The only way is up

The world economy is suffering its worst slowdown for 50 years, but the chemical industry should start to recover this year, the annual CIA Business Outlook Conference predicted

A mixture of global and regional issues, including a sharp downturn in capital spending, rising energy prices, tighter monetary policy, depressed trade and inventory liquidation, has resulted in the most serious global economic downturn for 50 years. Describing the nature of the current downturn as 'synchronised sinking', Malcolm Mitchell, chief economist at BP Chemicals and chairman of the CIA business and trade board, said the chemical industry had felt the impact earlier than other sectors and the outlook for the beginning of 2002 was gloomy, with the Euro zone in recession or close to it.

positive growth drivers

But it is not all doom and gloom, he told the annual CIA Chemical Business Outlook conference, because the factors for an upturn are already largely in place and a recovery, led by the US, could be only a matter of months away. The negative factors that caused the slowdown will become positive drivers: a rebuilding of inventories; energy price deflation; a recovery in investment in cheaper high tech capital goods; a relaxation in monetary policy resulting from lower inflation; and fiscal incentives, particularly in the US.

For both Europe and the US, chemical volumes are currently at the bottom of the cycle, Mitchell claimed, but a recovery for the US is expected to start this quarter, with Europe following suit by the end of the second quarter. Trends will not be uniform, however. 'Germany will again underperform, with prospects for France and Italy somewhat better,' he predicted. 'In the UK our estimate is that output grew by 3% last year, which will be followed by a more modest 1% in 2002 as the UK economy loses momentum and the sustained strength of sterling bites deeper.'

Similarly not all parts of the chemical industry will enjoy the same degree of recovery. 'Over recent years pharmaceuticals has outperformed the industry, at least in volume terms,' Mitchell pointed out. 'And we expect that trend to continue, with growth of over 8% last year and 5% expected this year.'

In accordance with the theme of the conference – 'Sustainability and Competitiveness – Concord or Conflict – Len Berlik, executive vp at ICI Performance Specialties, said that the outlook for 2002 depended very much on how companies performed environmentally. 'Environmental and social performance is important for share price performance and company growth,' he contended.

The concerns of the public, who are becoming much more socially and environmentally aware, the EU White Paper proposals and a continuing problem with the image of the chemical industry all led to the impression that while the industry is at a low ebb, the likelihood is that things are not going to improve significantly. If they do, said Berlik, it will come about through coupling sustainability and environmental concerns with economic growth.

innovation needed

Consultant Steve Hannam showed some positive aspects in the industry that could lead it out of recession. These include young, clever scientists, 'who need to be managed actively' to keep them in the industry. Companies also need to create an entrepreneurial spirit, give responsibility and freedom early in careers and introduce reward systems to match success.

He said that innovation was needed to improve the green performance. This could be achieved by reducing waste, continually renewing products and processes and focusing on the customer's needs.

The final ingredient for a better future is to 'add magic. Whether it be through better formulation, service or solutions, the aim must be to allow the customer to differentiate between products.'

To achieve all this, Hannam saw the way forward as focused diversification. 'A cynic would say that "focusing the business", is looking to sell that business, and anyway, being too focused leaves the company open to market vagaries,' he said. 'but, being too diversified is to dilute a company's strengths. Life is a series of niches.'

The problems facing the chemical industry included a lack of training to encourage into the industry the 'young, bright scientists'. It was agreed that this image could be improved only at the local level, by interacting with the community, and encouraging visits to chemical plants.

But one delegate asked: 'How can we expect "the young, bright things" to enter the industry, when companies are slaves to the altar of shareholder's profits?' This was a question to which the panel of speakers had no real answers