HazardEx Interview: Steve Elliott, CEO, Chemical Industries Association
16 April 2013
2013 will be an important year for the Chemical Industries Association (CIA), the trade association for chemical and pharmaceutical businesses in the UK. Government will announce key aspects of the UK’s future energy policy, which will determine the industry’s long-term profitability, and the organisation will help coordinate the publication of a future strategy programme for the sector. CIA Chief Executive Steve Elliott spoke to HazardEx about these and other issues.
Elliott is keen to emphasise the key role of the chemical and pharmaceutical industry within UK plc.
“We contribute £80 million every day to the UK, spend £5 billion each year on research and development, provide employment for over half a million people in well-paid jobs and we are the UK’s number one manufacturing exporter.”
And the industry is in relatively good health. The latest CIA quarterly survey of its members showed that 46% of business leaders expect higher sales volumes in 2013, while only 19% said they may see a decline.
Like other trade associations, the CIA’s role is twofold: lobbying and advocacy; and supporting members on issues of best practice, regulation, compliance, training and related issues.
Both roles have come to the fore in a major sector initiative due to be launched in May. The UK Chemical Industry Strategy for 2030 involves close collaboration with other sector organisations and companies, as well as the government, and will set out a strategic vision and a related implementation plan.
“This goes beyond the CIA, and the intention is to come up with a complete vision of what we hope the sector will look like in 2030, and the means to achieve that vision,” says Elliott.
“We are focusing on five key areas: energy and climate change, innovation, trade, access to finance and value chains.
“The work is being led by a strong leadership group, for example we have INEOS director Tom Crotty leading the energy and climate change work, and senior figures from other sector companies responsible for the other key areas. We’ll be asking for government commitment to help us make things happen.”
Elliott says the CIA has built up a good relationship with government, and feels the industry’s concerns are taken seriously.
“In last year’s Autumn Statement and Energy Bill there was tangible support for manufacturers. In terms of tax and financial incentives we have three things in place which we think are helpful for chemical businesses.
“The first is the so-called Patent Box, which came in a few years’ ago and reduces corporate tax by half for R&D and innovation. This has significant benefits for knowledge-based businesses such as pharmaceuticals and agrochemicals, and beyond them their suppliers of chemical ingredients.
“Secondly, headline rates of corporate tax are heading in the right direction and becoming more competitive. Also, the threshold for capital investment allowances is now £250,000 – very helpful for manufacturing.
“Thirdly, there was an indication in the Energy Bill addendum that energy-intensive businesses could be exempt from additional subsidies for renewables and nuclear development. The details are still vague, but the message is positive, nevertheless.”
Increasingly, he feels, ministers and industry are singing from the same hymn-sheet.
“This government has talked a lot about commitment to manufacturing and about rebalancing the economy and we are seeing some follow-through. DEFRA Environment Secretary Owen Paterson for example, has been a strong advocate of shale gas, while DECC Secretary of State Ed Davey has a balanced approach. His statement on the publication of the Energy Bill - ‘We don’t want to deindustrialise the UK’ - explains his move to insulate energy-intensive industry from the full effects of the dash for renewables.
“Some of our members accompanied Greg Barker, the Climate Change Minister, to Germany last year, to get the Government to understand how much energy-intensive companies are compensated, or insulated, from higher energy costs – up to 95% of the true cost in some cases.
“And Business Secretary Vince Cable, perhaps because of his background with Shell, is the most responsive of all. He keeps us in the loop to the extent of personally ringing us up to inform us about new legislation coming through. We didn’t get that from any previous Secretary of State.”
“The penny has dropped that if you want successful automobile, aerospace or life science industries, which are held up as the UK industrial crown jewels, then they can only succeed if they are successfully underpinned by the supply industries, and ours is a key supply industry.”
So the UK Government is on side, Elliott says, but those industries could get their ingredients from anywhere in the world. The challenge is for the chemicals sector to persuade industry to source locally at a time when energy costs for intensive users are still amongst the highest in the EU, and are tumbling in the US because of the increased availability of shale gas.
“Three-quarters of our membership is headquartered outside the UK. We need to persuade them of the benefits of retaining and indeed expanding their operations here. Our strategic vision document will enable us to make a strong case as to why chemical companies should locate in the UK, but we already know some of the reasons.
“Our knowledge base is very deep. We have very strong universities and improving graduate and technician quality. Initiatives such as IChemE’s ‘Why not Chem Eng?’ have led to a significant increase in the number of chemical engineering undergraduates, up 16% in 2011 alone. The 10% increase in chemistry undergraduates in 2011 is also encouraging.
“The business culture is very strong in the UK, and Asian companies, for example, are confident operating in the UK because of that and the language. We are often seen as a bridge between Europe and North America.
“Our industry clusters also help. In places like Teesside, Runcorn or Grangemouth your suppliers and clients are on the doorstep. And the concentration of talent and innovation in science parks in places like Cambridge, Oxford and Bristol is also a draw.
