Belgian Chemicals Industry Faces Challenges

UNCLAS BRUSSELS 003578

SIPDIS

SIPDIS

STATE FOR EB/CBA, EUR/ERA AND EUR/UBI
USDOC FOR 3133/USFCS/OIO/EUR

E.O. 12958: N/A
TAGS: EIND EINV BE
SUBJECT: Belgian Chemicals Industry Faces Challenges

Refs: (A) 04 STATE 57073 (B) Brussels 3964


1. (U) Summary. Belgium's chemical industry is one of the
country's most important economic sectors, representing 16 percent
of national GDP. Many American chemical companies maintain a
significant presence in Belgium. The industry faces challenges as
high demand draws investment to the developing world and Eastern
Europe. Upcoming implementation of REACH, the EU chemical
registration initiative, will also raise costs. The Belgian Federal
and Flanders Regional governments have recognized the risks to this
important sector and taken steps to improve the investment climate.
However, the underlying problems of high taxes and an inflexible
labor market are hard to tackle. End Summary.

--------------
A Position of Strength
--------------

2. (U) The chemical industry is a crucial part of Belgium's
economy. With revenues of 48 billion euros in 2005, it accounted
for 16 percent of Belgium's GDP. The sector employs over 93,000
people and is a key part of Belgium's international trade; 80
percent of Belgian chemical products are exported, representing 31
percent of Belgium's total exports by value. The United States
supplies 12 percent of Belgium's chemical inputs and receives 4
percent of its chemical exports. Inputs are processed and
distributed throughout Europe from Belgium's chemical hub in
Antwerp. The port of Antwerp is the second largest petrochemical
agglomeration in the world, exceeded only by Houston, Texas.


3. (U) About half of all private sector investment in Belgium is in
the chemical industry. The sector is also one of Belgium's main
attractors of foreign investment; in 2004, 75 percent of total
investment in the chemical industry came from outside of Belgium.
The United States is well represented in the Belgian chemical
sector; American companies held an estimated 5.3 billion dollars of
capital stock in the industry in 2004. Du Pont, Chevron Phillips,
Dow, ExxonMobil, Shell, and others all have a strong presence in
Belgium.


4. (U) Despite its importance to the Belgian economy, the chemical
industry faces several challenges to its future growth and
development. The chemical industry shares the malaise affecting
much of Belgian industry: an investment climate of high wages, high
taxes and low labor flexibility. Due to growing demand for chemical
products in the developing world and highly competitive production
costs there, multinational corporations are focusing attention and
new investment dollars on Turkey, Russia, China and the Middle East
rather than in Europe. Lower wages and higher fiscal incentives in
the new EU member states make them increasingly attractive venues
for European operations and headquarters, challenging Belgium's
traditional role as "the capital of Europe." Rising energy costs
are also taking their toll on the industry. Because many processing
methods are quite energy-intensive, even a small increase in energy
prices can drive a firm's costs up considerably.


5. (U) Following a period of loss and stagnation in 2003 and 2004,
the Belgian chemical industry saw a return to revenue growth in

2005. Industry experts predict this trend will continue through
2006-2007. However, this revenue growth reflects mostly an increase
in prices rather than productivity; while revenues increased 4.3
percent in 2005, output and material investment in the same year
were both lower than 2004 levels, by 3.6 percent and 10.5 percent
respectively. Investment levels are expected to rebound in 2006 as
several new investment projects have been announced, including the
construction of a new, cleaner-burning electric plant at
ExxonMobil's Antwerp refinery. ExxonMobil is also planning to
expand its existing petroleum refining capacity by 10-15 percent
over the next three years. Employment in the industry has been
relatively stable over the last five years.


6. (U) Pharmaceuticals are a subsector within Belgium's chemical
industry that has attracted high levels of American investment and
accounted for much of the chemical industry's annual 8 percent
increase in research and development over recent years, twice the
industry's average. Basic chemicals and plastics have also enjoyed
steady growth. Textile chemistry, on the other hand, has
experienced negative growth for much of the last five years,
following the shift in textile production to China and other
industrializing developing countries.

--------------
The Challenge of REACH
--------------

7. (U) The industry must also prepare for the coming implementation
of REACH (ref A),the new EU regulatory framework for the chemicals
sector. Chemical companies have already begun preparing for REACH,
taking inventories of their products and factor inputs to gather
what data they already have on the chemicals likely to be
registered.


8. (SBU) Costs of implementing REACH, while difficult to calculate,
are expected to be substantial. DuPont Belgium alone will need to
register 120 different substances at a cost of 20,000 to 500,000
euros each, depending on the tonnage used. Added to the
registration costs will be the cost of labor and management time
expended on the process, the fee to be paid to the new European
Chemical Agency, and the long-term costs of developing adequate
substitutes if the agency should so require. The real costs will
depend on the speed of processing and strictness of enforcement by
the European Chemical Agency, but most analysts expect the
competitiveness of Europe's chemicals industry to be negatively
impacted.


