building our low carbon industries

CONFIDENTIAL

Building our low carbon industries:

Economic, employment and fiscal benefits of securing the

energy intensive industries in the UK

FINAL REPORT

prepared for:

The Energy Intensive Users Group and

the Trades Union Congress

Prepared by:

Orion Innovations LLP

Date: July 2012

Building our low carbon industries

Orion Innovations LLP 1 Quality Court Chancery Lane London WC2A 1HR Tel: +44 203 176 2721 Email: [email protected]

IMPORTANT NOTICE

Whilst reasonable steps have been taken to ensure that the information contained within this Report is correct,

you should be aware that the information contained within it may be incomplete, inaccurate or may have become out of date. Accordingly, Orion Innovations LLP makes no warranties or representations of any kind as to the content of this Report or its accuracy and, to the maximum extent permitted by law, accept no liability whatsoever for the same including, without limit, for direct, indirect or consequential loss, business interruption, loss of profits, production, contracts, goodwill or anticipated savings. Any person making use of this Report does so at their own risk.


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EXECUTIVE SUMMARY

Introduction

The widespread belief that energy intensive industries (EIIs) are labour intensive and heavily polluting remnants of a bygone era could not be further from the truth. EIIs, which include cement

and lime, ceramics, chemicals, glass, industrial gases, iron and steel, non-ferrous metals, pulp and paper, and coke and refined petroleum product industries, are the bedrock of the UK manufacturing industry. They produce primary inputs for much of what we manufacture and consume, and contribute significant sums to the social and economic fabric of the country. UK EIIs are often more efficient and less polluting than competitor operations in other parts of the world, and their outputs are essential to the delivery of a low carbon future. Whilst these industries are mature, with the right policies and business environment, they continue to offer significant

prospects for growth.

The sponsors of this report, the Energy Intensive Users Group (EIUG) and the Trades Union

Congress (TUC), both support the shift to a low carbon economy as an essential response to the challenge of climate change, and believe that EIIs are vital to realising this transition.

However, EIIs have been placed under enormous pressure as a result of both the general economic climate and UK and European environmental and energy policies. There is significant

evidence that these policies are having a corrosive effect on the viability of individual businesses and entire industry sectors within the UK. The impact if any of these industries were to fail would be significant. Without EIIs in the UK, their products would need to be transported, often great distances, to serve UK demand. This not only means a loss of UK employment, GVA, taxes and other benefits, but a likely significant increase in carbon emissions.

Building our low carbon industries seeks to demonstrate the economic, fiscal and employment benefits of sustaining EIIs in the UK and therefore the potential impact if these industries were to

be lost. This report outlines a number of policy challenges which must be addressed so as to mitigate a potential decline in EIIs.

Data was gathered through desk-based primary and secondary research. A database of evidence was assembled for all EIIs based on UK Office for National Statistics (ONS) information. Qualitative insight was sought through the deployment of a questionnaire with industry trade bodies and associations; discussions with the TUC and its affiliates Unite, Community, GMB and Unity; and a number of phone-based interviews with EII enterprises. The study has focused on three industries

and the regions in which they have a significant presence. These were ceramics manufacture in North Staffordshire, the glass container industry in Yorkshire, and the chemicals industry in the North West of England, North East of England and Scotland.

Findings

EIIs make a direct contribution to the social and economic fabric of the UK economy through gross value added, fiscal contributions, and employment. In addition, they sustain their suppliers

through the purchase of goods, materials and services, and their customers through the provision of cost-effective products. The staff induce further value add and employment through their wage spend, and there is evidence that EIIs are important contributors to skills development and training, and act as anchors for industry-wide innovation.

EIIs employed in excess of 160,000 people in the UK in the year to end March 2011. More than four times this number are estimated to be employed in their derivative supply chains. EIIs have a combined turnover in excess of 86 billion and account for approximately 20% of UK

manufacturing turnover and 3% of the UK economy as a whole. EIIs are relatively high value added, with a combined GVA in excess of 14 billion. In the year to end March 2008, GVA for individual EIIs ranged from approximately 40,000 per employee in the ceramics industry and 50,000 in glass, to 120,000 in chemicals and 150,000 in petroleum products. This compares with the UK average for the same period of 46,000. EIIs purchased 68.6 billion of goods, materials and services from their suppliers in the year to March 2008, equivalent to 21% of the UK manufacturing total. Employment costs, including wages national insurance and pension

contributions were in excess of 6.6 billion or 38,000 per employee.

EII businesses are often large (e.g. steel and chemicals) and/or clustered together to benefit from shared feedstocks and infrastructure (e.g. ceramics and glass). As such, they are often the dominant employer and source of GVA in a particular region.

As the largest industrial energy consumers in the UK, there is often a mistaken assumption that EIIs are energy inefficient. However, by virtue of the importance of energy to their overall costs,

most EIIs have been driven to maximise the efficiency of their operations over several decades. In


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many instances, EIIs in the UK are believed to be best in class in terms of energy efficiency and environmental impact.

EIIs are typically commodity businesses, operating in globally competitive markets. Without them, the UK would import their products, or those of their customers. Economic and social value and

environmental costs would simply be accrued abroad. Conversely, with a strong and internationally competitive industry, the export potential for the UK is significant.

