VERBAND DER CHEMISCHEN INDUSTRIE e.v. Statement to the press by Utz Tillmann, Director-General of VCI, 6 March 2018 in Frankfurt am Main (The spoken word takes precedence) Ladies and Gentlemen: I am glad to welcome you to the VCI s Press Evening 2018. This time, we have chosen the venue in a far-sighted approach to the future as we want to look ahead after our annual stocktaking for the chemical industry in 2017. Tonight we will discuss both economic and political aspects. Overall, this is about three topics: First: The business situation of the chemistry industry in the 4th quarter 2017. Already now, I would like to say that things were encouraging. Second: The development of the chemical-pharmaceutical industry in Germany in 2018. In view of the good shape of the economy at home and abroad, we are raising our forecast. Third: The political framework conditions for the chemical-pharmaceutical industry here in Germany. With a two-third majority, the SPD members voted for the coalition agreement with the Union as a joint government programme. Speaking in metaphors, the marathon of government formation is on the home stretch. Ladies and Gentlemen: The 4th quarter 2017 was very positive from the chemical industry s viewpoint. Developments of the previous quarters continued. Since early 2017, the economy gained momentum both in Germany and worldwide. At the beginning of last year, the real strength of the upswing in the following months was not expected. The initially reserved attitude in many business forecasts was connected with 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
numerous risks to the economy in early 2017. Once more speaking in metaphors, the global motor of the economy then got going in the course of the year, and the upswing gained an increasingly broad basis. Most recently, no major national economy remained in recession. In consequence of the good economic development, industrial production in Germany and Europe went up vigorously throughout the year. As industry is the most important customer for chemical products, the rising demand for industrial goods brought good business for our companies especially in the second half 2017. The described good development culminated in a particularly strong 4th quarter. Lively dynamics in the industrial nations and the robust economic growth in China supported this development. Overview of the major indicators for Q4/2017 From October to December 2017 the production in the chemical-pharmaceutical industry grew by 2.8 percent against the previous three months. Compared with the 4th quarter 2016, even stronger growth by 7.3 percent was achieved. After a slight drop in the 3rd quarter, the prices of chemical products were back on the increase. In the 4th quarter 2017, the prices of chemicals made in Germany were 0.3 percent higher than in the previous quarter and 2.7 percent above the level of the previous year. Invariably, higher production and prices have a positive effect on the industry s sales. Therefore, it is not surprising that in a comparison with the previous three months in the 4th quarter 2017 the sales of chemical and pharmaceutical companies climbed by 2.6 percent to a total of 46.3 billion euros. Compared with the previous year, there was a marked sales increase by 9.5 percent. In an annual comparison, domestic sales improved by 7.9 percent. Foreign sales went up in the two-digit range (+10.5 percent). The strong 4th quarter made an important contribution to strong growth in the chemical industry in 2017 overall. In the course of last year, we raised several times our forecast for 2017. The preliminary official figures are now available, and we see the need for another upward correction of the annual indicators. 2
Indicators for the year 2017 overall Here, last year s stocktaking for the German chemical-pharmaceutical industry: In 2017, the industry s production rose by 3.8 percent. The capacity utilization of plants averaged 86.3 percent and was thus above the average of many years. In 2017, producer prices went up by 3.2 percent. The good development of demand put companies in a position to rapidly pass on rising raw material costs to their customers. The industry s sales improved by 6 percent to 195.8 billion euros in 2017. Foreign sales rose by 6.6 percent. The development in Germany was good too. Last year, domestic sales climbed considerably by 5 percent. Employment went up as well in 2017. At present, the chemical-pharmaceutical industry has almost 453,800 staff, reflecting an increase by 1.5 percent over the previous year. Since the lowest point in 2010 (414,800 staff), the industry has created 39,000 new jobs. Finally, a brief glance at the development in the various chemical sectors. You can see in the chart that almost all sectors recorded strong production increases in 2017. Production growth was particularly strong in the pharma sector. But production also expanded significantly in the other chemical sectors, on average by +2.6 percent. The demand for petrochemicals rose dynamically in the course of the year. But all in all, the production in this sector was slightly lower than in 2016. However, this does not adversely affect the overall positive picture for 2017. All the important chemical indicators are pointing upwards. Will the upswing last in the present year? We think so and this takes me to the second part of my speech. Outlook for the year 2018 The global economy is currently in a solid upswing. Economic growth 2017 turned out clearly more dynamic than in the previous year in the USA, in Japan and the euro zone. China s economy strongly expanded too. The upswing in these major national economies together with rising raw material prices also stimulated the economy in emerging markets. 3
