Statement to the press

Professor Dr. Ulrich Lehner

President of Verband der Chemischen Industrie (VCI)

8 December 2009, Frankfurt am Main

(The spoken word takes precedence)

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Ladies and Gentlemen:

One of the most difficult years in the history of the German chemical industry is nearing its end. The decline in chemical production – as calculated against the previous year - can be compared only with the situation in the first oil crisis some 35 years back. In 2009, we saw the lowest point a few months ago, so that now things are looking up again. The mood in the chemical industry is largely confident; companies are hoping for better business in 2010. However, recovery will be only moderately dynamic. It will take several years to get back to the peak level, where chemistry was as recently as in the 1st half 2008.

Next, some information about business developments over the past 12 months: even confirmed pessimists were surprised by the strong impacts of the global financial market crisis on the economy worldwide. Our industry was hard hit by the massive drop in global industrial production and the resulting weakness in the demand for chemical products in Germany and abroad. In the 1st half 2009, production had to be cut temporarily by 30 percent, before the rapid downtrend came to a halt. Chemical business picked up noticeably in the 2nd half of the present year – but from a very low level.

The above-described developments resulted in a production decline by 10 percent for the year 2009 as a whole.

Details about chemical sectors

In 2009, all chemical sectors were affected by the financial and economic crisis: developments of organic basic chemicals were much weaker than in the previous year. For all three sectors of basic chemicals combined, a decline by 16 percent was recorded. Trends were particularly negative for inorganics (e.g. chlorine or sulphuric acid), where production dropped by 19.5 percent. Polymer production (e.g. polyethylene, PVC or manmade fibres) fell by 18.5 percent. With a production decline by 6.5 percent, trends were somewhat less dramatic for manufacturers of petrochemicals (e.g. ethylene, propylene and benzene).

The economic crisis was also felt in the sectors of fine and specialty chemicals and consumer-related chemicals: in 2009, the production of specialty chemicals plummeted by 14 percent. The production of detergents and personal care products dropped by 8.5 percent. These two sectors were particularly strongly impacted by reserved consumer behaviour and the crisis of the automobile industry.

With a production decrease by 2.5 percent, the pharmaceuticals business did not escape the crisis in 2009, either.

Prices

The year 2009 saw a general drop in chemical prices. The price decline was attributable, firstly, to falling raw material costs: oil and gas were much cheaper than they had been one year earlier. Secondly, many chemical manufacturers were forced to reduce their prices due to weak demand. Since mid-2009 chemical prices have been stabilizing. In 2009 as a whole, they were – on average – 2.5 percent lower than last year.

Sales

As compared with 2008, total sales of the German chemical industry fell by 12.5 percent to 154.4 billion euros. Within this overall picture, foreign business was somewhat more stable than domestic business.

Foreign sales dropped by 12 percent to 85.4 billion euros. Domestic sales declined by 13.5 percent to 69.0 billion euros.

Exports and imports

In 2009, exports – this term comprises foreign sales by German chemical companies, re-exports and chemical exports by third parties – fell by 12 percent to 123.2 billion euros. Irrespective of high pharmaceutical exports – which are usually less sensitive to cyclical developments – the financial crisis had strong impacts on our export business.

Given the weak situation of industry, imports of chemical products dropped considerably against 2008 - i.e. by some 11 percent to 86.8 billion euros.

With around 36.4 billion euros, German chemical companies once more contributed significantly to the export surplus of our country.

Employment

As compared with the production decline, there was a relatively low drop in employment: in 2009, the number of staff employed in the German chemical industry averaged 435,000 persons - i.e. 1.5 percent fewer than last year.
Short-time work and flexible instruments under the collective bargaining agreement prevented higher staff cuts. To enable a comparison: during the same period of time, the German manufacturing industry as a whole lost almost twice as many jobs.

Investment

Due to the global economic crisis and within cost-cutting programmes, chemical companies clearly reduced their investments in 2009. Smaller investment projects were postponed, and companies were cautious in the planning of major projects.

Consequently, investments of chemical companies dropped by 10 percent to 6.3 billion euros in 2009.

In view of low capacity utilization – which averaged 75 percent – there were no capacity increase investments. In the given situation, higher investments are unlikely for 2010. However, we assume that the level of investment will remain more or less stable.

Outlook

In the 2nd half 2009 most production plants, which had been idle temporarily during the crisis, went back into operation. Many chemical companies were able to return to full-time work earlier than planned. This indicates that the worst is over for our industry. However, we cannot simply forget about the crisis: our capacity utilization remains unsatisfactory, and the production level – on the annual average – corresponds to the level of 2004.

·For 2010, we are expecting an increase in German chemical production by 5 percent. With the depth of the crisis from which we are emerging and the ensuing basis for comparison, this is only a minor improvement.

·Due to mounting pressure from raw materials markets, prices will rise slightly. We are expecting a modest price increase by 1 percent.

·In 2010, sales of the German chemical industry should improve by roughly 6 percent.

Our member companies are largely confident that there will be no setback in the next months. Quite the contrary, they believe that the demand for chemicals will further grow.

In Germany, this assessment relies on upward trends, which seem to prevail throughout the manufacturing industry. In particular, production is expected to return to significant growth in carmaking and plastics processing. Almost one third of domestic sales of chemical companies is achieved in business with these two customer industries. An end of the downturn is also in sight in mechanical engineering, which was hit relatively late by adverse economic impacts.