Most EIIs are capital intensive, and the most significant emissions abatement opportunities require innovation and capital investment. Many EIIs are international conglomerates, with individual UK businesses competing internationally for capital. Realising energy efficiency therefore requires a stable and competitive business environment that encourages long-term capital investment and innovation.

EIIs and their supply chains account for a large proportion of UK energy use and associated emissions. Ensuring that they, and their supply chains, are efficient is critical to realising UK and international carbon emissions abatement objectives.

However, EIIs are also a key part of delivering a low carbon economy. They provide the raw materials and infrastructure that support the production and installation of low carbon energy generation technologies such as wind turbines and solar panels, and energy efficient solutions such

as insulation and low energy lighting. It is their continued innovation that will deliver important new products such as light weight glass, hydrogen fuels and scientifically applied fertilisers.

The policy challenge

There is significant concern amongst those EII members contacted during the course of this study that Government policy, both current and historic, risks jeopardising the well-being of industry and could fail to deliver emissions abatement objectives.

Current policies rely heavily on enhancing the economics of energy efficient interventions through

increased energy prices. In practice, this approach reduces the industries capacity to invest, and if applied unilaterally, distorts international competition to the detriment of the UK. The resulting leakage of manufacture to both developed and developing world economies, can give rise to an

increase in energy use and emissions through the use of inferior processes, more carbon-intensive electricity, and greater transport of goods.

As the primary variable in EII cost of manufacture is typically the price of energy, international success is reliant on competitive energy prices. By implication, policies are needed that encourage

investment in energy efficient plant and innovation, but which also ensure internationally competitive energy prices.

Broader industrial policy is seen as being a key influencing factor as to whether companies invest in new and more efficient plant in the UK. On this, the UK is seen as lagging behind key competitors in mainland Europe and elsewhere, with a number of respondents reporting a reluctance to invest in the UK due to negative business environment and policy uncertainty.

Industry has concerns about UK policy makers commitment to EIIs and their understanding of the importance, complexity and fragility of these sectors. Policies that result in the loss of key components of any supply chain, or of critical mass within an industry, risk undermining the sector as a whole and incurring significant economic and social cost.

The EIUG and TUC believe that the interests of EIIs, policy makers and key stakeholders should readily be aligned with one another and that current failings result from a poor understanding of these sectors, inadequate debate, and a failure to work in close partnership. It is their objective,

and the purpose of this report, to enhance understanding and encourage debate between these key players.

Recommendations

We recommend the creation of a common vision for all EIIs in the UK, shared by Government, industry and other key stakeholders. Given the importance of EIIs to the UK, both in terms of economic value and employment, and in terms of realising a low carbon future, we believe that this vision should be to develop and grow the worlds most energy efficient EIIs in the UK.

This vision should be reflected in a consistent approach by all Government departments and other policy stakeholders. In particular, industrial strategy needs to be linked to energy and

environmental policy. We believe that these policies should:

Maintain and enhance the international competitiveness of UK EIIs, in particular with regard to energy prices and carbon costs;

Encourage investment in energy efficiency and emissions abatement;


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Recognise multiple energy sources uses;

Avoid carbon leakage, in particular to countries with less stringent environmental constraints.

Critical to realising this is an industrial strategy that:

Sets clear objectives for policy interventions that encompass industry competitiveness, energy

and the environment;

Provides policy stability and long term clarity of Government intent, for national and international businesses contemplating investment in the UK;

Takes a cross-industry and cross-supply chain perspective, and minimises the possibility of sub-optimal decision making;

Enables investment in cross industry infrastructure and actions (e.g. recycling);

Proactively supports and accelerates the development of new energy efficient processes,

technologies and applications;

Secures high quality, highly skilled and high value employment for the UK economy.

And an energy strategy that should:

Provide long term security of supply, and minimise unnecessary fluctuations in price e.g. through investment in gas storage capacity;

Provide a clear path to decarbonise energy supply using a cost effective mix of energy sources.

In order to develop and realise a common vision and strategy, we believe that it is important for policy makers, trade bodies and other stakeholders to build lasting and effective partnerships with one another, possibly through new industry bodies and/or forums.

It is also essential to develop and maintain reliable databases of information which can be used to make more informed decisions, as good governance needs accurate and reliable data. This report has highlighted that official ONS data, currently used for making critical policy decisions, is highly flawed.

Maintaining EII competitiveness is vital to the delivery of a low carbon economy. However this will only be made possible with cross-stakeholder cooperation and inclusion. Government has a responsibility, as part of its industrial policy, to ensure this happens.

How to read this report

In reading this report, each section may be read on its own, or the report can be read in full. The report is structured as follows:

Section one provides an introduction to the study, its background and methodology;

Section two is a more detailed summary of each EII and should be read if you want to know more about a specific industry, or indeed to briefly introduce you to an unfamiliar industry;

Section three is an analysis of the importance of EIIs to the UK economy and employment. It is based on Government data and publically available information;

Section four explains how EIIs are critical to the delivery of a low carbon economy;

Section five documents the current policy challenges and current practices;

Section six briefly outlines what might happen if these challenges are not addressed;

Section seven concludes with our recommendations.


