The CIA gathers industry insights through a quarterly business survey to advocate for our members’ interests with policy makers, regulators and other stakeholders.
Read more
The CIA is proud to announce the launch of the new Sustainable Health Metrics Tool.
Read more
The chemical and pharmaceutical industry is fundamental to modern society. With an immense variety of products, from vital medicines and foods, the construction of buildings, to transport and leisure, the industry truly does have an impact on virtually every aspect of our daily lives.
Read more
This report has two sections. The first is a CIA analysis of government data via the Office for National Statistics (ONS). This section assesses the UK chemical industry’s performance against that of the wider economy and is followed by a look at what challenges lie ahead. The second section presents the results and further analysis of our own Q3 2023 Business Survey.
Download: CIA Economic Report Q3 2023
As we enter the second half of the year, the global economy is still struggling with challenges that emerged last year: international conflicts continue to strain global supply and demand, and inflationary trends require Central Banks to establish tight monetary policies. In the UK, the inflationary peak was reached in October 2022, with annual prices increasing by 11.1% from the previous year, but despite the tight monetary policy adopted by the Bank of England, almost a year later, inflation remains significantly above 2.0%. A core factor that led to sticky inflation was the high level of consumers’ savings acquired during the pandemic and the high demand of consumers for services which they could not consume during the lockdowns, e.g. restaurants, theatre, travel.
At the beginning of the year, most forecasters expected tight monetary policy and tough operating conditions to lead the UK into a recession, but resilient consumer spending made a recession in 2023 unlikely, with updated forecasts accounting for muted growth. Whilst the general global economy is expected to weakly expand in the next two years, the global industry is expected to contract, with intermediate and energy-intensive goods being the worst-performing sub-sector.
The latest data published by the ONS looks at GDP, production and trade in the first half of the year. In Q2, GDP grew by 0.2% with expansions across all sectors. Services still have not recovered from the pandemic, whilst production and construction output levels are now above pre-pandemic. Nevertheless, high energy prices severely hindered manufacturing output, especially chemical output which relies on gas both as feedstock and energy sources. In 2022, UK chemical production fell by 4.7% with major contractions in the second half of the year. In Q1, the chemical output expanded by 1.3% but contracted by 0.7% in the second one. June and July were the better-performing months with monthly growths of 1.0% and 1.5%, respectively.
The value of the UK chemical trade fell in the second quarter of 2023 as both exports and imports contracted. The main driver of the decrease is trade with EU countries, which was not offset by marginal increases in non-EU trade. Nevertheless, in the year to July 2023 we exported over £60 billion worth of chemicals and remain the second largest UK export.
Consumer Side Inflation in the first quarter averaged at 10.1%, and at 8.4% in Q2. In July, it fell to 6.8% and in August to 6.7%; core CPI drove August’s slowdown. Core CPI’s slowdown from 6.9% to 6.2% likely guided the Monetary Policy Committee’s decision to maintain interest rates at 5.25%.
For chemical producers, inflation is easing as input and output prices have been deflating for four consecutive months. The deflation of chemical input and output prices is the symptom of low demand and diminishing production levels. Despite tight operating conditions, in the three months to July, chemical pay increased but not above inflation, resulting in real terms pay cuts for the seventh consecutive month.
Turning to our survey, it is evident that operation conditions remain tight as for the fifth consecutive quarters sales fell with quicker falls in domestic sales and European exports. Low demand led to lower production levels, capacity utilisation, and employee numbers as companies continued to struggle through diminishing margins. Energy costs remained largely unchanged but are expected to increase significantly through winter, putting an additional toll on margins as output prices remain low due to strained demand.
The general consensus is that the last quarter of 2023 will not differ significantly but will be better than Q4 2022, which was the worst recorded quarter as per CIA Business Survey records. Sales, both domestic and international, are expected to improve by less than 20% of respondents as most expect contractions or no significant changes. Production levels and capacity are also not expected to improve, with almost a third of respondents fearing further reductions.
Long-term estimations are slightly more positive due to a baseline effect. Over half of the respondents expect sales to increase from current levels over the next 12 months, but over a year of falling margins has led two-thirds of respondents not to expect higher margins in a year’s time. These estimations also show caution in terms of energy, as 27% fear further increases in their energy costs.
For the second quarter in a row, ‘weakening demand’ was ranked as the main issue by over half of respondents, followed by ‘labour cost increases’ and ‘energy price increases’. Both ‘energy price increases’ and ‘skills shortages’ were considered the main challenges to business by 9% of respondents. Among the issues that are expected to worsen: ‘weakening demand’ and ‘labour cost increases’ ranked higher, followed by ‘energy price increases’ and ‘raw material price increases’, and unexpectedly ‘fright price increases’ and ‘Net Zero Transition’.
The second quarter brought additional strain to chemical producers as more contractions in sales were reported. Most respondents experienced a decrease in input and energy costs from the previous quarter, but output prices also decreased.
