United Kindgom

Key facts

CHEMICAL INDUSTRY SNAPSHOT

The second-biggest industry 

With over £60.0 billion of exports and £30.4 billion of value added to the UK economy, 2023 saw the chemicals & pharmaceuticals industry as the UK’s second largest manufacturing industry behind machinery & transport equipment.  

Offering a full product range 

The UK industry is active in all key areas: basic inorganics, petrochemicals, polymers, agrochemicals, paints, detergents and personal care products, in specialties such as adhesives, flavours and fragrances, and in a host of industrial specialties including lubricants, fuel additives, construction chemicals and catalysts. It is also a global leader in pharmaceuticals with numerous research centres around the country and a thriving collaboration between academia and industry.  

Employing and investing 

The UK chemical and pharmaceutical industry has a workforce of over 130,000 people and across the country the equivalent to 46,000 fulltime people work on chemical and pharmaceutical R&D. The workforce is on an average weekly salary of over 21% higher than the rest of the manufacturing sector and nearly 27% higher than the average across the economy. Focusing on the gender breakdown, 34.8% of the workforce are women above the 25.2% manufacturing average. Chemical and pharmaceutical businesses are also at the heart of multiple high value supply chains and are estimated to support a further 500,000 jobs – many in poorer economic regions of the UK.  

The sector is a national leader when it comes to research and development (R&D) spend with an annual investment of almost £10.0 billion which accounts for over 19% of the UK’s total business spend and equivalent to 0.4% of national income. 

On top of this spend on R&D, the industry spent a further £7.2 billion in 2023 on business investment into areas such as buildings, vehicles, and machinery. This accounts for 18.6% of private sector manufacturing’s spend.  

UK chemical industry performance through 2023

2022 was one of the most challenging years on record for UK chemical businesses as the Russian invasion of Ukraine exacerbated the energy crisis and cost-of-living crisis. Labour and raw material shortages combined with considerable price increased, have led to a downturn in the industry as output contracted by 7.0% in the second half of the year. The severe contraction in the last quarter of 2022 marked a weak start to 2023 with January’s 2023 output 18.1% below pre-pandemic levels.  

The challenges around demand and cost arose in 2022 continued through 2023 resulting in a 9.1% yearly contraction of chemical output. Nevertheless, most of this contraction is linked to shrinking production and capacity utilisation in H2 2022, as between January 2023 and December 2023 output contracted by 4.2%. 

When considering pharmaceuticals, 2022 remains a year marked by contraction despite really high production in H2 2022. The same cannot be said for 2023 which saw pharmaceutical output increase by 9.8%, yet thanks to extremely high demand throughout the pandemic and the pivotal role of the UK pharmaceutical sector in the development of COVID-19 vaccines, pharmaceutical output in December 2023 remained 38.9% above pre-pandemic level.  

For this reason, when combining chemical and pharmaceutical output in 2023 these sector’s expanded by 2.4% thanks to strong pharmaceutical production.  

Current challenges faced by the industry  

The UK chemical industry is facing a number of current and long-term challenges. CIA’s quarterly surveys shows that until Q2 2023 the main challenge faced by UK chemical industry was energy price increases, since then weakening demand for chemicals has taken over as the main concern for businesses. Energy, raw materials, and labour costs pushed up by the cost-of-living and energy crisis coupled with low consumer demand for goods resulted in destocking trends which impacted the whole supply chain, including chemicals.  

Energy Price Increases   

Even if energy price increases was not in the top three main challenges in Q4 2023, at the time of writing (April 2024) energy prices are almost double what they were in 2019 and roughly 2 to 5 times higher than in China and the US. Energy has a strong impact on UK chemical business for the following reasons:  

1. Direct cost: The clearest impact is that on the cost of production. The UK chemical industry is energy intensive and in addition, it uses both methane and ethane gas as a feedstock. Industrial gas prices are volatile and depend on regional and global wholesale markets.  During the energy crisis, the UK Government stepped in to support businesses by capping the wholesale cost of gas and electricity impacting businesses. Since winter 23/24 wholesale prices have substantially reduced, and when corrected for inflationary effects, they are largely where they were pre energy crisis. That said electricity prices remain significantly above competing nations given the UK’s policy of decarbonising electricity generation as it primary tool to tack climate change and its policy of recovering subsidies and incentives by way of a l levy on electricity bills. As a result some Electro intensive businesses receive relief from policy costs, with further support measures coming into effect under the British SuperCharger in an attempt to close the gap with competing nations.   

2. Indirect – demand: As energy bills and overall cost of living increase households tend to decrease discretionary spendings impacting overall demand in the economy. In addition, the end of lockdown shifted demand away from goods towards services. This trend in both the EU and UK led to weak industrial production, especially for intermediate goods – which include chemicals.  

