VERBAND DER CHEMISCHEN INDUSTRIE e.v. Statement to the press on the business situation of the German chemical industry Mr Marijn Dekkers President of Verband der Chemischen Industrie (VCI) 9 December 2015, Frankfurt (Check against delivery) Welcome to our annual press conference. To say it right at the beginning 2015 was not an easy year for our industry. The conclusion in one sentence: The German chemical and pharmaceutical industry is robust but total sales are stagnating, and there are signs of alarm for the longer-term future. We see both light and shadow for the most important indicators of our industry. Production rose slightly by 1 percent. Thus, we are roughly at the level of overall industrial production in Germany. At the same time, there was a drop in prices. In consequence, total sales amounted to 190.8 billion euros and remained at the previous year s level. More precisely: We saw a decline by 1.5 percent at home in Germany and an improvement by 1 percent abroad, so that developments were mixed. Really strong impulses from the global economy were lacking. In particular, trends in emerging markets did not fulfil our expectations. Russia and Brazil were in recession. Growth weakened visibly in China. This combination has debilitating effects on the other parts of the world, and it was a brake to industrial production. Growth of the global demand for chemicals slowed down accordingly. This was felt by our companies. The demand for chemicals rose only slightly, both at home and abroad while competition pressure was high, mainly in basic chemistry. The best news is about jobs. Irrespective of stagnating sales, employment rose slighty by 0.5 percent. At present, the German chemical industry has 447,000 staff. 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
Production When looking at the developments over the past years, it is deplorable that we cannot speak of positive dynamics. After the slump 2009, production stabilized again quickly in the chemical-pharmaceutical industry. But since 2012, growth has not changed essentially. In the overall year 2015, too, growth was really moderate. When excluding pharmaceuticals, there was even a drop in production. Producer prices In the annual comparison, producer prices have been falling continuously since 2012. Like in the previous year, the price development for crude oil was decisive. On the annual average, the price per barrel was around 45 percent below that of the previous year. Burdens on comparies were eased less significantly due to the weaker euro to the US dollar and the companies passed on the lower raw material costs for capacity utilization. This brought price reductions for customers too. On average, chemical prices fell by 2.5 percent in the overall year 2015. Low interest rates, the rate of the euro and the oil price currently give tailwind to the German economy. But we should be ready for a situation where the wind might change direction. We also see the development in research spending and investment as a warning signal. In 2015 they roughly remained at the previous year s level. This means that we need to do more in Germany to drive forward innovation and to facilitate investments. I will come back to this later. The chemical sectors A glance at the various sectors shows that the share of basic chemistry in overall production is still high. But the manufacturers of basic chemicals are facing ever stronger import pressure. Moreover, some basic chemistry plants had to be shut down temporarily due to technical problems. These factors contributed to the generally weak development of chemical production in 2015. 2
The most dynamic trends were recorded in pharma production with a strong increase by 4.5 percent. The upward trend of the previous year lasted for fine and specialty chemicals. These include, for example, plant protection products, paints, coatings and disinfectants. Inorganic basic chemicals improved too. A drop was recorded for polymers and petrochemicals. However, the demand picked up in the course of the year. The production of chemicals close to consumers was below the previous year s level. In total, consumption went up in Germany but due to rising import pressure this did not benefit the manufacturers of soaps, detergents, cleaning agents and cosmetics. Therefore, they had to cut production. Sales Mainly the restrained demand from industrial customers made itself felt at home in Germany. Combined with the price effect, domestic sales dropped to 74.6 billion euros. By contrast, foreign sales rose by 1.0 percent to 116.2 billion euros also because of the weaker euro. European business came up to our expectations only partly. The recovery in Europe lasted and industrial production went up. But prices in exports to other European countries fell noticeably. For this reason and comparable with the domestic situation, proceeds in trading with Western Europe dropped by 1.5 percent irrespective of the positive volume development. Sales to Eastern European countries declined even more significantly by 3.5 percent. This was mainly attributable to less business with Russia. On the positive side, overseas sales especially to North America improved strongly. In particular, sales to the NAFTA countries went up considerably by 13 percent. Here, positive impulses came from the pharmaceuticals business. Sales to Latin America rose by 3.5 percent, exports to Asia increased by 5.0 percent and trading with Africa climbed by 3.5 percent. 3
