Chemical monitor: March 2006

Production costs in the chemical sector increased sharply in November 2005, recording one of the biggest rises ever seen in a single month. This jump was mainly due to higher fuel costs, especially for gas products.

The index for chemical costs for fuels and raw materials advanced by 3% in value as against a rise of 1.1% the previous month. The underlying trend was sharply higher, with an increase of 10.2% on an annual basis.

The major factor in this increase has been the trend for fuel costs, excluding crude oil prices. Fuel prices jumped by nearly 20% in November and were up by almost 50% compared with a year ago. Gas prices were sharply higher but crude oil prices were 3% lower in November, although they were up by 38% compared with the corresponding period a year ago. In addition, costs of imported chemicals were 0.3% higher in November, while metals advanced by 0.6%.

Costs for intermediate products advanced by 3.8%, following an increase of 1.3% in October. They were also up by 12.1% compared with November 2004. Moreover, costs for pharmaceuticals advanced by 1.9% in November as against an increase of 0.9% in the previous month, and were 3.9% higher on an annual basis.

Chemical prices were also higher, but the increase was smaller than that for chemical costs. They moved up by 1.2% in November, following a small increase of 0.1% in October. The underlying price trend showed a steady rise, averaging 4.9% compared with a year ago.

Prices for intermediate products increased by 2.8% in November, led by prices for inorganic chemicals. On an annual basis they averaged an increase of 6%. However, the increase in prices for pharmaceuticals was limited: they showed a gain of 0.9% in November but were lower than a year ago, falling by an average of 2.7% in value.

Evidently, some chemical companies are facing a difficult period as a result of the sharp increase in production costs. Should this trend continue, UK chemical companies will see their profitability come under severe pressure unless they manage to improve their productivity to a significant degree.