3. Indirect – competitiveness: the cost of energy in China is 6.2 times cheaper than in Europe, including the UK.  A similar competitive disadvantage is experienced against the US and Japan is not as exposed on energy as the EU +1.  The disparity in energy costs is reducing the UK’s international competitiveness at a time when the UK is reliant on global demand.  

Weakening Demand   

The cost of energy is not the only challenge facing UK chemical producers, and more recently weakening demand has become incrementally more limiting for businesses. As the end of the lockdown concentrated most of demand towards services rather than goods, industrial production struggled. Low demand left manufacturers in a tough spot as the energy crisis and COVID-19-driven supply chain disruptions increased production costs reducing margins as businesses were unable to pass the higher costs on to consumers. Additionally, higher input costs incentivised companies to keep low levels of stock impacting demand for intermediate goods, such as chemicals. The re-opening of the Chinese economy with their lower production costs brought extremely competitively priced goods in the British and European market further diminishing demand for UK produced goods. Moreover, the EU is the biggest market for UK chemicals, and as some major European countries entering recessions in 2023 and European industrial production continuing to struggle through the first few months of 2024, UK chemical production has also been impacted. To summarise, destocking and cheaper imports strained domestic demand, whilst industrial downturns in the EU affected exports of chemicals and products that use chemicals. Whilst there is no clear end to this trend, recent anecdotal evidence suggest an easing of conditions especially in terms of domestic demand.  

Skilled Staff Availability   

The final major challenge facing the UK chemical industry is the availability of skilled staff, recruitment and retention. A workforce with an adequate skillset has been an underlying challenge for the UK chemical industry for a number of years.  The pandemic has exacerbated some of the challenges but BREXIT coupled with unhelpful immigration policy and an ageing workforce have delivered a perfect storm of workforce related issues. Labour shortages are a challenge across the UK economy, UK employment rate remains 1.2 percentage points lower than pre-pandemic due to an increase in the number of people who are economically inactive. Predominantly, the increase in the economically inactive are people aged between 50-64 and are long-term sick, some have retired early and many with critical skills from within the chemical sector. This overall fall in labour supply has squeezed the manufacturing workforce. Currently there are 2.7 job vacancies in the manufacturing sector per 100 jobs, significantly above the long-run trend of 1.7 and pre-pandemic peak of 2.6.  The CIA works closely with UK universities, skills organisations and those providing critical apprenticeship training to help ensure a future pipeline of skills is available to the industry. 

Mid-to-Long Term Challenges   

In the mid-to-long term the industry faces challenges surrounding UK REACH, the net zero transition, and lack of tangible support from government. Whilst the US established strong financial incentives for industries working towards the Net zero target, the UK is still missing a cohesive industrial policy with clear achievable targets and incentives for industry. 

Revitalising pharmaceuticals  

Production of pharmaceuticals, for decades one of the fastest-growing sectors, fell sharply between 2009 and 2014 as companies sought to counter increased R&D and regulatory costs and fewer blockbuster drugs by moving production elsewhere. This led to outsourcing of active ingredient production both elsewhere in Europe, including Ireland, but also to industrializing nations with or near large consumer populations, including India, China and Singapore.  

However, this outsourcing trend has been called into question – driven by higher-than-expected costs, extended supply chains, poor quality control in some new production locations and most fundamentally national vulnerability in the face of Covid-19. Last year UK government announced a £1 billion investment in life sciences sectors aimed at boosting innovation and commercialisation. 

The UK’s strong science base has helped R&D spending stay high but the country has struggled to attract significant manufacturing investment – a situation we hope is alleviated with clarity over Brexit, emergence from Covid-19 and practical support (including sufficient public investment) to deliver the technology and infrastructure required to enable industry to respond to the UK’s net zero commitments. Another core issue of this sector is skills shortages and remuneration, with pharmaceutical development and manufacturing being a global and highly competitive field, companies need to attract and retain the best staff with the right skills and experience.  

Strong in the North  

There are chemical manufacturing sites in all UK regions. Primary commodity chemicals are produced mainly in Scotland and Northern England. Feedstocks include hydrocarbons (mainly gas and refined petroleum fractions), minerals and vegetable or animal-derived oils and fats.  

Clustered with customers  

Sequential processing is the norm, with co-located processing clusters adjacent to industrial customers in other industries.  

In the UK we have five main chemical clusters: Grangemouth, the Humber, the North West, Southampton, and Teesside. In these sites there is a higher concentration of refineries, chemical and pharmaceutical  businesses.  