But these figures should be seen with caution. Positive exchange rate effects due to the weaker euro give an overrated picture of improvements in all regions. In terms of volumes, business developed less strongly. Investment and research spending We are showing you a chart with the development of fixed asset investment in our industry. On average, this is a nice trend so that all seems well. But since 2012 companies have been increasingly investing abroad. 8.6 billion euros in the present year, as compared with 7.2 billion euros domestically. This is a 20% differential. And the gap continues to widen: Foreign investments rose by 2 percent investments in Germany only increased by 1 percent. These are no short-term developments. Chemistry is capital-intensive; we are planning investments over periods of five or more years. Especially rising numbers of energy-intensive production plants are built abroad. This is where the high costs of the Energiewende (energy turnaround) in Germany are directly felt as a location disadvantage. Moreover, we note that small and mid-sized enterprises have become more cautious with fixed asset investments. We see these trends with concern. In the long run, they put at risk the performance ability of the entire value chains. We urgently need an industry policy initiative in Germany to clearly improve the investment climate not only for chemistry but for German industry as a whole. Also in respect of research spending, we clearly notice that positive outside impulses are lacking. In 2015 chemical and pharma companies spent a total of ca. 10.4 billion euros on research and development. This corresponds to the level of the previous year. But stagnation is not enough to hold our own in global competition. Other nations are much more dynamic. I am not only thinking of the USA. Also China, India and South Korea are more and more increasing their R&D investments. Innovations are our strength, but we need to do a lot to keep it this way. Otherwise, one is soon overtaken by competitors. 4
Some weeks ago we presented a study where we highlighted internal and external levers for driving forward innovations in chemistry. There is also much to do for the companies: from clear innovation strategies to a living innovation culture. Politicians need to become active too, for getting the innovation location Germany ready for the future. We need a venture capital act to attract more investors to Germany. I very much hope that the government coalition in Berlin will adopt such legislation still in the present legislative period. We need fiscal incentives for research. They would help small, mid-sized and large companies to invest more in innovations. And we need a fitness check for regulation, so that innovations are not impaired but supported. As you can see: There is a great need for action. Here, the VCI bets on constructive cooperation with politicians. The alliance Future of Industry is an encouraging approach. Together with the Federal Ministry for Economic Affairs, trade unions and other industry associations, we are developing proposals for getting the location Germany ready for the future. Furthermore, we have resumed the Sector Dialogue Chemistry with the economics ministry. These are good starting points. And we will do whatever we can to achieve good results. Outlook Over the past three years, chemical companies largely assessed the business situation as stable/positive. The German chemical industry can still hold its own in an increasingly difficult global economic environment. According to the most recent ifo survey, the companies are not dissatisfied with the current business situation. But: enthusiasm looks different. In fact, there is not too much reason for optimism: Economic risks are adversely affecting the sentiment. Irrespective of the economic recovery in Europe, the 5
industry is not expecting the business situation to improve significantly in the next six months. This reflects deep uncertainty. The companies have doubts about a robust course of the global recovery. Weak points have become visible: Literally speaking, emerging markets might develop from the growth drivers into the problem children of the global economy. Especially the slowdown in growth in China and recession in Russia and Brazil might spread to other national economies. But our industry worries not only about low dynamics of the global economy. The companies also fear that the massive building up of basic chemistry in the Middle East, in China and in the USA will lead to overcapacities in the world market. In this difficult environment, good framework conditions for innovation and investment are even more important because global competition is getting fiercer. Finally, I would like to give an outlook of developments in the German chemical industry in the coming year. We are expecting the moderate trend to last: Also in 2016, German industry is likely to benefit from low interest rates, cheap oil and a weak euro. Therefore, we are expecting economic growth to slightly accelerate in Gemany in 2016. This is to the direct advantage of our industry. Against this backdrop, the industry can once more hope for positive volume business domestically. Both industrial production and construction should improve. This increases the demand for chemicals at home in Germany. Prospects for the export business are cautiously optimistic too, as growth of the global economy should be somewhat stronger in the coming year. In 2016 the global industrial production is anticipated to grow by 2.5 percent. This brings a livelier demand for chemicals which will benefit the German chemical industry too. All in all, much speaks for somewhat brisker business for German chemical companies with customers at home and abroad. But this does not equally apply for all business sectors. In basic chemistry the favourable oil price reduces the production-cost disadvantage, as compared with the USA or the Middle East. But companies have to cope with rising import 6
pressure and competitiveness problems. By contrast, there is tailwind for specialty chemicals, given the further stabilizing demand from Europe and other major foreign markets. Forecast 2016 Taking into account all of these factors, we arrive at the following projection: For the overall year 2016 we are expecting an increase in chemical production by 1.5 percent. Producer prices are likely to stagnate. As regards sales, this brings an increase by 1.5 percent to 193.6 billion euros. We assume that domestic sales will rise by 1.0 percent to 75.5 billion euros. For foreign business, we are even expecting sales to improve by 1.5 percent to 118.1 billion euros. There is no reason to lose courage. German chemical and pharma companies are successfully engaged in global competition. But we have to make sure that we do not live on our old strength. We should look towards the future even more courageously, and we should take care of more innovations. At the Day of German Industry some weeks ago, I was asked what Germany will look like in 2030. I think that in 2030 Germany can be even more innovative and more competitive than it is today if we all work hard for this. Now I give the floor to Dr Utz Tillmann for an expert assessment of the ongoing climate protection conference UN COP 21 in Paris - from our industry s viewpoint. 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) 7