VZCZCXYZ0026
RR RUEHWEB

DE RUEHBS #3578/01 2931512
ZNR UUUUU ZZH
R 201512Z OCT 06
FM AMEMBASSY BRUSSELS
TO RUEHC/SECSTATE WASHDC 3400
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUCPDOC/USDOC WASHDC

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. 
 
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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. 
 
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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