16 January 2018

Regulation does shape profitability

In an article written for Chemistry Today, Dorothee Arns, Executive Director of Petrochemicals Europe, explains why streamlining EU regulation is necessary to preserve the industry's competitiveness while maintaining high environment and safety standards.

Please read the full article below:

Introduction

Does regulation really impact the European (petro-)chemical industry in a quantifiable way, or is this just the unilateral perception of the industry? In 2015 the European Commission decided to take a deeper look into this topic to find concrete answers, embedded in the framework of their “Better Regulation” agenda. Independent Belgian consultant Technopolis was entrusted with conducting a comprehensive study called “Cumulative Cost Assessment (CCA)” and basing it on genuine data rather than on simulation. Since up until then precise data had never been published before, the new revolutionary aspect of this cost assessment exercise was that, with the help of companies opening their books, for the first time ever facts and figures were put on the table, not opinions. The outcome - officially published on the Commission´s homepage (http://ec.europa.eu/DocsRoom/documents/17784) in summer 2016 - illustrates the different dimensions of regulation and their effect on the profitability of European (petro-)chemical producers.

EU Regulation 2004-2014 under scrutiny

The study analysed the cumulative costs - in terms of monetary obligations, capital expenditure, operating expenses and administrative burden - of the most relevant EU legislation with an impact on the chemical industry in the 28 EU Member States during the period 2004-2014. Basically, the entire chemical sector was covered, although cost was assessed only for the six subsectors with sufficient data available to produce reliable estimates:  petrochemicals, inorganics, plastics, pesticides & other agrochemicals, specialty chemicals and soaps & detergents. Among the pieces of legislation during the period considered only those incurring the highest cost directly attributable to chemical companies were taken into account, amongst them for example REACh, CLP (= Classification, Labelling and Packaging), biocides as well as investment in anticipation of Seveso III and  phase 3 of the ETS (= Emissions Trading System).

The survey did, however, neither consider the effects of legislation from other sources such as national authorities, nor major and complex European legislation becoming effective only after 2014, such as the Energy Efficiency Directive (EED). Moreover, the regulatory costs contained in energy prices were not taken into consideration in quantitative terms, albeit constituting a substantial cost factor.  

The outcome: regulatory costs significantly shape profitability 

The Commission´s report showed that (quote) “when all legislation relevant to chemical companies is cumulated, the estimated average annual total direct cost borne by the subsectors covered by the study during the period 2004-2014 approaches €9.5 billion, representing around 2% of their turnover and 12% of the value added. Comparing cost with Gross Operating Surplus (GOS), which can be used as a proxy for profit, the cost represents as much as 30% of this value, indicating that legislation cost is among the important factors shaping the profitability of the EU chemical industry”.

In fact, with a total of around  €100 billion paid over the 10-years period under investigation, regulatory costs have not only almost doubled within a decade, but meanwhile also reached almost the same order of magnitude as the total Research & Development (R&D) expenditures of the chemical industry in Europe. 

According to the Commission´s analysis, the top three regulatory cost drivers between 2004 and 2014 were emissions and industrial processes legislation (33% of total cost), followed by chemicals legislation (30%) and workers´ safety regulation ( 24%). These three sources together accounted for 87% of the total regulatory costs, whereas the contribution of the other packages examined – energy, transport, product-specific regulation and customs & trade – to the overall regulatory cost was much smaller. 

Nevertheless, it should be noted that the cost impact of the legislative packages scrutinised varied from subsector to subsector, strongly depending upon product groups´ and production chain specifics as well as differences in the anticipated impact of each subsector on health and safety – of both consumers and employees – and on the environment. 

The report further highlighted that the impact of legislation is also determined by company size, because the ratio between regulatory costs and value added proved to be more disadvantageous for small and medium-sized enterprises for almost all packages. This is due to the fact that costs of  complying with legislation are not linear and cannot be amortised by a large volume of chemicals. 

The path forward

Of course it is good to see that the topics of better regulation and industrial competitiveness have moved up on the agenda of the EU Institutions. At the same time it is evident that the developments and shortfalls of the years 2004-2014 as described in the report cannot be changed ex post. However, industry hopes that the results help to draw the right conclusions for future regulation, i.e. to identify possibilities of doing things better, smarter and more cost-efficiently to avoid additional burdens for European chemical producers in the future. 

One step towards this goal could be, for example, to review and possibly harmonise reporting obligations for companies in order to reduce administrative effort and associated costs. Another quick fix could be to streamline EU and national regulations to avoid duplication of work. 

It is important to emphasise that talking about the lessons learned from the CCA study does not mean lowering health, safety and environmental standards or eliminating regulation. Its benefits are evident, and all chemical companies in Europe are firmly committed to complying with the legislation. The question is only whether the same target can be reached with less costs and burden to safeguard the competitiveness of European producers and to (re-)attract more investments to Europe. Especially with regard to the latter, regulatory stability and predictability is of utmost importance, particularly  in  capital-intense industries like (petro-)chemicals with investment costs for building a new grass-root  steam-cracker easily exceeding €1.5 billion.

Hence, if Europe wants to maintain its traditionally strong industrial backbone and domestic innovation potential while achieving its ambitious climate targets, it is high time to find a well-balanced approach between economic, environmental and regulatory necessities. The EU Commission´s Cumulative Cost Assessment and the Better Regulation Agenda per se can be important tools for doing so.