VERBAND DER CHEMISCHEN INDUSTRIE e.v.

VERBAND DER CHEMISCHEN INDUSTRIE e.v. Translation / Original: German Statement to the press by Dr. Marijn E. Dekkers President of Verband der Chemischen Industrie (VCI) at the VCI s half-year press conference 22 July 2015, Frankfurt (Check against delivery) The German chemical industry looks back on a mixed 1st half 2015.Production did increase, but sales developed only sluggishly due to falling prices. On the positive side, pharmaceuticals and specialty chemicals continue to perform well. The production of basic chemicals is growing again, too. Foreign business with overseas customers benefited from the favourable rate between the euro and the US dollar.but production growth is weak for an upswing phase. It is true that the upward trend is discernible. But it seems to be lacking in strength. The demand for chemicals is rising only slightly in Germany and abroad. There are no sustainable impulses from the global economy. This means in figures: In total, the production in the chemical-pharmaceutical industry went up by 1 percent in the 1st half 2015. Excluding pharmaceuticals, the chemical production rose by 0.5 percent. Capacity utilisation was average (84.5 percent). Situation of the chemical sectors Basic chemistry recovered slowly from the marked production setbacks of the previous year. But petrochemicals production (-2 percent) and polymers production (-1.5 percent) were still lower than in the 1st half 2014. Business with inorganic basic chemicals developed more favourably. The production of industrial gases, fertilisers and other inorganic basic chemicals climbed by 1 percent in the 1st half 2015. 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

The upward trend of the previous year lasted highly dynamically for fine and specialty chemicals. A production increase by 4 percent was recorded in this segment from January to June 2015. The pharmaceutical business developed positively too. Pharma production rose by 2.5 percent in the 1st half of the present year. By contrast, chemicals close to consumers were 2.5 percent below the previous year s level. Consumption did rise in Germany but this did not benefit the producers of soaps, detergents, cleaning products and cosmetics, because imports went up considerably in this segment too. Therefore, German producers had to cut their productions. Prices Crude oil prices fell clearly in the 2nd half 2014. This development continued in early 2015. In a comparison with the previous year, crude oil was 46 percent less costly from January to June. But at the same time, the euro was devalued against the US dollar so that the cost burden for raw materials eased much less markedly for the companies. For this reason, the price of naphtha the most important raw material in the German chemical industry was only 30 percent lower in the 1st half 2015. For sufficient capacity utilisation, the companies passed on the lower raw material prices to their customers: In this setting, the prices of chemicals fell on average by 3 percent in the period under review. But in mid-2015 the chemicals prices were back on the rise. Good capacity utilisation, a further devaluation of the euro and the gradual return to higher oil prices made the trend reversal possible. Sales With falling prices, overall sales in the chemical industry rose only slightly irrespective of the higher production volume. Sales totalled 96.5 billion euros and were 0.5 percent higher than one year ago. At home in Germany, the production of our customers barely increased. This was reflected in the weak development in the demand for chemicals. Due to the price effect, domestic sales dropped by 1.5 percent to 37.4 billion euros. 2

The euro devaluation boosted the export business which rose by 2.5 percent to 59.1 billion euros in the 1st half 2015. Sales to Western Europe (EU15) fell by 0.5 percent. Sales to Eastern European countries developed negatively too; they declined by 1.5 percent. By contrast, overseas sales improved visibly. Sales to the NAFTA countries expanded vigorously (+12 percent). Here, positive impulses came particularly from the pharmaceutical business. Sales to Latin America (+15.5 percent) and Asia (+10 percent) rose significantly too. Regarding these figures, exchange rate effects are decisive for growth. Employment Irrespective of low economic dynamics, the chemical companies continued to build up employment in the 1st half 2015. The number of jobs in the German chemical industry rose by 1 percent as compared with the previous year. At present, our industry has well over 447,000 staff. But we are not expecting any further employment growth for the 2nd half 2015. Outlook for the 2nd half 2015 The 1st half of the present year gives no reason to cheer for the German chemical industry; but there is no reason to complain, either. According to the most recent ifo-survey, the companies are largely positive about their current business situation. However, the risks for the economy are affecting the business sentiment in chemical enterprises. For three years now, business expectations in the industry have been around the zero line. Irrespective of the economic recovery in Europe, the industry is not expecting the business situation to improve significantly in the next six months. One reason is the uncertainty about the duration and the robustness of the upswing. Geostrategic and economic-political risks contribute to this. The conflict between Russia and Ukraine persists. The massive stock market slump in China could impact the real economy of that country and slow down growth even further. Moreover, the Greek crisis will keep all of Europe in suspense. So far, the international capital markets have been responding calmly. After all, the EU countries, ECB and IMF guarantee for the credits as the main creditors. 3

We are not expecting a contagion effect for other European crisis countries. The recession in Greece is no danger to the slight upward trend. The importance of the Greek economy is not strong enough for this. Our industry is an example of the above: In 2014 under 1 percent (0.8%) of all chemical exports from Germany went to Greece. This corresponds to 1.3 billion euros, so that Greece ranks 14th among the 28 EU Member States behind Ireland and Portugal. All in all, we are expecting a moderate upward trend for the German chemical industry in the coming six months. This estimate relies on the following factors: The economic stabilisation of the eurozone is progressing. The situation should also develop positively in the other EU Member States, particularly in the UK. Consequently, the demand for chemicals from Germany will rise on the European market. This should benefit German producers, because imports from overseas are becoming more expensive due to the weak euro. This applies especially for basic chemistry, which additionally profits from cheap oil this reduces the disadvantage of production costs as compared with competitors from the USA or the Middle East. Already back in 2014, specialty chemicals benefited from the rising demand in Europe and in important foreign markets. We proceed on the assumption that this trend will last in the present year. The improvements in industrial production and in the building industry result in a stronger demand for chemicals at home, so that chemical companies can hope for more domestic sales in Germany too. Forecast for the overall year 2015 Against this backdrop, we arrive at the following projection: For the year 2015 we maintain our forecast, i.e. we continue to expect a production increase by 1.5 percent. Producer prices should fall by 2 percent. Today we are more optimistc about chemical industry sales, which should rise by 0.5 percent to 191.8 billion euros. Sales in Germany will further drop (-1%), irrespective of the higher sales volume. Because of the weak euro, an improvement (+2%) of foreign business is likely. 4