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TABLE OF CONTENTS

EXECUTIVE SUMMARY ......................................................................................................... 2

LIST OF ACRONYMS ............................................................................................................ 6

1. INTRODUCTION TO THE REPORT .................................................................................... 7

1.1 Background to the study ....................................................................................... 7

1.2 Methodology and participants ................................................................................ 7

1.3 Disclaimer .......................................................................................................... 8

2. INTRODUCTION TO EIIs IN THE UK ................................................................................ 9

2.1 Overview ................................................................................................. 9

2.2 Cement and lime ....................................................................................... 9

2.3 Ceramics ............................................................................................... 10

2.4 Chemicals and Industrial Gases ................................................................... 10

2.5 Glass .................................................................................................... 11

2.6 Iron and steel ......................................................................................... 11

2.7 Non-ferrous metals .................................................................................. 12

2.8 Pulp and paper ........................................................................................ 12

2.9 Coke and refined petroleum products ............................................................ 13

2.10 Supply chain and regional inter-connectivity ................................................... 13

3. IMPORTANCE OF EIIs TO THE UK ECONOMY .................................................................. 16

3.1 Overview ............................................................................................... 16

3.2 Number of Enterprises .............................................................................. 19

3.3 Employment ........................................................................................... 20

3.4 Turnover ............................................................................................... 21

3.5 GVA ..................................................................................................... 22

3.6 Turnover and GVA per employee .................................................................. 22

3.7 Purchased goods materials and services ........................................................ 24

3.8 Wages and social security contributions ......................................................... 25

3.9 Corporation taxes and levies ....................................................................... 25

3.10 Regional variation .................................................................................... 26

4. EIIs ROLE IN THE TRANSITION TO A LOW CARBON ECONOMY ........................................ 29

4.1 Energy intensive but efficient ...................................................................... 29

4.2 Primary inputs to low carbon solutions .......................................................... 32

5. THE POLICY CHALLENGE ............................................................................................. 34

5.1 Introduction ........................................................................................... 34

5.2 Maintain international competitiveness .......................................................... 34

5.3 The Autumn Statement ............................................................................. 35

5.4 Encourage investment for energy efficiency and emissions abatement ................... 36

5.5 Recognise multiple energy sources and uses ................................................... 39

5.6 Avoid carbon leakage ................................................................................ 40

6. PENALTIES OF FAILURE .............................................................................................. 42

6.1 The domino effect .................................................................................... 42

6.2 Lessons from history ................................................................................. 43

6.3 Economic, employment and fiscal impacts ...................................................... 44

7. CONCLUSIONS AND RECOMMENDATIONS ..................................................................... 46

APPENDIX: EII QUESTIONNAIRE RESPONSES ....................................................................... 48

Cement and Lime ....................................................................................................... 49

Ceramics ................................................................................................................... 51

Chemicals .................................................................................................................. 54

Glass ........................................................................................................................ 56

Iron and Steel ............................................................................................................ 58

Pulp and paper ........................................................................................................... 60


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LIST OF ACRONYMS

ABS Annual Business Survey

BLA British Lime Association

BRES Business Register Employment Survey

CIA Chemical Industries Association

CHP Combined heat and power

EII Energy intensive industry

EIUG Energy Intensive Users Group

EU ETS European Union Emissions Trading Scheme

GVA Gross value added

IDBR Inter-Departmental Business Register

MPA Mineral Products Association

NEPIC Northeast of England Process Industry Cluster

ONS Office of National Statistics

RHI Renewable Heat Incentive

ROC Renewable Obligation Certificate

TUC Trades Union Congress


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1. INTRODUCTION TO THE REPORT

1.1 Background to the study

Energy intensive industries (EIIs), which include cement and lime, ceramics, chemicals, coke and petroleum, glass, industrial gases, iron and steel, non-ferrous metals, and pulp and paper, are the

bedrock of the UK manufacturing industry. They produce primary inputs for much of what we manufacture and consume, and contribute significant value to the social and economic fabric of the country.

EIIs are currently under significant pressure as a result of both the general economic climate and UK and European environmental and energy policies.

The sponsors of this report, the Energy Intensive Users Group (EIUG) and the Trades Union Congress (TUC), both support the shift to a low carbon economy as an essential response to the

challenge of climate change, and believe that EIIs are vital to realising this transition.

Energy intensive sectors make a vital contribution as national or regional employers, providing

direct and indirect employment for some 800,000 workers. Employment in these sectors generally comprises skilled, relatively well paid workers, with many long-standing union recognition agreements. Many plants sit at the heart of the communities in which they operate, and their futures are vital to the local economies.

However, these industries share concerns about UK policy makers commitment to EIIs and their understanding of the importance, complexity and fragility of these sectors. The EIUG and TUC believe that the interests of EIIs, policy makers and key stakeholders should readily be aligned with one another and that current failings result from a poor understanding of these sectors, inadequate debate, and a failure to work in close partnership. It is their objective, and the purpose of this report, to enhance understanding and encourage debate between these key players.

This report, commissioned by the TUC and EIUG, is based on primary and secondary research and

analysis into the economic, fiscal and employment benefits of sustaining EIIs in the UK. It also examines some of the policy challenges associated with sustaining these industries in the UK. It builds on two past studies completed for the TUC and EIUG by Water Wye Associates1 and the

Centre for Low Carbon Futures2.

