MNI INTERVIEW: German Chemicals Weigh Fiscal Boost Vs Energy
MNI (LONDON) - Germany’s planned EUR500 billion infrastructure fund could help reinvigorate a domestic chemicals sector facing the threat of U.S. tariffs, but red tape, high energy prices and rising material and labour costs mean pressure to relocate abroad remains, an industry association’s chief economist told MNI.
The announcement this week by the two parties expected to form the next German government of a bid to relax strict debt rules to allow for massive investment in infrastructure and defence will undoubtedly boost demand, Henrik Meincke, Chief Economist at the Verband der Chemischen Industrie (VCI), said in an emailed interview.
“The chemical industry is at the beginning of almost all value chains, including the defence industry. Higher defence spending leads directly and indirectly to an increase in demand for chemicals. Debt-financed investments in defence capabilities would also boost demand,” he said.
Prior to this week’s announcement, the VCI expected stagnating production and a fall in sales of around 1% this year. How much of a boost the sector now gets remains to be seen, Meincke said, and will depend on the details of fund spending
But he expressed cautious optimism that the incoming administration, led by the Christian Democratic Union, which has promised to cut taxes, will go further to address some of the industry’s key concerns than its ‘Traffic Light’ coalition predecessor, while also working with the European Commission to streamline directives. (See MNI INTERVIEW: German Economy "Stuck," Top Economist Says)
“Cutting taxes and bureaucracy, improving the infrastructure and strengthening Europe are the priorities. A market economy needs a regulatory framework. But in recent years, Berlin and Brussels have gone much too far with fragmented and inefficient regulation. And the Green Deal threatens to cause a tsunami of rules. Meanwhile, bureaucracy has reached a level that makes it impossible for companies to be successful,” Meincke said.
ENERGY PRICE
Still, German firms will continue to face challenges for as long as they continue to pay a higher price for energy than their competitors, while also having to deal with crumbling transport infrastructure. Price competitiveness in basic chemistry is negatively impacted above all by high energy costs, while rising material and labour costs are becoming a problem in speciality chemistry, he added. (See MNI INTERVIEW:Structural Drags On German Growth-ifo's Wohlrabe)
Other than for the pharmaceutical industry, all fields of the chemicals sector are suffering from a lack of orders, falling profits, and the declining competitiveness of Germany as an industry location - raising the prospect that firms will simply seek opportunities elsewhere.
“Investments and energy-intensive raw material production are being shifted to other locations,” Meincke said. “Other factors have a role, too, such as the transportability of products. Moreover, cost disadvantages can be partly offset through efficiency measures and integrated production or passed on to customers. Where this is not possible, the pressure to relocate abroad gets stronger.”
No less concerning is the prospect of a trade war between the U.S. and EU that would hit heavily export-based Germany’s chemical and pharmaceutical industry hard at home and abroad.
“At EUR35.6 billion, the U.S. is currently by far the most important export market for German chemical- pharmaceutical products outside the EU. U.S. tariffs on chemicals or pharmaceuticals would mean a strain on this business. Tariffs on our customers' products would adversely affect our sales in Germany and Europe,” Meincke said.