At present, the global upswing has a broad foundation and covers wide fields: investment, consumption, trade the situation has become much livelier for all indicators. Global industrial production is accelerating too. Given this development and the strong 4th quarter 2017, chemical companies are very satisfied with their current business situation. Their positive rating of the current situation is quite similar to that in the last boom phase from 2004 to 2008. Business is doing well. At the moment, the industry has a tailwind. The companies are also optimistic about the further development. They are expecting good business to continue well into the 2nd half 2018. This confidence is evident in employment and investment too. But the uncertainties about President Trump s trade policy could act as a brake. The chemical and pharma industry is not impacted so far. However, distortions between large trading partners like the EU and the USA could adversely affect the global upswing. But overall, there are currently good prospects for 2018 for the German national economy as a whole. The VCI anticipates GDP growth by 2.2 percent. Some economic researchers and the federal government are even more optimistic. However, the decisive point for chemical business is not the overall economic development but the business situation of industry. Here, the prospects are unusually good. Like the European industry, also German industry should once more significantly expand its production in 2018 (+3.0 percent). Against this backdrop, both domestic business and European business are likely to improve significantly for the German chemical industry. Up until now, the outlook is also positive for the overseas export business: The economy once more picked up recently in the United States. The Japanese economy continues to run at full speed. Brazil seems to be coming out of the recession, and the economy is cooling only slowly in China. All in all, the demand for chemicals made in Germany should rise considerably in the present year. However, risks to the further development persist. These are mainly the potential impacts of a hard Brexit, increasing protectionism and the geopolitical regions of crisis. Also, the market turbulences in early February with the fear of recession and rising interest rates show how quickly a positive development can come to an end. But so long as there are no such dampening effects, the upward trend should last in 2018 for German chemical business. Therefore, after the good 4th quarter 2017 we have revised upward our projections for 2018 compared with the VCI press conference last December. 4
VCI forecast for 2018 The VCI estimates that chemical production in Germany will increase by 3.5 percent in 2018. With stable raw material prices, chemical prices should increase only slightly by 1 percent. Given the good demand for chemical products, the industry s sales are anticipated to climb by 4.5 percent to well over 204 billion euros with similarly positive developments in domestic and foreign business. Political framework conditions for the industry Ladies and Gentlemen: Let me now come to the third and final part of my speech. As you have seen, the German economy is doing well. With the lowest unemployment rate since German reunification (2017: 5.7 percent), a successful industrial core and rising tax revenue, politicians might be tempted to simply administer the future of our country instead of shaping it. If we want to hold our own in international competition, we need to set the course for more investment and innovation, speed up the optimisation of digital infrastructure and the digitalization of the public administration, improve the conditions in education, have affordable energy supplies, and adapt company taxation. These are just a few of the major fields where political action is urgently needed from our viewpoint. More and more redistribution is no guarantor for sustainably securing growth, prosperity and social participation. Shaping the future means developing effective reforms. Now the new federal government needs to intensively drive forward the above-mentioned topics. It is not enough to preserve what has been achieved. Germany runs the risk of losing touch with those countries that more firmly tackle the topics of the future and strongly promote research and innovation. How this can be approached becomes evident in a bigger picture: Our competitors in China, India, Singapore and other emerging markets in Southeast Asia have caught up in terms of process technology and science. With intensive support from their governments, they are advancing science and 5