Water Wye Associates looked at the Cumulative Impact of Climate Change Policies on UK Energy Intensive Industries and concluded that, as tax structures stand, EIIs are carrying the greatest burden of polices to tackle climate change and reduce energy use. The report concluded that, in

future, the impact will become even more disproportionate and intense. The report called on Government to consult with industry and trade unions to develop a policy framework that would avoid the loss of jobs and investment to overseas competitors who have weaker climate change policies or none at all. It found that the fundamental threat is carbon leakage, not only the loss of jobs, but also control over carbon emissions.

The Centre for Low Carbon Futures study looked at the role of EIIs in the delivery of a low carbon

future, and the technologies likely to be available in 2050 which have the potential to assist in meeting national emissions reduction targets. It came to the conclusion that EIIs are critical to realising a low carbon future, but that there is a need for sizeable investment in capital plant and innovation. The report identified a number of significant barriers to this investment that include

the price of energy, availability of capital, lack of Government financial support for R&D, and regulatory uncertainty. The report concluded that there is a compelling rationale for Government to develop an industrial low carbon manufacturing policy and a technology innovation strategy, in

particular for EIIs, which also encompasses sector-wide solutions such as carbon capture and storage.

This third study seeks to demonstrate the economic, fiscal and employment benefits of sustaining energy intensive industries in the UK and therefore the potential impact if these industries were to be lost.

1.2 Methodology and participants

EIIs are defined as industries that have the highest energy intensity Evidence of the economic,

fiscal and employment benefits of sustaining EIIs in the UK was gathered through desk-based research, selected phone-based interviews with a range of employers across the energy intensive industries, consultations with the TUC and its affiliates Unite, Community, GMB and Unity, and the

deployment of an industry questionnaire.

1 Water Wye Associates, The Cumulative Impact of Climate Change Policies on UK Energy Intensive Industries Are Policies Effectively Focussed?, July 2010 2 Centre for Low Carbon Futures, Technology Innovation for Energy Intensive Industry in the United Kingdom, July 2011


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A database of evidence was assembled for all EIIs based on public domain information. In particular, information was gathered from the Office of National Statistics (ONS) Annual Business Survey (ABS) for 2008 and Inter-Departmental Business Register (IDBR) for 2009 and 2011. These provide a consistent set of data across all industries and regions.

The ONS data has limitations in terms of its accuracy and availability at a detailed level. For this reason, a questionnaire was deployed with the trade associations for all EIIs, the results of which are contained within the Appendix to this report. Where there is an obvious discrepancy with ONS data, we have sought to explain this in the appendix.

Lastly, in order to fully understand the importance and interdependencies of individual EIIs, and their sensitivity to energy policy and price, we conducted a number of phone-based interviews. For expediency, we focused on three industries and the regions in which they have a significant

presence. These were ceramics manufacture in North Staffordshire, the glass container industry in Yorkshire, and the chemicals industry in the North West of England, North East of England and Scotland. We spoke to the following trade associations and businesses, to whom we extend our

thanks.

Sector

Ceramics

Chemicals

Glass Containers

Trade Association British Ceramic Confederation

Chemical Industries Association NEPIC

British Glass Manufacturers Confederation

Companies Ibstock GrowHow Stlzle Flaconnage Dudson Ltd INEOS Grangemouth Beatson Clark Endeka INEOS ChlorVinyls Allied Glass Johnson Tiles SABIC Tata Chemicals

In all cases, we sought to gain an understanding of:

The importance of the business and/or industry and its value to the wider economy. In particular research looked at the nature and scale of upstream and downstream supply chains, and of local interdependencies (e.g. shared skills and resources);

The nature and governance structure of the business (e.g. local or international ownership; single or multiple sites; diverse or narrow business focus), and the basis for key decision

making (e.g. local or international decision making; factors influencing decisions; internal/external competition for resources);

The importance of energy price to the business (e.g. energy intensity, exposure to international competition), and impact of energy policy and price on the business (e.g. on capital investment and operating decisions);

Any recent or planned decisions that would have a significant impact on the future of the business in the UK, and which have been influenced by energy policy and price;

The role that EIIs see themselves playing in a future low carbon UK economy, and the extent to which these roles been realised to date.

1.3 Disclaimer

Work has been completed on a best endeavours basis. We are aware that there are limitations to the reliability of ONS data and where possible, this information has been checked with industry bodies. There are likely to be remaining inaccuracies. However, we do not believe that these would

alter the key findings and conclusions from this study.

We are also mindful that interviews have been conducted with just three EIIs in specific regions. However, the findings from these interviews are reinforced by previous studies and we believe them to be applicable to all EIIs and all regions.


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2. INTRODUCTION TO EIIs IN THE UK

2.1 Overview

EIIs share a number of characteristics, which can be summarised as follows:

Regionally significant: EII businesses are often large (e.g. cement, chemicals, petroleum,

industrial gases, iron and steel) and/or clustered together to benefit from shared infrastructure and resources (e.g. ceramics and glass). As such they are often the dominant employer and source of GVA in a particular region;

Mature, commoditised and internationally competitive: EIIs are mature, often supplying commoditised products to internationally competitive and price-sensitive markets;

Capital intensive: Most EIIs are highly capital-intensive, dependent upon long term fiscal and regulatory stability in order to attract investment;

Multi-national: EIIs are often multi-national concerns, with inter-company competition for

capital investment. Many are foreign-owned;

Centred on large and complex supply chains: EIIs have large and valuable supply chains, and are in turn important elements in the supply chain of downstream industries;

High value and highly skilled employment: EIIs employ relatively skilled and well paid workers, with average wages in excess of UK and manufacturing averages.

