NORTHERN POWERHOUSE: CHEMICAL & PROCESS SECTOR AUTUMN 2018

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CHEMICAL & PROCESS SECTORScience and Innovation AuditA Science and Innovation Audit Report sponsoredby the Department for Business, Energy & Industrial StrategyAU T U M N 2 018NORTHERN POWERHOUSE:

ForewordIntroductionThis audit sets out to assess the chemical and processing sector innovationecosystem across the Northern Powerhouse. The vision and impact of thestudy is to ensure that the Northern Powerhouse contributes to the successfuldelivery of the Strategy for Chemistry fuelled growth and by 2030 for chemistryusing industries to increase their contribution to the UK economy from 195billion to 300 billion.The purpose of the Audit is therefore to identify the networks, skills, capabilitiesand facilities needed to ensure continued global competitiveness and to identifyactions that the consortium can take or investment needed to fully realise thevision.This Science and InnovationAudit, clearly places both theNorthern Powerhouse and thechemicals and process sectoras key contributors to the UK’sgrowth.The chemicals sector is a hiddengem of British manufacturing, atonce globally competitive andat the same time an integralpart of many supply chains across the wider advancedmanufacturing sector. It is essential to build on existingcritical mass, both within industry and our excellentinnovation ecosystem and where possible reshoreactivity and invest in new value adding activities.Future growth is dependent on developing andpromoting globally the strength which a combinedNorthern Powerhouse manufacturing and researchproposition can bring.JAKE BERRYMINISTER FOR THENORTHERN POWERHOUSEThis Science and InnovationAudit is a clear mandate forbusinesses, Government andUniversities within the chemicalsand process sector across theNorthern Powerhouse to uniteto deliver the shared goalsand new delivery mechanismsrecommended in the report.The Northern Powerhousechemicals and process proposition articulated in thisaudit is a powerful tool to reacquaint many investors,academics and business people across the UK andbeyond of what we have here in the North: An industryof global scale and competitiveness which can fuel ournext industrial age.In autumn 2015 the UK Government announced regional Science and Innovation Audits(SIAs) to catalyse a new approach to regional economic development. SIAs enable localconsortia to focus on analysing regional strengths and identify mechanisms to realisetheir potential.This Science and Innovation Audit has been developedto identify the global competitiveness of the chemicalsand process sector across the Northern Powerhouse(NPH). The SIA has reviewed for the first time, thepan Northern Powerhouse chemicals and processsector industrial proposition and the continuing fitnessof purpose of the associated regional innovationecosystem.The SIA recognises the maturity of the sector andexisting support structures and seeks to future proofits global competitiveness by identifying emergingtechnological opportunities and their consequentialrequirements on the regional innovation ecosystem.Figure 1: The SIA region comprising the LEP areas; North Eastern,Cumbria, Tees Valley, York, North Yorkshire and East Riding,Lancashire, Leeds City Region, Liverpool City Region, GreaterManchester, Humber, Sheffield City Region and Chester andWarrington.Geographic CoverageThe audit geography is the Northern Powerhousewhich covers all 11 North of England Local EnterprisePartnership (LEP) areas . The area is shown in Figure1. Allowing for overlap of these areas means theeffective Science and Innovation Audit geographic areacomprises the three North of England regions (NorthEast, North West and Yorkshire and Humber) plus theSheffield LEP districts that lie within the East Midlandsregion.Tees Valley & DurhamTotal GVA 21,312mSector GVA per employee 154,000Average Wage 37,543Location Quotients 3.7163 establishmentsHumberTotal GVA 18,378mSector GVA per employee 215,000Average Wage 35,923Location Quotients 4.1192 establishmentsLiverpool & CheshirePAUL BOOTHCHAIR OF TEES VALLEYLOCAL ENTERPRISE PARTNERSHIPTotal GVA 60,196mSector GVA per employee 449,000Average Wage 35,923Location Quotients 3.0373 establishmentsNorthern Powerhouse2Northern Powerhouse Chemical and Process SectorNorthern Powerhouse Chemical and Process Sector3

