Statement to the press

Professor Dr Ulrich Lehner

President of Verband der Chemischen Industrie (VCI)

8 July 2009, Frankfurt am Main

(Check against delivery)

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Ladies and Gentlemen:

In the 1st half 2009 the global economic crisis heavily impacted the balance sheets of German chemical companies. This was mainly attributable to the weak demand for chemicals. When the automotive, electrical and construction industries and further industrial sectors are experiencing major shortages of orders, the chemical industry – as an upstream supplier – is directly and strongly affected, too.

However, when we look ahead we see a glimmer of light amid dark clouds. Production has stabilized over recent months, even though at a very low level. After the steep drop at the end of 2008, there are now many signs that the recession is bottoming out in the chemical industry.

But first, some more information about the reporting period: in the 1st half 2009 chemical production dropped by 15.5 percent compared with the still good 1st half 2008. Capacity utilization fell to another low of only 72 percent. To enable a better comparison: today we are roughly back to the production level of 2003. But as I said before, the trend over the last few months gives reason for cautious optimism. For example: since February, production figures in the basic chemicals sector have been increasing slightly from month to month.

Let us now take a look at the individual chemical sectors:

In the 1st half 2009 developments varied considerably. Compared with the 1st half 2008, the strongest production decreases were recorded by manufacturers of basic chemicals. But the production of fine, specialty and consumer-related chemicals fell markedly, too:

In the period under review, the production of inorganic basic chemicals dropped by 24 percent below the level of the previous year. Polymer production declined significantly by 30 percent. With a production decrease by 18 percent, the situation was somewhat less dramatic for petrochemicals. It is worth noting that these are average figures for the 1st half 2009, which do not reflect the improving trend of the last few months.

In the consumer-related sector, the situation was hardly any better for fine and specialty chemicals. Manufacturers of detergents and personal care products reduced their volumes by 10 percent; the production of fine and specialty chemicals fell by 22 percent. At present, only the pharma business is withstanding the crisis - but in this sector, too, production was reduced by 0.5 percent.

Sales

In the 1st half 2009 total sales of the German chemical industry decreased by 16.5 percent to 69.7 billion euros. This decline affected domestic and foreign business alike: Foreign sales fell by 17 percent to 40.2 billion euros. Domestic sales amounted to 29.5 billion euros and were thus some 16.5 percent lower than in the 1st half 2008. Due to the much weaker business situation of industry, there was a strong drop in the domestic demand for chemicals.

Prices

At the beginning of 2009, the price decline for chemical products lasted initially. But prices have been stable since April. For some basic chemicals, prices are even back on the increase. In the 1st half 2009 prices of chemicals were, on average, 1.0 percent lower than in the 1st half 2008. The price decline was particularly marked for petrochemicals (minus 11 percent) and polymers (minus 4.5 percent).

Exports and imports

In the 1st half 2009 exports – this term comprises foreign sales by German chemical companies as well as re-exports and chemical exports by other industries – dropped by 12.0 percent to 62.3 billion euros. The global economic crisis reduced the demand in all export markets for chemicals from Germany.

Due to the weak domestic demand for chemicals, also imports dropped noticeably in the period under review: imports were 10.0 percent below the level of the previous year. In total, chemicals worth 42.6 billion euros were imported into Germany.

All this results in a foreign trade surplus of ca. 19.7 billion euros for chemical products. Thus the chemical industry made a strong contribution to keeping Germany's foreign trade balance positive, even in a very difficult environment.

Employment

Irrespective of major sales problems, employment figures in our industry were more or less stable from January to June. In the 1st half 2009 the German chemical industry employed some 439,500 persons, i.e. there was a drop by only 0.5 percent as compared with the situation one year ago. Companies are using all flexible labour market instruments and collective bargaining agree­ments to adapt to the crisis and to protect jobs of permanent staff. Furthermore, companies are increasingly resorting to short-time work. This should currently impact some 50,000 chemical industry staff.

After my statement, Dr Tillmann will tell you what companies are thinking about their staff developments in the further course of 2009. This aspect and some more topical trends in the current economic situation were parts of our survey among roughly 50 member companies. Just one brief remark beforehand: if the chemical industry's production in the coming months of 2009 remains at the level of the 1st half 2009, there will be more pressure on companies towards job cuts.

Investment and research spending

Profits of most companies have collapsed due to the crisis, the demand for chemicals is still shaky, and capacity utilization is low. In the current situation, it is understandable that maintaining their liquidity and reducing debts are priorities for many companies – over other strategic options. Moreover, higher mark-ups for risks and shorter repayment periods at numerous banks and other credit institutions make it more difficult to finance major investments. Against this backdrop, companies are reviewing their investment projects. Some investments are postponed. We assume that the German chemical industry will reduce fixed asset investments by 5 to 10 percent in 2009.

However, to our knowledge this does not apply to research budgets of chemical companies. In 2008 chemical companies spent around 9.1 billion euros to secure the future with new products and processes. We expect their research and development spending to remain at that level also in 2009.

Outlook

Meanwhile the mood in the chemical industry has improved somewhat, even though the current situation is still seen in a negative light. But now expectations are neutral for the coming months: companies are no longer expecting a further decline in chemical business. As I said earlier, we should have reached the trough.