This initial section provides a brief overview of EIIs in the UK, the nature and scale of their activities, the key players, their manufacturing processes, the uses for their products and their supply chains.

This is followed by a brief introduction to EII supply chains and their intra-regional connectivity which illustrates how EIIs provide the primary inputs for much of what we manufacture and consume, and explains their importance to the UK economy.

2.2 Cement and lime

The cement and lime industry comprises the following subsectors: manufacture of cement and

manufacture of lime and plaster. The Mineral Products Association (MPA) is the trade association representing all six UK cement manufacturers, whilst the British Lime Association (BLA) represents the four largest lime manufacturers.

In the UK there are 12 cement kiln sites plus 8 cement grinding and blending sites. These are owned by 5 international companies: Hanson Heidelberg Cement Group (3 sites), Lafarge Cement UK (11 sites), Cemex UK (3 sites), Anglo American plc (1 site that is operated by Tarmac Buxton

Lime and Cement), and Kerneos Aluminate Technologies (1 site); and one UK owned company, Quinn Cement (1 site). There are 7 sites that produce commercial lime. These are owned by UK companies: Singleton Birch (2 sites) and Steetley Dolomite Ltd (2 sites); and international companies: Lhoist (1 site) and Anglo American plc (2 sites operated by Tarmac Buxton Lime and Cement). In addition there are 6 sites that produce lime largely for their own use. These sites are owned and operated by Tata Steel, British Sugar and Specialty Minerals.

Cement works have traditionally been built on deposits of limestone, chalk, and clay or shale so as to minimise the transport of heavy raw materials. The proximity to cement markets also affects

the location of new sites, as it typically becomes uneconomic for cement to travel more than 200 miles from the plant to the point of use.

The primary raw materials used in cement manufacture are calcium carbonate, silica, alumina and ferric oxide which, when burned in kilns, produce cement clinker. The clinker is then ground with additives such as gypsum (a setting retardant) to form cement. This is stored on-site and

transported either in bulk or packed in paper or plastic-lined paper bags before shipment. Historically, primary fuel inputs were petcoke, but use of natural gas as a fuel source has increased in recent years.

There are 27 types of cement manufactured in conformance with a European Standard. The principal cements consumed in the UK are: Portland cement, Portland blast furnace cement, sulphate resisting Portland cement, masonry cement, Portland pulverised-fuel ash cement. Most cements are manufactured using a similar process. Cement is the essential ingredient in concrete,

which is the world's second most consumed substance after water. Its main downstream use is in construction.

Lime plants have been historically located on deposits of limestone or chalk (calcium carbonate), or Dolomitic limestone (calcium carbonate and magnesia), with a distinct concentration of plants located in the Midlands region. The raw material is cut, crushed and chemically altered in a kiln by heating to approximately 1000 to 2000 degrees Celsius. Through the process of adding heat


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quicklime or Dolomitic lime is created and the addition of water then creates hydrated or slaked lime. Lime products have many different uses and are used in large quantities in iron and steel production, construction, paper processing, drinking water purification and food production.

2.3 Ceramics

The ceramics industry includes the following sub sectors: mining of clays and kaolin; ceramic household and ornamental articles; refractories; ceramic sanitary fixtures; ceramic insulators and insulating fittings; technical ceramic products; other ceramic products; ceramic tiles and flags; and bricks, tiles and construction products in baked clay. The British Ceramic Confederation (BCC) is the industrys association which represents the interests of key players such as Ibstock, Morgan Ceramics, Dudson, Johnson Tiles, Endeka and Ideal Standard, as well as many other enterprises. Although some of the firms are UK owned, many of the larger firms are based overseas.

The ceramics industry is spread across the whole of the UK. There are approximately 160 BCC member sites around the country. Sites making clay construction products such as bricks, roof

tiles and clay drainage pipes are co-located with clay quarries and are concentrated in the South Downs, East Midlands, West Midlands, and Yorkshire, depending on geology. Much of the tableware and giftware sector is centred on Stoke on Trent together with many suppliers. There is also a concentration of refractory manufacturers in Yorkshire. Otherwise the industry is dispersed

throughout the country, with many enterprises employing only a few people.

Materials used in the manufacture of ceramic products are sourced from quarries and works across the UK, as well as some specialist materials from further afield, such as white flint from Belgium. The manufacturing process consists of a number of steps, namely grinding of raw materials, shaping, drying, firing and cooling. The latter steps may be repeated a number of times, using heat in the process. This is where much of the energy, primarily natural gas, is used.

Ceramic products are varied, widely used and perform many functions in the modern society. They

are consumed across healthcare, all high temperature industries (refractories e.g. for glass, steel , cement, chemicals, aluminium), hospitality, homeware, and building and design sectors, amongst others. Products include household and ornamental goods (e.g. plates, cups and vases), larger

household fixtures (e.g. basins and toilets), building materials (e.g. tiles and bricks),and electrical, technical and medical ceramics..