The Chemical andProcess SectorThe chemical and process sectorencompasses the range of industriesin which raw materials are processedthrough chemical conversions togive finished products. The sectorinputs to a range of chemistryusing industries in sectors such asaerospace and automotive throughthe provision of coatings, adhesives,rubbers and plastics, as well asproviding intermediary ingredientsto the pharmaceutical, cosmetics,agrochemical, personal care, paintand home care sectors. 28bn upstream28 212 212bn downstreamWhilst the upstreamchemicals and processsector accounts forapproximately 28bn,15.8% of manufacturingoutput, it has adownstream impact onapproximately 212bnor 90% of the UKmanufacturing sector.The sector accounts for140,000 employees, 6%Scale of Sectorof UK manufacturingworkforce. Workers in thissector make a significant contribution to the UKeconomy with an average GVA per employeeof 144,000, significantly higher than both theaerospace ( 65,000/ employee) and automotive( 108,000/ employee) sectors 1. 144k144 65 108 108k 65kChemicals& ProcessAeroAutomotiveGVA Per Employee4Northern Powerhouse Chemical and Process SectorEnulatory vironmengetRnical ConsultancyTechRawmaterials &feedstocksInternational contextGlobal chemical sales in 2016 were led by China ( 1,331bn),USA ( 476bn) and Germany ( 185bn). The UK continuesto be a significant player in the global chemicals market,presently ranked 10th with 60bn sales 2.BulkChemicalsAutomotiveSpeciality chemicalsformulated productsand advancedmaterialsDemand for chemicals, particularly intermediate andfinished goods, continues to expand both in Britain andglobally. However, what is in question is the UK’s ability tomeet both indigenous and export demand, as increasingcompetition from both East (e.g. China) and West (e.g. USA)is driving down revenues and making it harder for UKbased firms to compete in the global marketplace.The reduction in exports has been across the boardincluding price sensitive sub sectors such as themanufacture of organic chemicals, pharmaceuticals andfertilisers and nitrogen.ChemicalProcessSectorBy-productsand wastematerialThe most significant growth has been in the emergingmarkets in China, India and Brazil. The global market isexpected to grow by a further 3% in the next 20 years asAsian and Middle Eastern demand and capacity continuesto grow. By 2030, Asia is expected to account for almosttwo thirds of the global chemical industry market 3.The chemicals and process sector has traditionally had avery strong export orientation, presently representing 18%of UK export trade. Figure 3 (overleaf) shows an upwardtrend in trade over the period 1996 to 2017 4. 2013 was thefirst unfavourable imbalance in trade for the chemicals andrelated products sector. This fall can largely be attributedto a number of Astra Zeneca products going off patent in2011/12 5.Figure 2: Chart illustratingthe sectoral definition forthe Chemicals and ProcessSector and relationship withchemical using uctsAgricultureExport Activities by CountryCountrySales (Billion )Population (Million )Sales per head ofpopulation ( apan1401271,102South erlands55173,235Italy5259881Northern Powerhouse Chemical and Process Sector5

Net Trade for Chemical ProductsThe chemicals and process sector across the UK and particularly inthe Northern Powerhouse is mature, both in the technology beingused and also the sectoral age profile. There are relatively fewnew business start-ups and the churn rate is low (i.e. few companyclosures). In addition, the sector is highly concentrated 6. The top four large firms account for 16.5% of total sectoremployment, 38% of turnover;The reduction in exportshas been across the boardincluding price sensitivesub sectors such as themanufacture of organicchemicals, pharmaceuticalsand fertilisers and nitrogen.Figure 3: Net Trade for the Chemicalsand related products 1996-2017. The top seven large firms account for 23% of total sectoremployment, 41% of turnover.Overall the chemicals sector has a higher proportion of mid-sizedbusinesses ( 25- 500million annual turnover) 7 than the economyas a whole. Most mid-sized companies are indigenously owned andgenerally compete in terms of price.Goods trade in Chemicals & related products, UK, 1996 to 20176055The proportion of SMEs is at variance to the wider economyin which there are circa 88% micro and 98% small enterprisescompared to circa 12% micro and 30% small enterprises forthe chemicals sector. There is also greater variance in thecomposition of the sector by scale than between sectors, with thepharmaceutical sector having the greatest preponderance of microenterprises, which reflects the higher number and proportion ofnew starts within this subsector.5045Trade in Chemicals ( 11971998-51996The UK chemical sector is facinga challenge of diminishing costcompetitiveness due to increasingcosts related to energy andfeedstocks particularly in relationto lower value intermediary goods.The knock-on effect of reducedproduction of these goods leads togreater fragmentation of existingsupply chains and a diminishedexport orientation across the sector.This decline in export orientationmay have a causal effect on the levelof innovation activity undertakenand be a consequence of reducedindigenous investment in Researchand Development and Innovation.Sector characteristicsGoods trade in Medicinal and pharmaceutical products, UK, 1996 to 201730,00025,000Trade in goods ( million)20,000The sector has a high proportion of mid-sized and large-scalecompanies, with the former generally delivering intermediategoods to the latter for subsequent exporting. There is a significantproportion of the larger companies under international ownershipwith, in some cases, a perception of “branch plant” status withhigher value adding functions such as headquarters and researchbases sited overseas.Whilst large firms account for over two-thirds of turnover, the midsized firms also make a significant contribution (26.4%) to turnoverfor the sector, however they only contribute around 4% of R&Dexpenditure 6. The low level of R&D spend within the mid-sizedand small enterprises suggests an imbalance within the sector,skewed towards the larger firms. This has highlighted the need toencourage greater take up of innovation, in particular by mid-sizedenterprises, with interventions being tailored to meet their specificcharacteristics.15,00010,0005,0006Northern Powerhouse Chemical and Process 0Northern Powerhouse Chemical and Process Sector7

