As the end of 2017 nears, Germany’s chemical and pharmaceutical industry is in a positive mood, thanks in particular to a buoyant performance by its main customers in Europe, but also to continued strong trade with Asia.

From the current perspective, the chemical producers association Verband der Chemischen Industrie (VCI) sees no signs of growth tapering off in the near future.  Despite the positive outlook, however, it warns that old and new hurdles line the path to progress. 

High electricity costs have always been a bugbear of this energy-intensive production segment, but newer threats are seen to loom in the guise of Brexit, Germany’s slow expansion of the digital infrastructure and most recently its failure to form a new government after the September elections.

Looking at developments of the past 12 months, VCI President Kurt Bock, CEO of BASF, said 2017 stood out as an “extremely good year.” With above average capacity utilization rates of nearly 87% and all business segments contributing positively, volume sales rose 3% across the board. Sales revenue increased by 5.5% to €195 billion, production by 2.5% and industry-wide employment reached a 13-year peak.

During 2017,  German chemical producers’ sales to domestic customers advanced by 4.5% to €74.4 million and sales to foreign customers (including those in the EU single market) by 6.5% to €120.4 million. At 8.8%, growth rates in Asia were highest, helping to compensate for the only sluggish 3% growth seen in North America. European sales solidified the overall average at 5.5%. With the going still rough in Brazil, sales to Latin America declined 2.5%.

In its outlook for 2018, the association said the dynamic seen in 2017 is likely to weaken, with production slowing slightly to 2% year-on-year. Sales are projected to rise 3%, boosted by a 1% increase in prices, and cross the €200 million threshold for the first time. Domestic sales are seen as adding 2.5% and foreign sales 3.5%.

VCI’s economists base their confidence to a major extent on continued robust demand for German manufactured goods. But with national tax-intake robust, the industry feels the country’s leadership lacks a vision for investing in its future. Not least it stresses that Germany must remain a good place to locate new chemical business. 

Along with inadequate attention to digitalization, Bock said more should be done to support education, research and innovation. The industry’s vision for Germany foresees an increase in nationwide R&D spending to 3.5% of GDP up to 2025. According to VCI figures, chemical producers contributed €10.5 billion to the national research expenditure in 2016.

Touching on the industry’s twin issues of climate protection and energy, Bock said Germany’s consideration of a tax on CO2 or a “hasty” exit from coal-fired energy generation would be “a step in the wrong direction,” which would have negative consequences for the country’s international competitiveness.

In pursuing a national climate policy, the EU’s national governments should concentrate on areas beyond the Emissions Trading Scheme (ETS), Bock said, pointing to the recently passed EU directive that would increase prices for CO2 certificates from 2021. “Adding regulations at member-state level would be ‘”double regulation without any benefit for climate protection,” he asserted.

The German chemical industry favors expanding the ETS at least to the G20 countries. Bock said. Touching on a nerve exposed by President Donald Trump’s withdrawal of US participation in the Paris Accord, Bock noted that the EU and the state of California are developing prerequisites for a joint CO2 emissions trading market. China’s introduction of an emissions trading scheme from 2018 could also offer “new perspectives for reducing greenhouse gases,” he said.

Among all concerns, the British exit from the EU, one of the country’s biggest chemical trading partners, is putting the deepest furrows in German chemical producers’ collective brow. With manufacturing on the other side of the channel shrinking, the trade balance has shifted clearly in Germany’s favor. The UK accounting for 6.7% of chemical exports, worth €12 billion, in 2016, British-made chemicals accounted 5.2% of the import total.

How severely individual chemical companies will be affected by Brexit depends on outcome of the next round of talks between the UK and the EU, but VCI believes customs duties of €200 million for chemical products could be expected.  The burden could be even greater if specific regulations such as REACH or licensing of crop protections and biocides differ, it calculates. 

To avoid “bureaucratic hurdles” post-Brexit, Bock said the EU and the UK will need to conform to the same standards here. The association has called for a “comprehensive agreement” in this direction.