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KEY NOTE Market Report : Chemical Industry UK : April 2005

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TABLE OF CONTENTS

EXECUTIVE SUMMARY

The UK chemical industry is one of the country's most important and successful manufacturing sectors and export earners. It provides employment (directly and indirectly) for around 400,000 people and is the UK's top manufacturing export market. In 2003, a trade surplus of £6.1bn was recorded on export sales of £31.48bn. Many major international chemical companies operate and manufacture in the UK, which is home to two of the world's top ten pharmaceutical firms — GlaxoSmithKline and AstraZeneca.

The industry's fortunes are closely connected to the vagaries of the global economic cycle. This is unsurprising, given that chemicals are a vital component in practically every consumer or industrial item on sale and, as a result of years of corporate consolidation, the chemicals industry is highly globalised. While the UK chemical industry can fare relatively well during an economic downturn confined to the UK (because exports account for such a large proportion of output), a global downturn can have serious consequences for the industry. This certainly proved to be the case during the international economic slowdown that began in 2001, when profits and output slumped even though the UK economy continued to grow at a healthy pace. However, the industry's fortunes have recovered in tandem with the global economy since mid-2003, and 2004 proved to be a bumper year for sales and profits.

Most sectors of the market experienced growth between 2000 and 2004, the few exceptions being plastics in primary forms, pesticides and other agrochemicals, perfumes and toilet preparations, explosives, essential oils, photographic chemical material and man-made fibres. However, production of basic chemicals and pharmaceuticals, which together account for nearly two-thirds of the market's value, showed steady growth.

The pharmaceuticals industry is of vital importance to the UK economy. Pharmaceuticals make up one of its leading manufacturing sectors, bringing in a trade surplus of £3.63bn in 2003. The background for drugs companies is certainly favourable. The population of most Western countries is ageing rapidly. At the same time, the industry is producing increasingly effective drugs for treating a growing range of illnesses, while governments around the world are under constant pressure to increase healthcare spending.

The long-term outlook for the overall chemical industry in the UK is positive, although the individual sectors are likely to experience contrasting fortunes. Key Note expects the trend towards outsourcing — whereby Western manufacturers transfer production of many low-technology basic chemicals to low-cost producers in the developing world — to continue, with China, which is also a major oil and gas producer, emerging as one of the main beneficiaries. The major chemical companies are also likely to continue to spin off their basic chemical divisions, and the industry in the UK will become increasingly focused on the hi-tech, high value-added end of the market, where the UK still has a competitive advantage. The pharmaceutical industry, in particular, should experience continued strong growth, as a result of growing private and public spending on healthcare and advances made in drugs to treat formerly critical illnesses.

Text © 2005Key Note

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Last updated by Amanda Porteous June 2005