9. (SBU) The costs of REACH are expected to fall hardest on small
and medium enterprises (SMEs) that produce finished articles and
thus have more links in their supply chains. Most American chemical
companies operating in Belgium are large multinationals and do not
fall into this category. The risk for American companies operating
in Europe is that small Belgian companies could go out of business
and stop supplying key chemicals to their downstream users, who
would then have scramble for alternate chemicals or suppliers. The
risk of such an avalanche occurring is quite high, since SMEs make
up the majority of the Belgian chemical sector; half of all Belgian
chemical firms have fewer than 50 employees. Some of the larger
American companies in Belgium have indicated that they would
consider partially or even wholly subsidizing REACH registration for
suppliers of key inputs in order to prevent disruption of their
supply chains.


10. (U) A different risk comes from the higher costs of chemicals
sold in Europe, as REACH administration expenses are passed along to
customers. If finished article manufacturers opt to cease
production in Europe due to higher factor input costs, they could
weaken demand for the products they had been purchasing from other
suppliers. This ripple effect in the Flanders region, where
chemicals play a particularly dominant role in the economy, would
impact the national economy rapidly.

--------------
DISINVESTMENT RISK
--------------

11. (SBU) Belgian authorities are particularly concerned about the
impact that disinvestment and relocation of chemical producers out
of Belgium would have on the national economy. The industry is a
crucial component that feeds the national logistics and
manufacturing sectors. When Belgian chemicals and plastics giant
Solvay recently announced major investments in China to produce
products for use in Asia, including specialty chemicals plants it
intends to construct in Korea and China in 2007, Flemish political
leaders asked for reassurances from the national champion that the
action did not portend future relocation of processing. Recently
the Vice-President of Total, the Belgian-French based petrochemical
company, stated publicly that Belgium faced a triple challenge: low
industrial growth, high energy costs, and globalization's wage cost
competition. Half of Total's investments today are in Asia, he
said, where Total expects to make 20 percent of its sales by 2010.


12. (SBU) Although the impact of companies moving their operations
out of Belgium would be major, its risk in the near-term appears
small. Industry analysts expect relative stability for the first
five years under REACH. The plants currently existing in Belgium
are there first and foremost to meet demand on the European market,
which will still exist after REACH goes into effect and cannot be as
effectively served from other parts of the world. It is possible
that facilities for a few specific products may be moved to Asia or
the U.S., but transport costs for large volume goods make such a
move unrealistic for many products. Most companies say they will
wait until the registration regime has been in operation for a few
years and the effects of the program can be more reliably calculated
before making drastic changes to their stock of capital investment
abroad.

--------------
TAX INCENTIVES
--------------

13. (U) Trying to preempt chemical and other industry relocation
out of Belgium, the GOB has introduced some fiscal incentives to
reward capital investment and reduce labor costs. (See ref B on the
notional interest deduction and a forthcoming cable on the 2007
budget for further details.) For internally financed companies,
such as many major chemical concerns, the notional interest
deduction is a significant incentive, lowering average corporate
taxes by 7 percent by one law firm's estimate. Several chemical
companies have taken advantage of the program since it came into
force in January 2006.


14. (U) Belgium is also taking steps to encourage research and
development. Since 2003 many researchers in the public sector have
been eligible for a 50 percent exemption from advance payment of
wages, lowering research wage costs by 15 percent. This initiative
has been experimentally made available to some private sector
researchers in 2006. Belgium has also instituted an R&D tax
deduction, set for tax year 2007 at 14.5 percent for a lump-sum
deduction and 21.6 percent for a staggered one. An additional tax
credit for research-related investment will come into effect in

2007. These measures could have significant positive benefits for
the chemical industry, especially in subsectors like pharmaceuticals
and eco-friendly technologies that have a large R&D component.

--------------
FLANDERS FOCUS
--------------

15. (U) The Flemish regional government released a report in summer
2006 recommending steps to improve conditions for the chemical
industry in Flanders. In addition to bemoaning labor costs, the
report suggested some non-fiscal measures that could be improve the
investment climate for the chemical sector. According to the
report, enhancing intellectual property protection and founding
strategic research centers in Belgium would encourage innovation and
prevent brain drain. Improved rail, road and pipeline
infrastructure would magnify Belgium's connectivity between
production and distribution centers, already one of the country's
strong competitive advantages for the chemical industry. The report
also recommended strengthening links with educational institutions
to ensure a larger, more capable employment pool for the future of
the industry.

--------------
COMMENT
--------------

16. (SBU) While the Flemish report made a number of
recommendations, it focused on areas under the control of the
Flemish regional government. Competitiveness of the Belgian
chemical industry, and the health of U.S. companies interdependent
with it, hinges far more on cost and flexibility of the labor market
than on education or transportation. The federal coalition
government has been reluctant to tackle these issues head on because
they strike at the core of Belgium's "social model". Bold change is
unlikely unless Belgians start to feel a more widespread economic
pinch from industry contraction in response to better conditions
elsewhere outside Belgium.

Korologos