Europe auto sector could be next trade war victim, Brexit uncertainty bites - Cefic DG

Author: Jonathan Lopez


LONDON (ICIS)--Europe’s chemical-intensive automobile industry could be the US’ next focus in its protectionist push if that country and China resolve their differences, according to the director general (DG) at European chemicals trade group Cefic.

Marco Mensink added that if the US and China do not resolve their trade differences and end the current truce for another hike in Chinese products into the US, the whole global economy could take a hit.

The European automobile sector is a key consumer of a wide range of chemicals, and a key job provider in the region. All major EU countries are key producers and consumers of vehicles, and a slowdown in the sector has both social and political ramifications.

Mensink said that while the global economy is holding on, uncertainty relating to trade conflicts and the unresolved UK exit from the EU are putting a strain on investments, both from companies and consumers.

Germany’s government has nearly halved its GDP growth forecast for 2019, citing those two reasons; the country’s economy is now expected to grow only 1% this year, compared to previous forecast of 1.8%.

Despite a more cautious economic environment as of late, Cefic is maintaining its growth forecasts published in December, with the European chemical industry expected to post 0.5% growth year on year, as uncertainty would weigh on consumer demand.

Although Mensink said that “things are not bad yet”, and the world economy would still be far from recession mode, he added that in the last quarter of 2018 consumption and investment had slowed down as “people held their breath” due to the trade war and Brexit-related political uncertainty.

As the US economic policy keeps morphing under President Donald Trump, deepening a protectionist push in order to revive domestic manufacturing sectors, the European automobile sector is indeed holding its breath: Trump wants US cars back on the roads in larger numbers.

The European automobile sector is also facing other home-grown problems. New carbon dioxide (CO2) emissions testing regulations implemented in 2018 caused a sharp decline in activity, and the leading horses in the race for electrification are not European.

“The US’ focus today is China. If the trade wars goes out of hand, the global economy will have problems,” said Mensink.

“However, if the US and China resolve their differences, there is a chance the US focus will turn to Europe, and its automobile sector could be targeted. That would cause all kinds of impacts for in the European chemical industry.”

Mensink said that it is the job of the EU’s executive body, the European Commission, to appropriately fund its agencies. This would be clear in any other case, but not on that of the European Chemicals Agency (ECHA).

The EU chemicals regulator, 11 years old now, has mostly been funded in the past by the registration fees from dossiers submitted to ECHA by companies to be able to trade their products.

The effort has been large, as recognised by most stakeholders. The Commission itself said in 2016 that regulatory costs for EU chemicals total as much as €9.5bn/year.

In interviews with ICIS, the regulator’s executive director recognised companies have undertaken serious efforts to comply with Reach, and the EU’s trade union federation IndustriAll also said in January that the regulation is sometimes “perceived as a bureaucratic monster” which puts a cost burden on smaller firms.

In the interview, ECHA’s chief Bjorn Hansen said that his efforts to get his message across about the Agency's funding had had a mixed result, complaining that current budget plans would in fact mean a cut in real terms.

There would be a risk that,failing to secure more direct subsidies from the EU budget, ECHA’s funding again being dependant on potential ad hoc-designed registrations fees coming from companies.

Mensink said: “I seriously think that, given that ECHA is up and running, it’s the role of the Commission to make it work. With the change of legislation, there is an increase in cases ECHA needs to deal with, as well as implementing and delegating acts: the role of the EU agencies is becoming more and more important.

“We support Hansen in his request to the Commission for more funds, a position which has also been backed by the European Parliament.”

IndustriAll also said in the interview that a certain “psychological stress” has descended upon Europe’s chemicals workers: overseas competitor producing countries are thriving – namely the US and China – and digitalisation promises to disrupt manufacturing methods and labour markets in decades to come.

The trade union federation's representative recognised that retraining workers in new skills will be key for the future, but she also brought up the issue of how everyone cannot be retrained, or everyone could not be retrained.

Mensink feels some sympathy for that argument, but also states that the cure to a loss of jobs in the sector in the future would indeed be intense retraining as well as a new way to treat employees, given their new skills.

“The number of employees in the chemical industry can still grow in the next decades, but jobs will change in content. You will need people with a chemical degree who, for example, can talk to their Chinese colleagues, explain their knowledge to others, as well as having IT [information technology] skills,” he said.

“It will be a completely different set of skills. On top of that, we will then compete in a different market because chemicals will compete with both chemicals and other process industries. People working in chemicals will be able to switch to employers like Google or Amazon, and therefore we will need to be attractive for those people too.”

With only a few weeks to go for the UK to exit the EU – on paper, 29 March – and given the political impasse in London to pass the withdrawal agreement, Mensink said its members have been working on contingency plans to prepare for a no-deal Brexit.

A slight delay to Brexit seems likely, given that timelines are becoming too tight for the legalities of such a process to be resolved in the remaining 47 days. The high level of uncertainty is prompting chemicals players to prepare for no deal, said Mensink.

ECHA on 8 February also warned companies to make contingency plans for a no-deal Brexit.

“There is a lot uncertainty in the industry right now because of the lack of [a withdrawal] deal. The only thing we can tell our members is to prepare for a hard Brexit,” said Mensink.

He went into details on how difficult the practicalities for a no-deal would be, and referred to how the UK would not have access to EU agencies’ databases, including Reach-related databases

“The UK will not have access to databases, and will not have voting rights in ECHA either. Companies will have to register substances both in the UK and the EU,” said Mesink, pictured.

“The challenge coming will be that you will have to have two registrations.”

The UK has been, together with Germany, the leading country in registrations within Reach, according to the Helsinki-based regulator's own statistics.

Another concrete example on which Cefic has been working on is waste shipments permits, which have long been harmonised among the EU countries.

The current permits would need to be re-approved by national governments, and Mensink said that “some of them are faster than others”, which could put a strain on current trade flows.

Cefic has long campaigned to lessen the burden of the EU’s Emissions Trading System (ETS), which penalises CO2 emissions and greatly affects energy-intensive sectors like chemicals.

The EU says that its ETS has “proved that putting a price on carbon and trading in it can work”, but industries like chemicals continue their crusade to lessen the financial burden the system imposes on them.

The EU’s most advanced ETS system would, in turn, put the global competitiveness of energy-intensive industries at risk, the argument goes.

According to Mensink, Cefic would have been one of the stakeholders that achieved certain success for the EU to lessen the burden, although the remedies put in place would still be far from ideal, he said.

“While measures have been taken to alleviate the problem to a certain extent, most companies still face serious costs … We [now] have a system of free allocation in place for remediation of carbon leakage, and compensation for indirect emissions,” he said.

“[However] Fertilizers producers, for example, still have to endure a significant negative impact from ETS.”

Carbon leakage is an expression referring to how high manufacturing costs in the EU – due to a wide range of issues like ETS, energy prices or Reach, in the case of chemicals – would make the region less attractive for investments, or even a victim of companies relocating overseas,.

Mensink said that while there have been notable investments in the European chemicals industry in later years, those investments are not at the same levels as those undertaken in the reborn US chemicals industry.

Pictured: Audi's assembly line in Ingolstadt, Germany
Pictures sources: Stephan Goerlich/imageBROKER/REX/Shutterstock and Cefic

Interview article by Jonathan Lopez

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