Chemicals production growing in Europe, but Brexit uncetainties weigh heavy

Nigel Davis

By guest author Nigel Davis. Nigel Davis is Insight Editor with ICIS, a course director with ICIS Training and a regular contributor to ICIS news. Nigel has been analysing and writing about the chemical industry for many years, the Insight column providing daily commentary on the sector, its markets and companies.

Europe’s chemicals output is growing relatively strongly against the backdrop of improved EU economic performance

European Central Bank president Mario Draghi suggested last week that there are clear signs of a “strengthening and broadening” recovery in the eurozone. This is based on 16 quarters of growth but still low rates of inflation.

Draghi is unsurprisingly cautious about when ECB stimulus might be withdrawn. Productivity has not improved sufficiently to help drive stronger growth. Having struggled with virtual stagnation and an increasingly worrying debt burden, the eurozone economies have found productivity constrained.

The ECB’s inflation target is just under 2% but wage growth has been insufficient to hold it there. Draghi suggested at an ECB meeting in Lisbon, Portugal, that this could be due to the eurozone’s pool of “underemployed”, those in work but who would like to work, and earn, more.

EU GDP growth in the second quarter is forecast by IHS Markit at 0.7%, up from 0.6% in the first quarter. Meanwhile, chemicals trade group

Cefic has forecast European chemicals production growth of 1.5% for 2017, up from 0.6% in 2016.

The weakness of Europe’s recovery has amplified political uncertainty. But while that has eased with Emmanuel Macron’s victory in the French presidential election – and his party’s showing in France’s National Assembly votes – the just started negotiations for the UK’s exit from the EU have created further headaches.

The European Commission has released its initial thoughts on how the EU’s budget might look after the UK has left the bloc.

Britain makes the second largest contribution (EUR 12 billion in 2016) to the EU’s annual budget by far and the loss will be keenly felt. Commissioners last week also stressed the increased cost burden of defence and the flow of migrants into the EU and the potential for a significantly greater budget shortfall (approaching EUR 20 billion/year) unless things change.

Balancing the books will require some creative thinking from Brussels including, most importantly, buy-in from political leaders in the 27 remaining EU member states.

Reform of the Common Agricultural Policy (CAP), which has helped guarantee farm incomes in France, Spain and elsewhere and deliver a degree of political stability, is probably essential. A financial transaction tax is a possibility.

Greater cooperation on immigration and security will be required. A new approach to border controls is likely as is a new approach to EU defence.

And annual budget contribution rebates, of the sort negotiated by former British Prime Minister, Margaret Thatcher, are likely to be a thing of the past. “The EU budget, and indeed the European Union as a whole, will change after 2020,” the authors of the commission report, said.

“This is certain – the status quo is not an option for our union. The EU budget will need to be simpler, more flexible, more streamlined and must enable more efficient spending.”

From the current standpoint that is difficult to see. With laudable, great visions, the European project has become mired in bureaucracy. And while a degree of stability and unity has emerged post the Brexit vote, diverse political and fiscal agendas threaten future cohesion and the potential for growth “The withdrawal of the United Kingdom will signify the loss of an important partner and contributor to the financing of EU policies and programmes, said commission president Jean-Claude Juncker.

“However, it also presents an opportunity for a vital discussion about the modernisation of the EU budget.

“At the heart of this debate are some fundamental and inter-related questions: What should the EU budget be used for? How can we make the very most of every euro to ensure that EU spending delivers tangible results for its citizens? What can spending at EU level achieve that spending at national level cannot? How can policies and programmes be made simpler and more transparent? And now is also the time to ask how the EU budget should be financed to ensure it has the resources it needs to meet the expectations of Europeans.”

Britain clearly has its own headaches as the reality of the mechanisms for Brexit become clearer. The step by step untangling of a web of ties that bind the country to the EU is unlikely to be completed easily and possibly not within the two year timeframe imposed on negotiations when the UK invoked Article 50 of the Lisbon Treaty.

Chemicals production has been growing quite strongly in Europe this year and has built well on 2016. That is from a combination of stronger regional demand growth and the demand for exports.

Certainly, the year on year comparisons look good against those from North America and Latin America and, indeed, from parts of Asia, including China.

The American Chemistry Council’s (ACC’s) Global Chemical Production Regional Index (CPRI) was up 1.9% on a three month moving average basis in May with growth of 3.6 % in western Europe.

Chemical production growth in western Europe month on month in May of 0.5 % was described as “solid” by the ACC. It compared with growth in North America of 0.2 % and growth in Asia Pacific of 0.4 %.