research in the direction of specialty chemicals. Here, governments and companies are united in the goal of striving for leadership in the global technology race, in order to win points in international competition. We see this especially in future-oriented fields like digital networking, artificial intelligence and machine learning or biotechnology. Our companies are constantly working to become more innovative and competitive. New products and business models are the core for this. However, getting the industry location Germany ready for the future is also a task for politicians. Ignoring global developments is not helpful. The international competition between locations for the best framework conditions is in full swing. Company taxation is a well-known example. After the largest corporate tax reform in the USA for 30 years, the average tax rate for US companies is 25.8 percent. In Germany, the tax burden is clearly higher (29.8 percent). It seems that politicians are not planning to change this: The coalition agreement completely ignores this point. A particular goal of the US tax reform is to bring research activities stateside. Various tax benefits are granted to those who perform research in the United States and exploit the research results in that country. Inter alia, since the turn 2017/2018 companies can fully write off investments. To give some orientation: In Germany, investments over 800 euros can be written off only over several years. This pains us especially when looking across the Atlantic: At present, for innovations the US is granting fiscal research incentives of 20 percent on R&D spending regardless of company size and number of staff. Such incentives were established stateside already back in 1981 and have been renewed ever since. At the VCI, we have been advocating for long such a concept to strengthen the companies ability to innovate and thus the location Germany; unfortunately, without real success so far. The coalition agreement between Union and SPD holds out the prospect of introducing fiscal incentives for research as has been done repeatedly in government programmes. But such incentives are to apply particularly for small and medium-sized enterprises, based on staff costs and costs of research mandates. This restriction turns the plan into the proverbial drop in the bucket. All the same, it would be an important step for gaining first experiences with this instrument in Germany. So far, the financial scheme does not include any budget for this initiative. Words should be followed by deeds. 6
This also applies for the general goal of spending in Germany a total of 3.5 percent of GDP on research and development by 2025. This will be barely achievable without fiscal incentives for research, as the public sector would need to additionally spend roughly 5 billion euros annually to reach this goal. Pursuing this 3.5 percent target is absolutely correct and we support it. For our industry, this means mobilizing additional R&D investments of 1.7 billion euros per annum. To provide some orientation: In the past years, industry as a whole has successively increased its R&D share in GDP. Already now, industry accounts for around 70 percent of research spending while the government s share has been stagnating since 2009. But overall, we are quite positive about the chapter on education, research and innovation. We very much welcome the weighting and orientation of research fields in the high-tech strategy, improved conditions for more venture capital, the package of almost 7 billion euros to optimize the teaching and learning situation in schools, the loosening of the ban for cooperation between the federal administration and the administrations of the federal states in education. The energy and climate policy is a decisive location factor for the chemical industry. The coalition partners do not soundly explain in their government programme how they want to stabilize for consumers the costs of the energy transition (Energiewende) for promoting renewables. The coalition agreement does not include a cost brake through an alternative funding of future solar parks and wind power plants instead of a further increase of the EEG charge (EEG- Umlage). The opposite is the case. The expansion of renewable energies is to be stepped up. By 2030, photovoltaics and wind power are planned to have a share of 65 percent in electricity production in Germany, instead of the formerly planned 50 percent. Their current share is 33 percent. According to our calculations, the extra tendering of 8 to 10 gigawatts of renewable energies alone according to the coalition agreement in 2019 and 2020 will bring additional promotion costs of roughly 760 million euros, with a corresponding effect of increasing the EEG charge. Thus, the cost peak from the Energiewende is still far from sight. 7
To avoid misunderstandings: Especially the chemical industry is an advocate and not an opponent of the Energiewende. Products and solutions from chemistry have an important role in the energy transition: Materials for regenerative power production or power storage as prerequisites for linking heat, mobility and electricity in the future are part of the business fields of many companies. Furthermore, renewable energies are a building block for bringing the future raw material base of the industry in a climate-neutral form. Power-to-X i.e. the use of electricity for manufacturing chemicals is an option on this path. We do appreciate the commitment in the coalition agreement to preserve the competitiveness of energy-intensive industry in Germany. At the same time, the energy policy of Union and SPD will make electricity even more expensive for consumers in the coming years. This highlights the urgent need for an alternative funding of future renewable energy plants. Ladies and Gentlemen: Now the way is free for a stable federal government. The incoming government will face huge challenges, and there is much pressure on it to become active. Measures to strengthen the industry location Germany must be taken swiftly in the important fields for action in the industrial policy. For the present legislative period, we are expecting the new government to deliver what the coalition agreement promises: fresh momentum for Germany. Contact: VCI Press Dept., Phone: +49 69 2556-1496, E-Mail: presse@vci.de http://twitter.com/chemieverband and http://facebook.com/chemieverbandvci 8