Close to feedstocks  

North West England is the leading chemical producer, followed by Scotland, North East England and the Yorkshire/Humber areas, whilst South Wales, the South and East of England regions also rank highly. Locations often depend upon availability of feedstocks such as North Sea hydrocarbons, salt and limestone, and energy (originally coal).  

Handy for ports  

Though peripheral to the centre of the European market, all chemical-producing regions have access to good ports and many benefit from an ethylene pipeline network, while Liquefied Natural Gas (LNG) re-gasification terminals complement natural gas supplies from the North Sea and Europe.  The UK has established 12 Freeports across the country.  The Freeports offer tax and employment advantages to business within scope.  

Investing for the future  

Over recent years, the import of cheap ethane from the US, landed in Grangemouth and Teesside, has helped underpin the long-term viability of the UK’s petrochemical industry.  Most recently, the announcement of a multi-million pound investment in Sabic’s Wilton facility should help secure the future of its UK steam cracker and the wider Teesside industrial cluster. In addition, October 2021 also saw INEOS announce a €2 billion investment in green hydrogen production, with the first plants to be built in Norway, Germany and Belgium and investment also planned in the UK and France.    

Building on knowledge 

Speciality chemicals and pharmaceuticals are more widely distributed. In recent years pharmaceutical R&D has increased in South-East and Eastern England, close to the renowned universities of Oxford and Cambridge.  

HOW ARE WE DOING?

Strengths

• Ethane import infrastructure and three crackers able to use ethane as a feedstock  
• LNG import and re-export facilities  
• Several closely integrated clusters  
• An extensive ethylene pipeline network  
• Modern chlor-alkali and derivatives production based on membrane technology  
• Strong exports to geographically diverse markets  
• High resource efficiency  
• Strong pool of highly-skilled researchers and staff  
• Highly innovative, backed by exceptional research and university infrastructure  
• Good labour relations  
• Strong safety and responsibility culture and performance in production and distribution  
• Able to satisfy sophisticated consumer demands  
• Improving public perception  
• Heightened political recognition and value driven by industry’s criticality to the economy and broader society in tackling Covid-19  

Challenges

• Ongoing disruption linked to Brexit and the medium to long-term impact on investment  
• Uncertainty over the design and implementation of UK REACH  
• Fragmented ownership of plants within clusters can lead to non-optimal long- term strategies  
• Energy prices are globally uncompetitive, driven up by EU and UK climate policies while US, Middle East and China rivals access cheap hydrocarbons  
• Mature European market: growth is faster in Asia and the US  
• Scarcity of skilled craft workers because of ageing workforce and competition from other sectors  
• Demand remains low after over 2 years of contraction  
• High production costs (energy, cost of labour, raw materials, trading) relative to emerging markets hinder international competitiveness  
• Historic strength in some key customer industries – e.g. aerospace and automotive – now challenged by ongoing Brexit disruption and stronger growth in non-European markets  

OUR CONTRIBUTION TO A COMPETITIVE EUROPE

Strengthening strategic planning

Over recent years, a long-established industry/government strategic partnership, known as the Chemistry Council, has seen its progress restricted by a combination of Brexit, Covid and, most recently, supply chain tensions and cost of living challenges driven by the war in Ukraine.  March 2023 will see the restart of the Council’s work, addressing the key challenges to long term growth with a focus on tackling decarbonisation and broader sustainability through competitive energy; reinforced and new supply chains and collaborative innovation.  The strategy to address this was published in November 2018, and the March restart of the Council will see a review of this strategy as well as composition of the Chemistry Council.  Whilst the Chemistry Council’s progress has been restricted over recent years, the industry has, however, congregated around a collective ambition to halve emissions by 2034 and by 90% by 2050, all based on sufficient access to hydrogen, carbon capture and storage and clean electricity.  The country’s ability to minimise emissions as quickly as possible is best demonstrated through our chemical clusters – especially Humberside, Teesside, the north west, the Solent region and Scotland (Grangemouth).  

Putting science to work

The UK government wants the UK to be the world’s most innovative economy and through the Industrial Strategy, has committed to reaching the target of 2.4% of GDP investment in Research and Development (R&D) by 2027. This objective As a first step to reaching the target, the Government announced an additional investment of £7bn for R&D over 5 years (from 2017-18 to 2021-22) as part of the National Productivity Investment Fund. This raises public investment in R&D from around £9.5bn per annum in 2016-17 to around £12.5bn per annum in 2021-22 – the biggest ever increase in public funding of R&D.  

Navigating Brexit

With 51% of UK chemical exports destined for the EU and 71% of chemical imports originating from the EU, it was very reassuring that tariffs were avoided and supportive Rules of Origin agreed as part of the UK/EU Trade and Cooperation Agreement. Nevertheless, 6 years after the vote the UK is still to establish UK REACH.