2.4 Chemicals

This study covers the basic chemicals sector, which encompasses the manufacture of: industrial

gases; dyes and pigments; inorganic basic chemicals; organic basic chemicals; fertilisers and nitrogen compounds; plastics and synthetic rubber. However, in a few cases where data cannot be subdivided, charts reference the broader chemicals sector which also includes the manufacture of other chemical products, such as paints; soaps, detergents and personal care products; adhesives; flavours and fragrances; industrial speciality chemicals, agrochemicals and pharmaceuticals; and plastics and rubber processing. Chemicals firms can be found in almost every area of the country,

but there are four regional concentrations in the Northwest, Northeast, Yorkshire and Humber, and Scotland.

The Chemical Industries Association (CIA) is the industrys representative body, supporting enterprises across the UK in many of the chemicals sectors. It represents all sizes of chemical and pharmaceutical businesses and approximately 70% of members are headquartered abroad. There are a small number of key players involved in basic chemical manufacturing. They are typically large businesses, often with international subsidiaries or ownership. Some key players include Tata

Chemicals, SABIC, INEOS, and GrowHow (Yara). EIUG members sitting outside the CIA include the two large industrial gases concerns in the UK; Air Products and BOC.

Organic materials, derived primarily from oil and natural gas, and inorganic materials, such as salt/brine and minerals, are the primary raw materials used in basic chemical manufacturing. The process of creating most organic chemicals begins with an ethylene cracker, which in turn feeds multiple derivative plants. These processes are typically highly energy intensive in both gas and electricity. Inorganic materials are manufactured in a variety of ways, notably the electrochemical

process that produces chlorine and caustic soda from brine (See Figure 1).

The UKs chemical companies produce a broad range of commodity, speciality and consumer chemicals. These feed into many downstream sectors and enable the manufacture of thousands of

products (ranging from medicines to insulation), a high proportion of which are exported and many of which support carbon reduction in other sectors of the economy (see Figure 2 for example products). In fact, over half of the chemical industrys outputs are bought by other industries for use in the manufacture of their own products, many of which are critical to a low carbon economy. The industrial gases sub-sector is a key supplier to oil, chemicals, glass and steel, and although it


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has almost no trade exposure itself, its costs are a significant contributor to these export sectors remaining internationally competitive.

2.5 Glass

The UK glass sector is made up of sub-sectors that include: manufacture of flat glass; shaping and

processing of flat glass; manufacture of container or hollow glass; manufacture of glass fibres (covering continuous filament glass fibre and glass wool with the latter outside the scope of this report); and manufacture and processing of other glass, including domestic and technical glassware. The British Glass Manufacturers' Confederation (British Glass) represents the UK's glass industry. The industry is made up of a range of different sized companies from large manufacturers employing 100s of people to very small enterprises with limited resources.

Glass manufacturing can be found across the country, but much of the mass production is

undertaken in Yorkshire and the Northwest. Over the past ten years, the number of companies manufacturing glass in the UK has roughly halved, meaning that many products with long and rich

British histories have now been offshored. Furthermore the harsh business conditions have led to major rationalisation within the glass industry so that there remain only ten comparatively large companies operating a total of eighteen sites across the UK. A small number of SMEs also exist to serve the special, technical and domestic sectors.

Only two of these companies are UK owned, with four owned and managed elsewhere in the EU and four owned and managed from outside of the EU. Key players include NSG (Pilkington Glass), St. Gobain, Guardian, Ardagh Group, O-I, Quinn Glass, Stlzle Flaconnage, Beatson Clark, Allied Glass and PPG.

Sand, limestone and soda ash are the principal virgin raw materials used by the industry and recycled cullet is used as much as possible. The glass manufacturing process requires a large and continual supply of fuel to ensure furnaces remain hot and glass molten. Furnaces typically last for

12 years and are never cooled. Interruptions to fuel supply are costly and potentially extremely damaging.

The UK glass industry produces an estimated four million tonnes of glass per year. Glass is unique

in that it is inert and will not degrade in quality over time. It is also infinitely recyclable. Glass products are used extensively in three key industries: food and beverage, medical, and construction. Some technical or high quality glasses have special formulations and for these high end products, use of recycled glass is less common. Glass also contributes to the manufacture of

low carbon technologies, such as solar panels.

2.6 Iron and steel

The manufacture of iron and steel comprises the following subsectors: manufacture of basic iron and steel and of ferro-alloys; manufacture of tubes, pipes, hollow profiles and related fittings, of steel; cold drawing of bars; cold rolling of narrow strip; cold forming or folding; and cold drawing of wire. The steel industry association is part of the EEF Manufacturers Organisation (Engineering

Employers Federation) which has a membership that includes every steel producing company in the UK as well as many steel processing companies.

The UK steel industry is dominated by global players such as Tata Steel Europe (formerly Corus)

which have operations across multiple continents.

The UK steel industry is concentrated in the North East and Wales. It has three integrated steelmaking sites (producing steel from virgin raw materials) at Scunthorpe (Tata Steel), Port Talbot (Tata Steel) and Teesside (SSI). The latter is currently mothballed, but planning to restart

shortly after investment by its new owners.

It also has five secondary steelmaking sites (recycling scrap steel into new steel, known as electric arc furnace steelmaking) at Sheffield (Sheffield Forgemasters and Outokumpu), Rotherham (Tata Steel), Cardiff (Celsa Steel) and Sheerness (Thamesteel currently in administration). There is a further mothballed furnace at Newport (Mir Steel).

