Upheavals as the squeeze tightens

Chemicals

The high value of sterling and the shift of capital investment to the Far East, especially to China, will be reflected this year by a fall in investment in the UK.

Investment last year was higher than expected, at 3.5% compared to forecasted 2.5% growth, but it will fall by 3% this year.

Employment is also expected to continue to decline, by 1.5%, the same percentage as last year. In December ICI said it would lose about 200 staff at its ChlorChemicals’ Runcorn site as part of an efficiency programme designed to save £20m.

The mature chemicals industry aims to squeeze more out of existing plants, exemplifid by BP’s programme to adapt its two Grangemouth crackers to boost annual ethylene capacity by 300,000 tonnes by 2000, and this should show through in output figures.

Industry output is expected to grow by 2% this year: it stayed flat last year while Europe surged up by 5% year on year. Exports are expected to grow by 3.5%, although imports are also expected to increase by 4%. But prices are expected to rise by 1.5%.

The Chemical Industries Association believes chemicals exporters are suffering significantly reduced margins, but are retaining their markets. Domestic prices are weak and volumes declining, because UK customers for chemicals are also being hit by sterling.

The likely delay in the UK joining EMU is also seen as a bad omen.

Concern over the cost of supplies and utilities will remain high on the industry’s political agenda. As the largest consumer of electricity, the chemical industry is keen that the review of the electricity pool should not be fudged. Electricity contract prices increased last year even though current pool purchase prices were lower.

‘The pool, which underlies electricity trading arrangements, is dominated by generators, and excludes the demand side of the market. It has failed to deliver competitive prices, and has cost our industry tens of millions of pounds annually,’ says Eliott Finer, CIA director-general.

Water costs have also increased continuously since privatisation, mostly through sewerage and treatment charges. And although Transco introduced transportation price cuts in November of 14 20% for industrial customers, interruptible gas prices are catching up with firm gas prices and the appreciation of sterling has reduced the differential between UK and European prices.

The call for control over the utilities is bolstered by the chemical industry’s voluntary pact with the Government to provide a 20% cut in fossil fuel consumption by 2005.

The spate of consolidation and refocusing by the main players looks set to continue. At the end of last year the upheavals in the industry culminated with an unwanted bid for speciality chemicals company Allied Colloids from Hercules of the US.

Anthony Gould