Oral statement to Parliament

Our competitive advantage in the chemical industry

This speech was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

I’m pleased to be here speaking to you this evening, in my present guise as Secretary of State for Business, Innovation and Skills and President…

I’m pleased to be here speaking to you this evening, in my present guise as Secretary of State for Business, Innovation and Skills and President of the Board of Trade.

The idea of a Board of Trade was first initiated by Oliver Cromwell in 1655 although the post of First Lord of Trade has changed somewhat since. My predecessors are an illustrious, if occasionally infamous, group. Cromwell who abolished the monarchy, of course, appointed his son Richard to the post. The first Earl of Shaftesbury, who served between 1672 and 1676, was prosecuted for high treason. In later times, at the beginning of the 19th century, the great Whig reformer Huskisson was run over and killed by the first demonstrations of a steam train.

While I have no plans to abolish the monarchy, or be run over by a train, the jury remains out on whether I’ll avoid a charge of high treason.

I want to talk about the broader economic picture. But perhaps I can say a little first about your industry. I don’t claim too much for my own experience but I did work with the chemicals division of Shell during my time with the company, in the group planning team and then as Chief Economist.

Shell had an unhappy experience with chemicals and always seemed to invest- at least when I was there- at the wrong stage of the cycle. I was asked to find the Holy Grail: to create a model which better predicted the turning points in the cycle. I believe the Holy Grail remains undiscovered.

.But Shell was a good company in my view and made its massive investments with a perspective of decades. It was starting to worry seriously about the implications for an energy and chemicals company of global environmental threats from greenhouse gas emissions in the late 1980s long before governments or environmental campaigning groups had grasped the significance of the issue. That experience taught me to be sceptical of some of the facile criticisms of this industry, and to respect the high engineering and safety standards employed by the leading companies, for whom reputational risk is a major preoccupation.

My other responsibility was thinking through the threats and opportunities posed by the emergence or re-emergence of the major emerging economies, notably, India and China. They were just beginning to open up on their way to becoming the economic centre of gravity of the world economy. The focus on Asian giants seems somewhat commonplace now, but 20 years ago it was counter-intuitive to invest there rather than in Europe or North America and big projects like Nankai in southern China were embarked upon with more soul searching. I assume there is less inhibition today.

Many of the companies represented here tonight are international: part of a global industry. This Coalition Government is very clear that the only future for the British economy is to be outward looking, attracting inward investment and pursuing trade opportunities. In my first few months as Business Secretary I have visited Brazil, India and China (the later two with the PM), and I am set to visit Russia next week. The purpose is to support British business and encourage trade.

The powerful forces of globalisation have coincided with major economic problems in the West, and the UK was particularly badly exposed to the credit crunch because of the size of the banking sector and the extent of personal borrowing against inflated property prices. If using a chemicals analogy, the fouling of a reactor is often addressed by a temporary fix to simply clear out the gunk, but what is actually needed is a fundamental change to whole system to prevent the fouling occurring in the first place. The extreme remedial measures that we have undertaken since forming the coalition are a central part of this fundamental change, but it will be some time yet before the economy is working normally.

One of this Government’s most important jobs is rebalancing the British economy, away from London and the South East of England, and towards those sectors where the UK has a strong base as in the case for technologically advanced manufacturing, including pharmaceuticals and chemicals. Yours is not a sector which comes running to the Government for cash when in trouble. And in any event we are having to cut public spending, we are targeting resources carefully.

In order to promote economic growth, my Department will be supporting 75,000 new apprenticeship places and we have successfully defended scientific research, and we are taking the lead in the creation of a UK-wide Green Investment Bank that will be capitalised initially with a £1bn. We will also play a key role in the operation of the new £1.4bn Regional Growth Fund, that will support projects with significant potential for private sector economic growth and employment, particularly in areas dependent on the public sector. And we are helping to establish innovation centres to provide a bridge between scientific research and industrial applications in fields such as composite materials.

Recovery has to be led from the private sector and the chemicals sector certainly has a vital role to play in the UK’s manufacturing industries. Annual sales for chemicals alone are £56bn, and this accounts for 15% of all UK exports of goods. The sector also has a consistent trade surplus with around 90% of companies exporting, which is more than any other sector. The chemical sector generates £10.5bn in value added, more than 7% of total manufacturing, and other manufacturing industries that are dependent upon chemicals have an aggregate output of around £1,150bn. The sector contributed to a total of £628m R&D investment in 2009, accounting for 4% of all business R&D in the UK. The chemical sector employs 170,000 people and several hundred thousand jobs in related sectors are supported by the chemical industry. I am grateful to colleagues who have championed the industry, particularly Esther McVey, the chair of the All Party Parliamentary Group for the Chemicals Industry, and Ian Swales who has strongly supported the industry on Teeside. I would add that my own constituency contains LGC, formerly the Laboratory of the Government Chemist providing valued high level employment.

The UK has a competitive advantage in parts of the chemicals sector, which stems from a world class science and research base. The Government’s science budget, as I said earlier, will be protected at £4.6 billion a year and key projects going ahead include the UK Centre for Medical Research Innovation.

We shall also continue to provide additional funding for high cost subjects such as Science, Technology and Engineering when we introduce the new funding arrangements for higher education, switching from government funded teaching in universities to graduate contributions.

UK post-graduate training in chemistry is already highly regarded by the industry evidenced by a remarkable number of UK-trained chemistry PhDs who either occupy senior positions in leading multi-national companies such as Johnson Matthey and GSK, or have set-up successful spin-out companies to further exploit their PhD research.

We’re going to need all this combined brain power if we are going to successfully tackle challenges such as climate change and moving towards a low carbon economy.

The chemical sector is responsible for 7% of global GHG emissions and is inevitably affected disproportionately by tough targets being set in the EU and globally. However, unlike many sectors, the chemicals sector has a significant and increasing role in reducing the greenhouse gas emissions of other sectors, as is highlighted in your publication today on how the chemicals industry is delivering a low carbon future 24 hours a day, developing sustainable alternatives to using fossil fuels and lowering carbon emissions by increasing energy and process efficiencies.

Improved fuel economy through the production of lightweight composite materials will undoubtedly help the push. New and improved insulating foams in buildings is increasing energy efficiency. And the work taking place in new bio-based chemicals is helping reduce harmful waste in farming.

As an energy intensive sector, your competitiveness is inevitably impacted by the cost of energy which can represent over two thirds of your production costs. The significance of that cannot be over emphasized for internationally traded, undifferentiated commodity chemicals where price is a cutting edge issue, determining sales and survival in global markets.

There is therefore a link between the competitiveness of the chemicals industry and Government policies on energy and climate change. My department is working in partnership with DECC and industry to develop an energy-intensive industry strategy and identify where further cost-effective abatement potential might exist. This will look at the cumulative impact of policies and make recommendations and report in the New Year.

To conclude, I would like to congratulate Steve Elliott and the Chemical Industries Association for the way in which you lead the chemical and pharmaceutical sector and the strong and determined voice that you give in your lobbying and representation and the way it is carried out. The CIA’s work on low carbon, on education and skills and tonight’s launch of the sustainability strategy are important contributions from your sector showing responsibility and new thinking that will help to shape government policy. The industry is in good hands, and I’d just like to reiterate that it plays, and will continue to play, a vital role in this country’s economy - and it its future.