Investments in Germany In Germany, there is not enough investment. The Fratzscher-Kommission 1 draws this conclusion in its report to the federal government. The Commission is calling for a much higher public spending to maintain roads and to expand the digital infrastructure. Does this problem also exist in Germany s third largest industry the chemical industry? The answer is YES! Since 1991, investments in plants and buildings of the industry have been largely on the same average level of 6.4 billion euros per annum. We have not been keeping up with inflation. In the present year 2015, our industy is investing in Germany well over 7 billion euros in production plants and buildings. This slightly higher amount is attributable to a combination of several special effects. These should be mentioned here: New major projects, like the TDI plants of BASF and Bayer, the need to catch up after the global economic crisis, networks and the progressing digitalisation of production processes, also called Industry 4.0, and currently favourable financing. The fact that the industry has been expanding production volumes by over 2 percent per annum reflects two developments in the German chemical industry: Firstly: Technical progress makes production processes more efficient. More output is achieved with less productive capital. Secondly: In the chemical industry, structural change is discernible away from plant-intensive basic chemistry to research-intensive sectors with higher value creation. This leads to a shift from investments in plants to investments in research and development. 1 Marcel Fratzscher is president of the German Institute for Economic Research/ DIW. The report on increasing investment in Germany Stärkung von Investitionen in Deutschland was prepared for the federal minister for economic affairs and energy Sigmar Gabriel. 5

Conclusion: Investments by chemical companies at the location Germany have been stagnating for 25 years; adjusted for prices, they thus even dropped. A study by Oxford Economics shows that the location has been increasingly losing in competitiveness since 2008. Since then, it can be observed that more and more investment streams are steered abroad. Foreign investment Since 1991, investments in chemical plants abroad have doubled from 4.3 billion euros to currently 8.6 billion euros. Since 2012, foreign investments have been higher than investments in Germany. In a recent survey, we asked our member companies about the reasons for their commitment abroad. The following emerged: Investments in Asia, Latin America and Africa are intended to open up markets. They are not because of cost advantages. But the following gives rise to concern: One third of investments by our member companies in the European neighbouring countries are attributable to cost advantages. At those locations, production is cheaper than in Germany. In the USA, even two thirds of investments are made for this reason. Here, the low raw material and energy prices through the shale gas boom are decisive. The location Germany continues to lose in attractiveness, as compared with the USA and other European countries. Why? Germany is not attractive enough: Good points are the infrastructure and qualified staff. Energy prices and labour costs have negative effects. When weighing these aspects, the other countries win. Cost pressure noticeably influences also the investment decisions by small and medium-sized chemical enterprises (mainly the Mittelstand ). This is highlighted by a VCI study of early 2015. The massively risen EEG-Umlage the charge in connection with the German renewable energy act is a particularly heavy burden on small and medium-sized enterprises (SMEs). Investments by SMEs had been going up continuously until 6

2008. Since then, investments have been postponed. To date, they have dropped by nearly 20 percent. 2 Need for political action Investments are planned over stretches of five or more years. Consequently, the constant investment level reflects the location choices of companies from the past. Back at that time, companies relied on improvements in the political framework conditons for competitive production in Germany. While the quality of locations really improved in Asia or in the USA, such hopes are not coming true in Germany. Therefore, there is no guarantee of chemical companies making future domestic investments in Germany at the existing level. Quite the contrary: more and more speaks against this. Therefore, we are drawing the following conclusion: We need an industry policy which significantly improves the investment climate. We cannot lose even more investments to other countries. Additional national burdens under the energy policy need to be avoided and reduced. First of all, the companies need more planning security. In the energy policy, it is deplorable that costs and reliability are moving apart in different directions. As an export-intensive industry, we speak for a liberalisation of world trade and free access to export markets. Therefore, we advocate a rapid conclusion of the Transatlantic Trade and Investment Partnership (TTIP) between the EU and the USA. Another lever for improving the framework conditions in Germany is a reduction of barriers for innovation. In this way, we also reduce obstacles to investment. Through the structural change towards research-intensive products, this is helpful not only for our industry but for Germany as a land of industry overall. Figuratively 2 from 2.8 to 2.3 billion euros 7

speaking, we need more tailwind for innovations, so that we can market our products faster and remain fit for the future in this manner. Many relevant proposals have already been brought forward: For example, introducing fiscal incentives for research and a venture capital act. At the European level, an innovation principle would make sense. This includes an instrument of the European Parliament for examining regulation as to its impacts on the innovation capacity of the economy. In Germany, the Bündnis Zukunft der Industrie the alliance for the future of industry is a good and promising starting point. Together with the economics ministry, trade unions and other industry associations, proposals are to be developed for getting the location in shape for the future. We need an industry-wide, comprehensive agenda for better investment and innovation conditions to get Germany ready for the future. I would take this opportunity to announce that the VCI will present to you in late September a study covering our industry as a whole. The forthcoming study will look into companyinternal and external barriers to innovation in the chemical-pharmaceutical industry. Germany is a strong industry location. We can only keep it this way if we all actively work for this: politicians, industry and the civil society. 8