All steelmakers other than Sheffield Forgemasters are foreign owned and part of larger steel groups. There are re-rollers mainly in the West Midlands, South Wales, North East, Scunthorpe

and Sheerness: some owned by Tata and several independent. Tubemaking takes place in Corby, the Northeast, West Midlands and South Wales. Located in Yorkshire, West Midlands and North Wales, wire and other cold drawing ownership is mainly independent of the steelmakers.

Iron ore, carbon (coke) and limestone are the main raw materials used in the production of iron, which is subsequently refined, strengthened and moulded to create steel. The major energy use is in initial stages of production, at the coke refinery and then within the blast furnace. Steel is also


12

one of the most recycled materials in the world. Each tonne of scrap recycled by the steel industry saves 1.9 tonnes of iron ore and 0.6 tonnes of coal.

Iron and steel based products contribute to a wide range of industries such as buildings, bridges and transport. They are also key components in the development of a low carbon economy, for

example in the construction of wind turbines.

2.7 Non-ferrous metals

The manufacture of non-ferrous metals comprises the following subsectors: precious metals production; aluminium production; lead, zinc and tin production; copper production; other non-ferrous metal production; and processing of nuclear fuel. The NFA (non-ferrous alliance) represents a large cross-section of the non-ferrous metals industry in the UK with a membership which includes the trade associations representing the aluminium, copper, nickel, lead, zinc,

magnesium, titanium, cobalt, molybdenum, tungsten and the metals recycling industry as well as precious metals and minerals companies.

Non-ferrous metal manufacturing sites are located across the UK, but specifically the Midlands, North West, North East and South Wales. Some 30 or so metals are in commercial use. The structure of the industry varies metal by metal. No company produces all non-ferrous metals although there are a few pan-European companies producing several metals such as, aluminium,

copper, nickel, lead and zinc; often seen as the five most important non-ferrous metals.

Non-ferrous metals are produced from natural mineral ores, which are sourced from national and international markets. There is also an increasing share of production originating from scrap. The production of non-ferrous metals is highly energy intensive. Non-ferrous metals are an essential and integral part of modern life. They are used as feedstocks for further manufacturing processes, but are also used in a wide range of other sectors such as copper wiring for telecommunications and aluminium in vehicle manufacturing.

Its worth noting that the United Kingdom has only one aluminium producer, Rio Tinto Alcan, which has recently announced plans to close. This plant currently accounts for about 1% of global output. About 59% of the UK's aluminium output is newly manufactured, with the remainder recycled from

scrap. The aluminium production industry is expected to generate revenue of about 2.03 billion in 2011-12, compared with 2.90 billion in 2006-07.

2.8 Pulp and paper

Pulp and paper manufacturing consists of the following sub-sectors: manufacture of pulp and the

manufacture of paper and paperboard. The Confederation of Paper Industries Ltd (CPI) is the leading organisation working on behalf of the UK paper-related industry. CPI represents the paper chain from the recovery of used paper through papermaking and conversion to distribution. Picon Ltd is the leading downstream industry trade association representing manufacturers and suppliers in the printing, papermaking and paper converting sectors.

The UK has 55 Paper Mills, producing around half of the paper used in the UK. The industry is

primarily multinational with ownership predominantly outside the UK. Most operators have multiple sites. Production is spread throughout the UK, with concentrations in the North West and South East of England. Key players include, Aylesford, Arjowiggins, DS Smith, UPM Kymmene, Kimberly

Clark, SCA, Smurfit Kappa, Sofidel, De La Rue, Iggesund, Palm and Saica.

Raw materials for the production of paper are primarily recycled paper and wood. Over recent years the amount of recycled paper used in manufacturing processes has grown substantially. Most paper made in the UK originates from recovered paper, with over 70% of fibres used coming

from recycled paper - the overwhelming majority collected in the UK. This UK based recycling infrastructure provides an important outlet for collected recyclate and income for recyclers. Virgin fibre is only made in quantity by two UK mills, both of which are integrated and use their production to make into paper on site. Market pulp is no longer made in the UK and mills that require virgin pulp import their needs from outside the UK.

Virgin pulp is produced through mechanical and chemical pulping processes that separates fibres and changes their properties ready to make into different grades of paper. Paper making can

happen directly at the pulp mill or (as is predominantly the case in the UK) at a separate site. During papermaking dilute pulp is formed into a continuous sheet with a series of rollers and driers then removing water the smallest modern machine making a generic grade would produce a minimum of 250,000 tonnes of product each year, often far more. During the finishing process, paper is sized and cut, and additives such as chalk or china clay can be coated onto the paper for various effects. Again this can either be at the paper mill or at a secondary remote converting site.


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Paper recycling involves turning waste paper into new paper products. Waste paper is sourced from three categories: paper trimmings from conversion operations, pre-consumer waste and post-consumer waste. The amount of contaminants that are acceptable in the recyclate depends upon the type of paper being produced. During the production process, waste paper is combined

with water to separate fibres back into a stock ready to be made into new paper. Mechanical separation equipment can include coarse and fine screens, centrifugal cleaners, and dispersion units that break apart ink particles, a process called deinking. The recycling of paper can produce 100% recycled paper or a blended product containing both new and recycled fibre. After five to seven times through the recycling process individual fibres become too damaged to make into new paper and are generally used either for energy production or as a soil improver.

While the sector has greatly increased both its energy efficiency and use of energy from renewable

resources, producing pulp & paper is inherently energy intensive.