Our VisionKey StrengthsOur vision is that over the next 12 years, the NorthernPowerhouse chemicals and process sector will:‘‘To ensure that the NorthernPowerhouse contributes tothe successful delivery ofthe Strategy for ChemistryFuelled Growth that by2030, chemistry usingindustries will increasetheir contribution to the UKeconomy from 195 billionto 300 billion’’. Be the most competitive location, by building upon its existinghighly efficient bulk chemicals infrastructure, further drivingdown costs through accessing (existing and emerging)affordable feedstocks and utilising nascent technologies; Regain lost export markets and re-shore the production of highvalue intermediary goods and R&Di functions of locally basedglobal concerns; Diversify into new geographic and sectoral supply chains; Deliver more knowledge transfer between industry of allsize and ownership structure and the regional innovationecosystem to enhance productivity and ensure globalcompetitiveness; Be a globally recognised centre for the application and testingof industrial digitisation and circular economy solutions to thechemicals and process sector; and Lead the adoption of bio-processing solutions for chemicalsproduction.8Northern Powerhouse Chemical and Process SectorStrong and connected clustersAt 13.40bn GVA, the NPH contributes 48% of the UK’schemical production and is by far the largest region in terms ofoutput for the sector. In addition, the sector contributes 26.5%of all NPH manufacturing GVA, compared with the UK averageof 21.2% 8.The Northern Powerhouse chemicals proposition is based uponthree strong clusters interlinked by strong East-West supplychains and associated pipeline connectors of key raw materials: Tees Valley and County Durham; Humber LEP area; and A combination of Cheshire and Warrington andLiverpool City Region LEP (Cheshire and Merseyside).Highly trained and responsiveworkforce.The NPH employs 44% of the UK Chemicaland Process sector work force 9. The NPHUniversities provide a quarter of the UK science,technology, engineering and mathematicsgraduates representing a significant opportunityto meet local demand for professional talent.In 2016/17, 39% of all chemical sciencesapprenticeships were started in the NPH 10. Thedemand for apprenticeships is high. Data fromthe Working Futures report 11 shows a trendtowards a more highly skilled workforce bothwithin the NPH and nationwide.Centres for Doctoral training (CDTs) representstrong vehicles for engagement with industryand also train postgraduates as futureemployees within the sector. There are presently9 Centres for Doctoral Training (CDTs) in supportof the sector with a further 6 under application.These sub areas have a location quotient of 3.4, compared with1.8 across the NPH as a whole against the average of 1 for theUK as a whole.The region has a strong tradition in exporting, dominated by thelarge companies and supplied by largely indigenously ownedmid-sized and smaller companies.Northern Powerhouse Chemical and Process Sector9

