Background
- The UK’s chemical producers have been recognised as critical manufacturing organisations by the government and are being encouraged to keep manufacturing (whilst of course observing strict guidelines to protect workers against COVID-19). The Secretary of State, Alok Sharma, published a letter in April thanking chemical industry workers, amongst other manufacturers, for their contribution in the face of adversity (copy of letter supplied).
- The industry produces materials that are critical to society and is under-pinning the efforts to combat COVID-19; the production of the materials needed to make vital drug substances, disinfectants and cleaning agents, packaging materials, water treatment chemicals to treat waste and to keep drinking water supplies safe – to name but a few.
Short term
- Companies that are focussed on certain industry sectors such as automotive, aviation and aerospace are certainly suffering. The chemical industry produces specialised automotive paints, coatings, fuel additives, greases and lubricants, additives used in the production of engineering polymers, composites and tyre processing, etc. Such businesses are expecting sales revenues to fall substantially; I have heard figures of ~ 20% on average. Inevitably, profitability will be impacted. However, more diverse businesses, and those related to personal care, food flavourings, sanitation, healthcare will likely see the opposite effect.
- Bear in mind also that you cannot just “flick a switch” to turn the country’s production units on and off. Except in extreme (emergency) situations, plant start ups and shut downs would normally take several days. Many facilities, whether batch or continuous, run 24/7 for the majority of 365 days of a year.
- The industry is very highly regulated and workers are familiar with wearing PPE and adhering to procedures. Thus, it has been relatively simple to modify working arrangements in manufacturing facilities to cope with COVID-19 and the unions have been almost universally supportive; although a few companies have reported challenges with workforce relations I understand that this is not a widespread issue. The chemical industry enjoys stronger health and safety standards and workforce relations than other sectors. Consequently, the chemical industry is still operating up and down the UK with relatively few redundancies or people being furloughed compared with other business sectors.
- There are however pinch points in the supply chain and these are likely to increase in number and severity in the short term; disruption from the usual Chinese new year celebrations coupled with the COVID-19 outbreak in China early on in 2020 already had an impact before the “lockdown” in Europe. Some raw materials have only been available from Chinese manufacturers since a couple of decades and whilst China is now getting back to work, shipping containers were already out of position and raw material supply chains under stress. Add to that the lock down in India, where the government has reportedly shut down all factories except those directly related to pharmaceutical production, and we can expect to see some disruption to both the supply side and the demand side for 3-6 months to come, with many company executives focussed on short term “fire-fighting” rather than new business development.
- The vast majority of chemical industry shipments are via sea (or road/rail inland) and I have heard numerous reports of containers being held up at ports – in the USA, India and Europe there are backlogs at customs due to reduced staffing levels and protracted procedures (additional checks, increased documentation, especially in France and Asia).
- Some lower volume, higher priced (and lower hazard) materials would normally be sent air-freight. However, the reduced capacity of airlines has resulted in substantial delays. This is expected to continue through June – July. Priority is being given to certain medicines and PPE shipments. Fedex and other couriers have backlogs of shipments, and warehouses filling up on account of consignments getting “stuck” with destination premises closed for receipt etc.
- An unintended consequence of increased hand sanitizer production, coupled with recent environmental pressure which has successfully reduced plastic packaging usage, is that there has been a shortage of bottles into which to fill sanitizer!
- Another immediate, short term concern is industrial waste treatment and disposal. Chemical processes necessarily produce waste which needs to be disposed of in an environmentally responsible fashion. Spent solvent is frequently used by cement producers to bring their kilns up to temperature. However, the demand for cement declined (together with the availability of workers) so that 2 of the largest UK cement companies shut down operations. Solvents can be stored up to a point on a business’s premises but companies have legal limits placed upon quantities and how material can be stored (in drums or bulk). Thus, consideration to be given to the competent authorities’ consent limits and permits.
Medium -Longer term
- Longer term, with weaknesses in the supply chain now exposed, I expect to see a renewed effort to on-shore/re-shore production and for critical materials to be produced in multiple geographies wherever possible. However, the industry is highly capital intensive and it takes many months to build new production facilities. Furthermore, some materials are derived from materials that are naturally occurring (mined) in certain parts of the world (e.g. lithium). The UK’s chemical industry will necessarily continue to be a globally active import-export sector, although with an even greater emphasis on re-use and recycling – the circular economy.
- A positive that I foresee that could be accelerated by the COVID-19 pandemic is faster innovation in new ways of synthesising chemicals – especially in the field of continuous flow (as opposed to batch) manufacturing. The advantages of this technology include a smaller physical footprint, more flexible kit, improved process safety, lower capex cost, and tighter impurity profiles (driving higher quality standards and satisfying regulatory bodies’ increasingly stringent requirements)…. Servitisation is relevant to the implementation of this technology, also R&D tax credits and patent box considerations.
- Whilst Government resources are being diverted to COVID-19 the Chemical Strategy/Sector deal discussions are on hold (although the Climate Change and Industrial Emissions Directive policy work is said to still be mostly on track).
- Introduction of some new products and processes to plant were expected to be delayed since the HSE (Health and Safety Executive) has not had sufficient capacity to work through COMAH (Control of Major Accident Hazard) variations – this could have a detrimental impact on businesses that are heavily focussed on technology transfer/contract and custom manufacturing, and innovator companies that rely on frequent product portfolio changes.
The UK-EU trade negotiations, so critical to the industry post BREXIT, have been widely expected to be delayed post December 2020. These have now resumed. Materials pass across borders frequently and the UK’s trade body, the CIA (Chemical Industries Association), together with the continental European counterpart (CEFIC) has campaigned for tariff free trade throughout. The industry view is that a delay would be harmful since it simply prolongs uncertainty on tariffs, but also with regard to regulatory matters (alignment with REACH).