Chances in foreign markets

However, the decisive factor will be developments of foreign markets in the coming months. After all, over 55 percent of the German chemical industry's production go abroad. Following the massive decline in foreign business, there are now increasingly positive signals. Growing numbers of countries are no longer in the stranglehold of the global economic crisis. This is reflected in rising gross domestic product figures and higher industrial production.

The European Union is by far the largest market for the German chemical industry. Almost two thirds of our exports go to the other 26 EU Member States. The EU made the turnaround in the 2nd half 2009. The order situation improved noticeably in many industries. Somewhat livelier business and low stocks at customer industries brought an increase in orders for chemicals from German companies.

Over the last few months, upward trends have been prevailing in the USA, too. NAFTA countries account for well over 10 percent of exports by German chemical companies. But the situation has not yet fully relaxed in that region. US citizens have to economize to pay off debts, which have accumulated over several years.

Strongest impulses for the global economy came from newly industrialized countries - with growth being most dynamic in Asia. The economic crisis was merely a dent in the growth of China and India, where industrial production is already back to pre-crisis level. With a combined share in exports of just over 3 percent – or ca. 4.3 billion euros – these two countries have not yet a primarily role for the German chemical industry. But for our industry, their dynamic growth obviously brings chances for the future: over the last four years alone, the volume of chemical exports to China and India has increased by some 80 percent.

Strengthen Germany as a land of industry

Ladies and Gentlemen:

Germany is a land of industry. With 24 percent, the manufacturing industry's share in the gross domestic product is higher in Germany than in any other industrial country. And for much longer than 100 years, chemistry has been the core of Germany as an industrial nation. Carmaking, mechanical and electrical engineering, plastics and metal processing or construction: products from the chemical industry contribute to the performance and innovative abilities of these and many more industries. In particular, chemical products help improve their energy and resource efficiency. Some 80 percent of our domestic sales are achieved with industrial customers. If the upward trend stabilizes for industry as a whole, this will directly benefit German chemical companies.

Our position in international competition is excellent, too:

In the European comparison, Germany is the largest chemical industry location: almost one fourth of Europe's chemical output is manufactured here. Companies want to further improve this position. The global comparison is even more exacting: in terms of sales, the German chemical industry currently ranks fourth among major chemical manufacturers worldwide – behind the USA, Japan and China.

However, for many years no other chemical nation has been working more successfully on export markets than Germany. Just before the crisis, German companies accounted for 12.6 percent – or the lion's share – of global exports of the chemical-pharmaceutical industry. This shows that chemistry "made in Germany" is a quality mark of global appreciation. Furthermore, this is reflected in our foreign trade balance: with a positive balance of 42.5 billion euros, the German chemical industry had by far the largest foreign trade surplus in 2008. But all this is no guarantee of future success. In global competition, no nation can claim "traditional" market shares. Figuratively speaking, the cards in industrial countries are now being reshuffled for the time after the crisis. This holds true for Germany, too.

Growth policy of the German federal government

After the grand coalition had to cope with the direct effects of the financial crisis, the new federal government is now facing the real challenge: the government must and wants to create suitable conditions for dynamic and lasting growth in Germany. This approach could be the beginning of the long-awaiting paradigm change in the economic policy – forward looking and with the chance to mobilize the potential of our economy, irrespective of the extremely difficult budget situation. From our viewpoint, the federal government is heading in the right direction.

In the coalition agreement, the government parties are emphasizing that they want to strengthen Germany as a land of industry. This is encouraging, because companies need better framework conditions so that they can succeed in inter­national competition – and the faster these conditions are brought about, the better.

With the "Wachstumsbeschleunigungsgesetz" (growth acceleration act) the federal government has taken the first step to prove that it is serious in its efforts. This act is to enter into force already at the turn of 2009/10. Our proposals are largely reflected in the decision to include crisis-easing measures in this immediate action programme, as regards the "Zinsschranke" (interest deduction limitation rule) and loss carry-forwards. There is also some improve­ment concerning inheritance tax, which regulates the tax-free transfer of companies from one generation to the next.

In the coalition agreement, the federal government also states its intention to introduce tax incentives for research in the present legislative period. Unfortunately, no concrete timeline is given. Now as in the past, we think that this step is decisive for strengthening the innovative abilities of companies. Especially in the current situation, the government should use all options to drive forward innovation. New products give fresh impulses for growth and crisis-proof jobs in Germany. Therefore, the VCI will continue to demand this form of incentive to be introduced fast and to the benefit mainly of research-based companies in all their different sizes.

The government's intention to encourage future-oriented technologies – such as nanotechnology - is also seen in a positive light. After all, innovations are more than guarantors of economic growth and new jobs – they are also key to progress in energy efficiency and climate protection.

In this field, the new federal government has set ambitious goals for itself. These goals are achievable only if industry can use its innovation potential to the full. This does not concern just one industry – cooperation is necessary across all areas and industries along the value chain, ranging from starting materials to end-products. Here, chemistry has a key role.

Solar cells of improved efficiency, better performing wind turbines and serial-production vehicles running solely on electricity or fuel cells would be inconceivable without the achievements of chemical companies. The chemical industry is at the centre of innovation. Therefore, Germany must remain a strong location of research and an internationally competitive production location for the chemical industry.

Much will depend on politicians finding the right balance. This means that both climate protection and competitive energy supplies for energy-intensive industries need to be ensured. Then, the chemical industry – together with other industries in Germany – can and will make important contributions to lasting and positive developments in our country.