The last year has been a challenge for the world economy to say the least. On top of this chemical companies in Europe are having to deal with the implementation of REACH and other legislative changes such as the EC Emissions Trading Scheme. But how has it affected the European chemical industry? To get an insight into this and more, Regions & Locations Guide asked René van Sloten, Executive Director Industrial Policy, Cefic about his take on the situation.

Regions & Locations Guide: How has the European chemical industry been affected by the economic instability?

R. van Sloten: The chemical industry in Europe is seriously affected by the economic and financial crisis. The worldwide financial crisis and the spill-over into the real economy is having a severe negative impact on most of the chemical industry's key downstream sectors, (automotive, construction and consumer durables). This dramatic slump in global demand in the value chain resulted in a sharp fall in production across all chemical sectors, in particular basic chemicals, polymers and speciality chemicals. Companies are making a lot of internal efforts to counteract the consequences of the economic decline and are doing all they can to keep their skilled permanent staff. Chemical SMEs, already facing increased costs stemming from the implementation of REACH, are also seriously affected. We recently saw some positive signals of recovery in Asia and Europe. It thus looks like the through has been reached and that the economy is slowly on its way to recovery. Looking ahead though the pattern of recovery remains uncertain, as underlying demand is still very weak. Consumer confidence will take time to recover, not least because unemployment has yet to peak. Although we expect chemical production growth in 2010 compared to 2009, it will take some time before pre-crisis production levels are reached again.

Is Europe sustaining its competitive edge?

R. van Sloten: With roughly 30 % of world chemicals production, Europe has been a leading chemicals production platform for many years. But as we all know, that position is not a given and we must strive to sustain it. Chemicals is one of the most global sectors and our industry has admittedly greatly benefited from globalisation. Roughly 25 % of our production is exported to the world markets and European companies are investing in key growth markets. On the other hand our industry is increasingly challenged by competitors from other regions, especially from BRIC-countries (Brazil, Russia, India and China) and the Middle East, which have access to cheap raw materials, profit from advantageous government policy in terms of low energy prices or are located in fast growing countries. This puts our competitive position as a region under threat: if markets are strongly growing elsewhere, raw materials are elsewhere and energy is cheaper elsewhere, Europe has to excel in other areas to remain competitive and to be able to attract investment.

How can this be achieved?

R. van Sloten: While the situation is challenging, we should not forget our key assets. Yes, we are disadvantaged versus other areas in the world as regards access to raw materials and energy costs, so we must make every effort to improve and use our competitive advantages, such as the presence of a large internal market of over 500 million affluent consumers, innovative capacity, integrated value chain (clusters), highly skilled labour force, in order to remain competitive in the global arena. For example, EU chemicals industry profits from high integration of production within clusters, such as Rijnmond, Antwerp, Ruhrgebiet. Authorities should therefore work on improvement of infrastructure, by investing in energy feedstock pipelines and dedicated rail freight lines, etc.
A logical consequence of multiple chemical production regions in the world is that our share of world chemicals 
production will decrease, simply because other parts of the world are growing faster. However, while percentage growth levels may be subdued in Europe because of mature markets, chemical sales in 
Europe amount to over €550 billion. 
And new societal needs in areas such 
as health, energy efficiency, food, etc. 
will create many new opportunities. Chemistry can provide the answers to these needs and we need to ensure that these solutions are developed in Europe and not elsewhere in the world. In that way we can sustain the wealth of our society, keep employment here and export these solutions to other parts of the world.

What are the key drivers for competitiveness?

R. van Sloten: Competitiveness plays both at the level of companies as well as that of regions. The key components of competitiveness refer to advantage in costs and know-how, and comprise parameters such as feedstock and energy cost, innovation and R&D, infrastructure and regulatory framework. As said, Europe suffers from competitive disadvantages in terms of energy and feedstock costs, a burdensome regulatory framework and high labour costs. At the same time the integrated nature of our industry and the presence of strong clusters together with a highly skilled labour force constitute advantages.
We need to strengthen areas where we have competitive advantages further and improve the situation where we are weaker. For example, liberalisation of gas and electricity markets will reduce the costs of energy, while improved access to renewable raw materials can lower feedstock costs. A stable and predictable, cost-effective regulatory framework is equally important. All these factors have been identified clearly in the High Level Group reports and recommendations on who needs to do what. The sooner these recommendations are implemented the better for our long-term competitiveness. All this can contribute to creating a favourable business environment in Europe, a precondition for attracting investments.

How can the EU and national governments support the European chemical industry?

R. van Sloten: As regards the short term, the European and national economic recovery plans are bringing relief to key customers of the chemical industry, and thus indirectly also to the chemical industry. As we have seen, these actions are now bringing relief to the economy. Our industry is not seeking direct government support in terms of state aid. Instead we are asking for improvement of the business environment for our industry. In the context of the economic crisis this can be achieved by making environmental policy an integrated part of the economic recovery plans and not introducing more strict legislative requirements where advanced legislation already exists, such as for waste and water, and with respect to Integrated Pollution Prevention and Control.

What about the mid-to-long term?

R. van Sloten: We greatly welcomed the initiative of European Commission Vice-President Gunther Verheugen to set up a High Level Group for the chemical industry in 2007. This group gathered some 25 high level representatives from the European Commission, Member States, academia, NGOs and industry that jointly contributed to the development of recommendations on how to secure the future competitiveness of the industry. The group concluded its work in February with a high quality report containing some 40 concrete recommendations. The HLG recommendations now need to be implemented and in this respect we are heartened by the conclusions of the May meeting of the Competitiveness Council composed of Ministers for Economic Affairs from the EC member states. The Council invited the Commission, Member States and industry to implement the conclusions of the HLG and to consider its recommendations as a roadmap for concrete and deliverable activities. A first report on implementation is due by the end of 2010.

How strong is the industry investment in R&D and what should be done to promote innovation?

R. van Sloten: The chemicals industry is highly dependant on innovation and R&D. Growth in this sector is in fact directly contingent on the innovative drive. But first of all, it should be borne in mind that R&D is only part of innovation. Successful innovation depends on a number of factors.
What the industry needs is a reliable and clear innovation policy framework that supports better cooperation between European, national and local initiatives. The EC's actions, supported by instruments such as the European Technology Platforms and lead markets initiatives, could deliver better through joint funding and joint activities of EC and national/regional institutions. At the same time better alignment and involvement of the full industrial value chain should also be ensured.
It is also necessary to speed up innovation delivery. Speed and scale are essential for innovation especially in times of cumulative challenges. Europe's current structures suffer from slowness and fragmentation, meaning that ideas generated here are brought to the market more successfully by others elsewhere. There is a need to synchronize the funding programmes and innovation support as well as for the uptake of innovative technologies, especially in the public sector. In many areas innovative technologies are already available; they just need to be brought together in appropriate demonstration projects, such as Smart Energy Home or F3 - Factory for the future.
Furthermore, innovation needs the timely development of appropriate skills and human resources in order to address the needs of tomorrow's business and a change in the mindset of society about the challenges ahead.