The UK chemicals sector is in trouble
From ammonia to plastics, there can be no modern economy without a functioning chemicals industry, and Britain’s is in peril, writes Sharon Todd
The recent announcement of a £350m Critical Chemicals Resilience Fund from Chancellor Rachel Reeves is welcome but it is also an acknowledgement of an uncomfortable truth: the UK’s chemicals sector is in trouble.
Up and down the country energy intensive manufacturing is faltering. The Chancellor has also announced £120m for the ceramics sector, providing relief to another struggling sector. But whilst these interventions are timely and certainly welcome, what is needed is a strategy to address the structural problems the UK faces.
Chemicals are not just another industrial sector. They are the foundation upon which much of the UK economy is built. From ammonia used in fertiliser production to ethylene underpinning plastics and pharmaceuticals, base chemicals are the starting point for thousands of everyday products. When this sector weakens, the effects ripple across agriculture, healthcare, energy and advanced manufacturing.
In short, there can be no modern economy without a functioning chemicals industry. The proposed fund is therefore an important step in the right direction – but larger scale investment is needed. In a capital-intensive sector an intervention closer to £3.5bn would be required to future-proof the UK chemicals capability for the next two decades. This needs to come from the private sector, but the private sector will not invest whilst the UK cost base is structurally uncompetitive.
The primary challenge is not abstract. It is clear and well-understood. UK chemical producers and other manufacturers are grappling with some of the highest industrial energy prices in the world. This is not a marginal disadvantage; it is a fundamental threat to competitiveness and therefore to UK industry.
Producing essential chemicals like ammonia and ethylene is energy-intensive by nature. When energy costs rise so far beyond those of international competitors, production simply becomes uneconomic. Companies ultimately move manufacturing elsewhere.
The erosion of domestic production is leaving the UK increasingly reliant on imports for critical materials. This weakens supply chain resilience, increases exposure to geopolitical shocks and ultimately undermines economic security. This scenario is rapidly being intensified by the current situation in the Gulf.
This is not helped by our net zero strategy. The reality is that much of the UK’s energy cost disadvantage is caused by UK policy. And, ironically, whilst high energy costs, largely the result of efforts to decarbonise the UK’s consumption, hurt both consumers and industry, consumption emissions are actually increasing.
The UK measures CO2 emissions to global standards, but these standards fail to recognise the total carbon from products we consume. Current calculations – known as territorial emissions – take emissions derived from products manufactured in the UK. But they exclude international shipping and aviation (two of the major emitters) and, crucially, they also exclude imports which, in fact, are rising as our own domestic manufacturing declines. This means that government is devising economic, energy and climate policy on the basis of partial, increasingly inaccurate information about the UK’s actual impact on global emissions.
It is challenging to see how we can justify our approach, when it prevents industry from investing and drives up costs to the consumer with no benefit to the climate.
The transition to net zero is both necessary and desirable, but it must be managed in a way that preserves industrial competitiveness. Significant progress has been made by the UK – in particular in the area of renewable energy. However, at present, the balance is not right.
The current route to net zero is deeply flawed. What is needed is a new pathway to net zero that addresses the UK costs to consumers and industry, whilst also reducing emissions. An independent review, based on a rational, evidenced-based approach is urgently needed.
Without that, the risk is clear. The UK will continue to lose capacity, expertise and economic value across not just chemicals but multiple manufacturing sectors that underpin so much of our daily lives.
The Chancellor is right to act. But this first step must not be mistaken for a solution.
Sharon Todd is the CEO of SCI