Elliott says it is easy to overstate other countries’ offer as a potential base for chemicals companies. Germany, for example, has been attractive in the past, in part because of the willingness of consumers to subsidise the energy costs of industry, but there are indications that this is no longer the case. Also, the decision by the German Government to close its nuclear power stations by 2022 and the country’s increasing reliance on Russian gas has led to fears about long-term energy security.
“But we have problems too,” he says, “and must face them squarely. Recruiting sufficient numbers of engineers and technicians will remain a concern at a time when many senior staff are nearing retirement. The number of students studying chemical engineering has been going up for the last seven or eight years but we face strong competition for graduates from the other process industries, and from consultants, equipment manufacturers, offshore and nuclear new-build. It’s a big challenge.
“Also, the Government’s words on energy intensive industry costs in the Autumn statement were welcome, but we still face two major issues under the current comprehensive spending review to 2015. The first is the indirect impact of EU ETS, the European emissions trading scheme, and the second the cost of the carbon price floor mechanism, which is only happening in the UK and is designed to attract nuclear new-build.
“The consultations on the carbon price floor closed just before Christmas, and although Government has said there would be a compensation package of £250m until 2015 for energy-intensive industries, we don’t feel this will go very far. Although we see the need for nuclear as part of the mix, ministers need to look at the longer-term effects of these significant extra costs and provide realistic compensation for all affected industries.
“You hear figures for the strike price being negotiated with EDF Energy being bandied around. Obviously we hope it will be at the lower end, but we need to get on with nuclear and we need to get on with shale gas.”
The early exploitation of shale gas in the UK is fully supported by the CIA.
“There are three issues for the chemical industry,” Elliott says. We need it for energy, we need it for feedstock and it will also be a market for companies supplying chemicals used in the fracking process.
“I went to a European seminar on shale gas recently and left with the distinct impression that, apart from Poland, the UK is the furthest ahead on the continent. We have the potential to lead here, and we must make sure it doesn’t become another GMO-style debate, embroiled in endless controversy. The companies involved and the regulators need to ensure shale gas development in the UK meets the highest environmental standards if they want a long-term future for this energy source.
“It’s not a magic bullet - shale gas development will still take five to seven years and almost certainly won’t have the same effect in the UK as in the US - but it is still a very positive development.”
Energy efficiency is another key area.
“Since 1990 we have improved our energy efficiency by 35% per tonne of product, and Government targets for the next four years are for a further improvement of 13.5%,” says Elliott. “We have looked closely at our operations and feel we can offer an 11% improvement.
“If we can come to a mutually-agreed figure on this, DECC will ensure the 90% rebate on the climate change levy if we meet our targets. This is another of the compensation measures introduced by the Government.
“The chemicals industry has always been very energy-intensive. INEOS, for example, has the same energy requirements as the city of Liverpool, so it has always been in our interests to become as energy-efficient as possible, and this will continue. We recently carried out a survey of our members and 80% said energy costs and volatility were the most important constraint on business.
“Other industries, such as food and beverage, are facing targets of 20% because they haven’t made anything like our long-term progress in this area.”
For 2013, the CIA is forecasting higher growth in the UK chemicals sector than anywhere else in Europe, with the possible exception of Germany.
Elliott says part of the reason for this is that the UK is starting from a lower base.
“Our recovery has lagged compared to others, and the eurozone problems are having an effect on the competition, but as long as Germany remains strong we will do well. Some 50% of our exports go to Continental Europe, and much of this to Germany, which is why we think it would be commercial and economic madness to pull out of the European Union.”
Another reason for the strength of the industry is the country’s good record of innovation, with nanomaterials, biotechnology, synthetic biology, composites and lightweight materials all areas of particular interest to the UK chemicals industry, Elliott says.
“We have the research councils at the R&D end, and increasingly the Technology Strategy Board providing government support to bridge the traditional Valley of Death between R&D and scale-up. That’s working a lot better now, and a good example is the government’s support for graphene.”
Another focus of the CIA’s activities is regulation.
“We’re working with the UK Petroleum Industry Association, Chemical Business Association, Tank Storage Association and others to see if regulatory coordination can be improved. We call this project ‘Single Regulator’ and its aim is to look into the possibility of combining the Environment Agency with the Health and Safety Executive. As a minimum, we want to see much better coordination and integration of regulatory enforcement.”
And the organisation has been heavily involved in the Process Safety Management Leadership training project, as well as other NSAPI/Cogent safety training initiatives.
But the principal efforts of the organisation in the early part of 2013 have been devoted to providing support for the many industry players involved in the Strategy for 2030 project.
“We have a critical period to make this strategy document, and industry leaders need to step away from the here-and-now to concentrate on the long term future of the whole sector. Some in the industry feel downtrodden and put-upon: by the regulators, the government or by negative public perceptions. There’s a feeling amongst some that we should keep our heads down and just do the business.
“But this growth agenda will require leading industrialists to raise their heads above the parapet and say: ‘Yes, I’m up for this,’ says Elliott. “It will be a challenging year, but I’m confident we will meet the challenge.”
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