An asset-rich innovation ecosystemThe effectiveness of the innovation ecosystem of theNPH was assessed using the following key variables:perspectives of academic research quality, Universityengagement with industrial base, business R&D spend,Government innovation support, Intellectual Propertyfiled and Research and Technology Organisations’ (RTO)activity.The NPH region contains 32 higher educationinstitutions with 522,000 students 12 and includes theN8 research partnership of eight research intensiveUniversities (Durham, Lancaster, Leeds, Liverpool,Manchester, Newcastle and York) 13. While the NorthernPowerhouse is a comparatively small region, it has anumber of individual academic institutions which haveinternational status and continue to attract significant UKand foreign research investment.The leading academic research institutions within theSIA area demonstrate strong research quality across allsix sub-sectors of the chemical and process industry withparticular strengths highlighted in materials sciences,chemical synthesis, chemical measurement, atmosphericphysics and chemistry 14.This high-quality research on an individual institutionallevel indicates that there is strength in depth across thechemical process sector within the SIA area that shouldbe utilised to deliver innovation and further enhance theregion.Figure 4 presents the analysis of research quality (asmeasured by the field weighted citation index) across thekey innovation needs identified across all six chemicaland process sub-sectors against publication quantity forthe Universities within the SIA. The combined scale andquality of research outputs if deployed collectively wouldoutstrip larger national comparator institutions severalfold.There is a northern cluster of nationally andinternationally important Catapults and other NationalInnovation Centres that support the chemicals andprocess sector. The key players are the Centre forProcess Innovation (CPI), the Materials ProcessingInstitute, TWI, the Royce Centre and Materials InnovationFactory. Driven by the needs of industry, theseinnovation centres work closely with academia andindustry to foster and encourage innovation in key areas.The innovation strength of the chemical sector isreflected in the predominance of patents filed onchemical sector technologies, which represents 38%of all patents filed in the NPH. The NPH exhibits aparticularly strong specialisation when comparedwith the rest of the UK in basic materials chemistry,macromolecular & polymer chemistry, materials &metallurgy, surface coating and technologies 15.Growth OpportunitiesThe SIA has identified a number of growthopportunities: Increase in demand in global markets forintermediate and higher value adding goods Use of nascent technologies and new energyfeedstocks Increased demand for reshoring and use ofcircular economy solutionsBenchmarking against best practice in internationalcomparator regions*, as illustrated in Figure 5 assumes that ifcumulatively delivered, the Northern Powerhouse vision hasthe potential to contribute 23bn of additional output to theUK economy, dependent on the following components andinterventions: New feedstocks could increase output by 30% Industrial digitisation could increase output by 20% Opportunities for the use of industrialdigitisation Supply chain diversification could increase output by 10% Opportunities to utilise sectoral free tradezones in conjunction with block chainsolutions Circular economy could increase output by 10% Skills development could increase output by 5% Opportunities to use Northern Powerhouseinternational networkingStrong enabling structures are proposed to deliver this visionincluding the development of: New models for commercialisingtechnologies: public/private partnerships andassociated financing mechanisms Northern Powerhouse Development Vehicle. Significant opportunities for scale and growthparticularly in mid-sized companies throughsupply chain/export diversification. A coordinated University translation vehicle, workingclosely with the RTOs and industry.* Rheinhessen-Pfalz; Antwerp- Rotterdam; Geleen; Gulf Coast (USA); Singapore; and Busan(formerly Pusan) South KoreaFIGURE 5: GROWTH TRAJECTORIES OF POTENTIAL INTERVENTIONS55Oxford3Cumulative impact of all interventions - 53bnLancasterCambridgeLiverpool2York50ImperialN8 5Sheffield1.5 (Billion)Quality of output (FWCI)2.540New feedstock (e.g. shale) 30% increase1Impact of industrial digitisation 20% increase35Circular economy 10% increase0.5Supply chain diversification 10% increase010002000300040005000Figure 4: Scale and quality of research, thepotential impact of collective R&D delivery.Northern Powerhouse Chemical and Process Sector25KEYN8 ResearchPartnershipEnabling Structures(University translation vehicle/ Northern Powerhouse Development Vehicle)6000Scale of output (number of publications)10Skills development 5% increase300Leading UKComparatorsYear 0Year 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9Year 10Northern Powerhouse Chemical and Process Sector11

Gap AnalysisAction PlanWe have utilised TOWS (Threats, Opportunities, Weaknesses and Strengths) analysis todevelop workable solutions to the opportunities/challenges identified in the SIA. Table 1summarises the key conclusions:Table 1: TOWS analysis of opportunities and challengesInternal Strengths andExternal Opportunities(S-O)- how can they usethe strengths to benefitfrom existing externalopportunities?Internal Weaknesses andExternal Opportunities(W-O)- how can they useopportunities to overcomethe organisat

Northern Powerhouse to unite to deliver the shared goals and new delivery mechanisms recommended in the report. The Northern Powerhouse chemicals and process proposition articulated in this audit is a powerful tool to reacquaint many investors, academics and business people across the UK and beyond of what we have here in the North: An industry

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