UK chems industry growth outpaces general industry in 2017 - CIA economist

13 November 2017 09:12 Source:ICIS News

Grangemouth

LONDON (ICIS)--UK chemicals sector growth has outpaced that of general industry in the country through the first nine months of 2017 as a weak pound and strong demand in Europe continue to buoy the sector despite uncertainty around Brexit, according to the chief economist at trade group Chemical Industries Association (CIA).

“The industry has generated [volume] growth of 3.2% in the year to September, compared to around 2% for the general manufacturing sector,” said Stephen le Roux, CIA’s head of economics.

“The key bright spot continues to be the relatively weak pound, they also see past investments in expanding capacity as well as developing new products as a big opportunity, and the market opportunities outside the UK,” he added.

The above-market growth has driven a rally in employment over the last three months, according to CIA data released last week, with chemicals and pharmaceuticals company employment in the country rising 12%, the fastest growth since 2015, to 140,000 jobs.

Uncertainty around the UK’s move to exit the EU continued foremost in the minds of company managers over the next 12 months, but capital expenditure (capex), research investment and employment are still expected to grow over the next 12 months, according to a survey of CIA’s members.

However, hesitance over future investment intensifies over a longer term, as the UK draws closer to the March 2019 deadline it has set to leave the EU.

“Generally, sales are still growing, exports are still growing [but] the outlook going forward is getting a little cloudier. Brexit’s threat looms large over the next 12 months,” said Le Roux, pictured right.

A lot of the growth is taking place in regions of the UK that have suffered from under-investment in recent years, CIA’s CEO Steve Elliott added, on the back of the UK’s increasing reliance on the financial sector, centred in London and southeast England.

Elliott said: “There are genuine and exciting opportunities for the sector in the UK building on our excellent university links, pushing forward innovation, developing supply chains and moving to a new energy future.

“Much of this work is done in regions of the UK where employment is desperately needed.”

The Bank of England’s handling of its recent interest rate hike has also not helped investor perception of the UK, according to Le Roux.

While the rate hike itself is not expected to have a noticeable effect on access to finance for petrochemicals companies, the bank’s bearishness on the UK’s economic future when announcing the rise cooled investor sentiment, he said.

The market had priced in expectations of a string of subsequent hikes, but the tone struck by the central bank’s monetary policy committee implied that the UK economy is not strong enough for many additional increases in its central rate of interest.

“I think the rate rise itself is not going to have a great deal of impact. Even for those who might be reliant on financing that are affected by the base rate change, the impact would be fairly limited,” Le Roux said.

“We’ve seen the opposite reaction from the currency market, where there have been quite steep falls, because the BoE said ‘we see Brexit as being a negative impact on our output for the UK economy, so rate rises are going to be very limited in extent and very gradual’,” he added.

While Brexit is unsurprisingly the key negative at present for producers, currency tailwinds continue to represent a bright spot for UK chemicals, as well as capacity investments coming on stream and research, le Roux said.

2017 looks set to go down as a boom year for global growth, particularly for the EU and eurozone, which looks set to achieve the fastest pace of growth in a decade, according to the European Commission, the EU’s executive body.

Commission projections for UK growth over the next few years are more pessimistic than for the EU as a whole, with the country expected to be among the worst performing economies in the union through 2019, even before Brexit has taken place.

European petrochemicals producers have also enjoyed a banner third quarter on strong margins and robust demand on the back of the European economic recovery, leading ratings agency Moody’s to note that some petrochemical products may be nearing the top of the cycle.

The first product from the flagship petrochemicals complexes under development on the US Gulf Coast is expected to enter the market next year, with Borealis CFO Mark Tonkens noting last week that increases in global polymer supply may start to be felt in product margins in the second half of 2018.

There has been little bearishness on growth over the next year among UK producers on product cycles or new US capacity, according to Le Roux.

“It’s not really been mentioned as an issue,” he said.

“I think, with the upturn in Europe that there is room for growth in Europe itself. I don’t think Europe feels pressured by US supplies yet, internal demand will keep Europe chemical plants busy enough,” he added.

The CIA is hosting an all-day conference on Brexit in London on Thursday 16 November. Click here for more information.

Pictured above: Two workers at INEOS' Grangemouth petrochemical complex
Source: INEOS

Interview article by Tom Brown

By Tom Brown