In an interview, Dr Kurt Bock, President of Verband der Chemischen Industrie eV (VCI) and Chief Executive of BASF SE with Chemical Today magazine speaks about the trends, challenges and policies in the German chemical and pharma industry.
2016 was a mixed year for our industry. The German chemical and pharma industry kept its investments at a high level, and the utilisation of its production plants was stable. But growth in our industry was not as high as anticipated one year ago. There was even a minor drop in our sales, essentially due to lower prices of raw materials and, consequently, lower sales prices. In view of the political turbulences in Europe and the uncertainty among many market players, this result might not come as a surprise. All the same, it is unsatisfactory for us.
Business Situation Production
Production is assumed to have climbed by only 0.5 percent in the present year; when excluding the pharma share, the production volume is even stagnating. If the positive development of the most recent months lasts and if the early indicators for the 4th quarter are to be believed, our production figure might be slightly higher. Thus, chemistry seems somewhat lower growth (+1.0 percent) than other industries and lags behind the development of the overall economy (+1.7 percent).
Strong impulses from the global economy are missing. In particular, developments in emerging markets were disappointing: Russia and China were in a recession. Growth was clearly getting weaker in China. This combination slowed down industrial production worldwide, which was reflected in the slower growth in the global demand for chemicals.
This was felt by companies. The domestic and foreign demand for chemicals and pharmaceuticals remained weak – while competitive pressure was high, and prices were under pressure too.
With nearly constant volumes, capacity utilisation averaged 83.7 percent. This figure is closer to the lower end of the past three years.
Developments by sectors
Developments were not homogeneous in all sectors of the industry. Therefore, let us throw a glance at the various chemical sectors:
Minor growth was recorded for basic chemicals. Imports decreased in this sector, mainly because the weak euro and the low oil price strengthened the price competitiveness of German and European producers. In consequence, the domestic production volume was back on the rise. The output of petrochemicals went up by 0.5 percent. A plus of 1.5 percent was achieved for polymers. The picture was less favourable for inorganic basic chemicals: The production of industrial gases, fertilisers and other inorganic basic chemicals dropped by 1.5 percent.
The weak global economy burdened the business in fine and speciality chemicals: Compared with 2015, this sector saw a production decrease by 0.5 percent.
The output of chemicals close to consumers was below the previous year’s level too. Consumer demand went up in Germany overall, but due to stronger import pressure, this did not benefit the domestic producers of soaps, detergents, cleaning products or cosmetics. They had to cut production by 2.5 percent.
The pharma demand was robust. Producers achieved a production increase by 2.0 percent.
Producer prices
Oil prices slightly went up again in the course of the year. All the same, because of the persistently weak global economy and high production volumes, crude oil prices averaged 44 $/barrel in 2016 and were still 16 percent lower than in 2015 – irrespective of the most recent price increases. The cost of naphtha ie. the most important raw material in the German chemical industry, fell in a similar range (around 17 percent).
With a view to continued capacity utilisation, the companies passed on their lower raw material costs to their customers. In consequence, chemical prices fell by 2.0 percent in 2016.
Sales
Due to falling prices, chemical industry sales dropped significantly – regardless of the rising production volume. Sales of the German chemical and pharma industry totalled €183 billion and were 3 percent lower than in the previous year.
Industrial customers in Germany ordered clearly fewer chemicals. Domestic sales declined by 4.0 percent to €71.5 billion.
Business abroad was hardly any better: Foreign sales fell by 2.5 percent to €111.5 billion.
Investment
A trend reversal in fixed asset investment started to emerge already back in 2015: Spending stagnated after four years of rising budgets. In 2016 the chemical companies invested €7.1 billion at home in Germany so that there was a drop by 0.3 percent against the previous year.
Foreign investments were lower in the present year too. The companies invested just under €8.4 billion at locations outside Germany – nearly 3 percent less than in 2015. All the same, foreign investments remain clearly above the level in Germany.
The research budgets in the industry increased once more. In total, in the year 2016, the chemical-pharmaceutical companies spent roughly €10.7 billion on research and development ie. 2 percent more than in the previous year.
Outlook
Summing up, the following can be said: The outcome of the business year 2016 is mixed for the German chemical industry. Sales were back on the rise towards the end of the year, but we do not yet see a trend reversal in this increase.
The companies are taking a reserved attitude regarding the further business development. Here, contributing factors are the uncertainty about the persistent growth weakness of emerging markets and the anxiety about the stability of Europe. It is assumed that there will be no noteworthy dynamics in the chemical business in 2017, either.
The uncertainty and the risks to the economy have even intensified over the past months. This applies particularly to the European Union, our home market. For example, the result of the Brexit referendum has adversely affected the investment and consumption climate in Great Britain.
Moreover, the EU is burdened with a long list of further problems: the refugee crisis, the unstable banking sector, the difficult government formation in Spain, the latent inability to pay of Greece, the constitutional referendum and the government crisis in Italy, or the controversial debate about trade and investment agreements like CETA and TTIP. At the moment, hardly anything speaks for the economy picking up in Europe.
The overall economic situation is difficult also outside this continent: It is still not clear what way the US will take in trade politics under President Trump. He has announced an infrastructure programme, and he has promised tax cuts. This could lead to a brisker economy in the short run.
The growth weakness persists in the emerging markets. Meanwhile, Brazil and Russia seem to have reached the trough. We are expecting that growth in China will further weaken – with noticeable effects on the neighbouring countries in Asia. Moreover, the forthcoming interest rate reversal in the US is hanging over many emerging markets like the proverbial sword of Damocles.
These framework conditions are not conducive to solid growth in the chemical-pharmaceutical industry. In figures, this means the following for the indicators of Germany’s third largest industry in 2017:
Forecast 2017
For the next year, we are anticipating a production increase of 0.5 percent. With slightly higher prices (+0.5 percent), sales should rise by ca. 1 percent to roughly €185 billion. While domestic business is likely to stagnate, foreign sales are forecasted to improve by 1.5 percent.
Note: Excerpts from a press statement issued by VCI on 8 December
© Chemical Today Magazine
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