69 2556-1496 E-Mail: presse@vci.de Please note: VCI news about the chemical industry is also available via Twitter (http://twitter.com/chemieverband) 8