All in all, we think that the demand for chemicals from industrial customers will rise slightly in the 2nd half 2009, because stocks are getting empty. In this respect, we have encouraging signs from some customer industries. But production is stabilizing on a low and totally unsatisfactory level. Therefore, we are forecasting for the year 2009 as a whole a decline in chemical production by 10 percent compared with 2008. This means that our previous forecast of May remains unchanged. The price level is likely to fall by 2 percent. Consequently, we must expect a drop in total sales by 12 percent in the present year.

Ways out of the crisis

Ladies and Gentlemen:

The economy might possibly be at a turning point, but the economic situation is and remains more than difficult. This is a period where our industry must prove itself worldwide. I am certain that the chemical industry in Germany has excellent chances for emerging stronger and even better performing from this crisis – mainly for the following reason: we can respond more flexibly to this challenge and we are better positioned than most of our world market competitors.

We create value from many more different sources than other chemical nations. This is because the German chemical industry is closely connected with all other industries in our country. Furthermore, our products enter the value chain at all levels. Another point is that relations between chemical companies and their customers and suppliers along the value chain have clearly intensified over the years. This benefits the quality and innovative character of products.

But one of our major advantages is that no other comparable country worldwide has such an intensive division of labour between small, medium-sized and large undertakings. The production of basic chemicals is an important field of activity especially for 150 large businesses, while over 1,500 small and medium-sized enterprises (SMEs) process these basic chemicals into fine and specialty chemicals. Products from 87 percent of these SMEs are present on the world market, where they fill true niches.

Cooperation is not limited to the chemical industry alone. Traditionally, the chemical industry and science engage in research cooperation for innovation. The historic roots of industrial chemistry in Germany benefit these joint efforts. Roughly one third of chemical companies cooperate with universities and non-university research facilities. Today, chemical companies are looking for cooperation partners not only in Germany but globally.

Irrespective or especially because of the crisis, companies must and will continue to enhance these two important strengths. Obviously, they will also continue to drive forward the restructuring of their business fields, reduce costs and look into new potential synergy effects. These are the challenges that we must face, and this is where company owners and managers must assume responsibility – in order to secure a good future for companies and staff, despite all difficulties.

Figuratively speaking, we are still moving on very thin ice which is not strong enough for an upswing. No doubt, the federal government's economic stimulus packages I and II have contributed to avoiding gaps in this ice sheet over the shallow water of recession. But if clever crisis management bets on existing strengths and the ability to innovate, the VCI believes that the government holds two more trump cards in its hand which it has not played as yet. There should be no misunderstandings: This is not about demanding a new economic stimulus package, and this is by no means about serving individual company interests – our goal is to fundamentally improve framework conditions for industry.

The first measure has a short-term effect; the other one is rather of a long-term nature. But both measures – abandoning the interest barrier; fiscal promotion of research – are going in the same direction:

1.   The interest barrier (Zinsschranke), which was introduced with the company tax reform 2008, renders credit-financed research and investment more difficult. Now the interest barrier limits the tax deductibility of interest payments - as operating expenses – to only up to 30 percent of earnings before interest, taxes, depreciation and amortization (EBITDA).

      As a research and plant-intensive industry, the chemical-pharmaceutical industry is more strongly impacted by the interest barrier than other industries. The negative impact of the interest barrier intensifies considerably in the present economic and financial crisis, because company profits are falling and credit interest rates are rising. With the citizens relief act (Bürgerentlastungsgesetz), the federal government subsequently made some minor improvements to relevant provisions for SMEs. But this does not benefit large businesses, who spend considerable amounts of money on research and development. Therefore, we advocate abolishing the interest barrier as soon as possible – as a further step by the public administration in efforts to cope with the crisis. At least it should be possible to suspend the interest barrier for two years.

2.   With a view to strengthening Germany as a research location, the government should introduce soon a fiscal promotion of research and development (R&D) for companies - at equal standing with project support. This measure without time limit would bring two major advantages: It leaves companies free to choose their own research topics and – given the wide range of experiences abroad – it is easy to handle. Almost all major industrial countries promote R&D through tax rules. We advocate an approach where companies engaged in research can deduct at least 10 percent of their total self-financed R&D spending from their tax payable. Where companies are making losses, they should be paid out a corresponding tax credit. A tax credit of at least 10 percent seems adequate for Germany, because tax credits of between 8 and 20 percent are widely found in large industrial countries.

Ladies and Gentlemen:

There is a lively debate about which concepts and instruments are suited best for overcoming these difficult times. With all the pros and cons of the measures taken by the federal government over the last weeks and months: beyond the current critical phase, political-economic considerations must once more focus on long-term framework conditions for industry in Germany, because industry is the backbone of Germany's economic strength. If we want Germany to be a strong and competitive industry location still in 2020, the right course must be set now.

This cannot be done without an intensive dialog between industry, politicians and society. For this reason, we have become active together with the Federation of Germany Industries (BDI) and other industries, and we have started the initiative "Industrieland Deutschland" (Germany – Land of Industry).

The main goal of this initiative is to find joint ways how we can

·secure reliable and competitive supplies of energy and raw materials,

·further improve conditions for research and education, and

·bring about the necessary acceptance in society for industrial projects and new technologies.

If this dialog helps us improve the understanding for the positions and needs of industry, we will have good chances of ensuring future viability and of bringing Germany even further ahead in the international competition of business locations.