Paper products such as newsprint, printing and graphics paper, hygiene and packaging are used throughout the economy.

2.9 Coke and refined petroleum products

Production of coke and refined petroleum products includes the following subsectors: manufacture of coke oven products and manufacture of refined petroleum products. The UK Petroleum Industry

Association (UKPIA) represents ten member companies engaged in the UK downstream oil industry on a range of common issues relating to refining, distribution and marketing of oil products, in non-competitive areas. These companies include: BP Oil UK, ConocoPhillips, Essar Oil, Esso UK, INEOS refining, Murco Petroleum, Petroplus Refining and Marketing (in Administration 24 January 2012), Shell UK, Total UK and Valero UK.

Oil refineries are a downstream sector of the wider global fossil fuel industry, taking in crude oil and natural gas from international conglomerates. UK refineries are based along the coast for easy

access of oil imports either by ship or pipe with the South East, Wales, North West and North East being the UKs main hubs.

Oil refineries are typically large industrial complexes with piping carrying fluids between large

processing units. The number of refineries in the UK has declined in recent years as there is strong competition from across Europe and further afield.

Petroleum refinery products are the basic raw material upon which all refinery processes are based. Long, heavy carbon chains are cracked into smaller and therefore lighter petroleum

products such as gasoline, diesel fuel, asphalt base, heating oil, kerosene, and liquefied petroleum gas. Petroleum products feed into chemical manufacturing processes as well as providing a range of fuels used in transport, manufacturing industries and heating.

2.10 Supply chain and regional inter-connectivity

EIIs provide the foundations for the UK manufacturing sector. Their products feed into a vast number of downstream industries which rely on availability and affordability of UK EII outputs.

EIIs are often highly interconnected, with products and outputs from one sector being used by another. This is particularly true of the chemicals sector where primary products feed into a wide network of interrelated industries such as the manufacture of cosmetics, soaps, paints, rubber,

plastics and adhesives (see Figure 1).


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Figure 1: Simplified diagram of main material flows and product groupings in the chemicals

industry3

The outputs from EII industries like cement and lime, ceramics, chemicals, glass, iron and steel, and non-ferrous metals feed into virtually all other manufacturing processes, and make their way into everything that we consume and use. The chemicals and steel industries provide examples (See Figure 2 and Figure 3).

Figure 2: Derivative chemicals uses4

3 Chemical Industry Association, 2011 4 Mckinsey and the ICCA (International Council of Chemical Associations), Innovations for Greenhouse Gas Reductions: A life cycle qualification of

carbon abatement solutions enabled by the chemical industry, July 2009

Chemicals products


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Figure 3: Derivative steel uses5

5 Coutinho & Ferrostaal, Steel Value Chain http://www.coutinhoferrostaal.com/valuechain.html


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3. IMPORTANCE OF EIIs TO THE UK ECONOMY

3.1 Overview

EIIs make a direct contribution to the social and economic fabric of the UK economy through gross value added (GVA), fiscal contributions (taxes and levies), and employment (staff and wages).

In addition, they sustain their suppliers through the purchase of goods, materials and services, and their customers through the provision of cost-effective products (turnover). The staff induce further value add and employment through their wage spend, and there is evidence that EIIs are important contributors to skills development and training, and act as anchors for industry-wide innovation. These indirect impacts are more difficult to assess, although it is conservatively estimated that four times as many people are employed in EII supply chains as are employed in the sectors themselves.

A high level overview of the key economic, employment and fiscal metrics for all EIIs, UK

manufacturing and the UK economy as a whole are given in Table 1. These same metrics are presented on a per employee basis in Table 2. These show that the contribution made by EIIs includes the following:

EIIs employed in excess of 160,000 people in 3500 enterprises in the UK in the year to end

March 2011. More than four times this number are estimated to be employed in their derivative supply chains;

EIIs have combined turnover in excess of 86 billion and account for approximately 20% of UK manufacturing turnover and 3% of the UK economy as a whole;

EIIs are high value added, with a combined GVA in excess of 14 billion. In the year to end March 2008, GVA for individual EIIs ranged from approximately 40,000 per employee in the ceramics industry and 50,000 in glass, to 120,000 in chemicals and 150,000 in petroleum

products. This compares with the UK average for the same period of 46,000;

EIIs purchased 68.6 billion of goods, materials and services from their suppliers in the year to March 2008. This equates to 21% of the UK manufacturing total;

Employment costs, including wages national insurance and pension contributions were in excess of 6.6 billion or 38,000 per employee;

EIIs accounted for 47% of total manufacturing taxes and levies in the year to March 2008, in excess of 12 billion.

Each of these metrics are reviewed and discussed in further details below.


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Table 1: Energy intensive industries (EIIs) totals6

Note: social security costs are the combined total of employer national insurance contributions and contributions to pension funds

6 Data for the years to end March 2008 sourced from the ONS Annual Business Survey. Data for the years to end March 2009 and 2011 sourced from the Inter-Departmental Business Register.


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Table 2: Energy intensive industries (EIIs) totals average per employee7

Note: social security costs are the combined total of employer national insurance contributions and contributions to pension funds

7 Data for the years to end March 2008 sourced from the ONS Annual Business Survey. Data for the years to end March 2009 and 2011 sourced from the Inter-Departmental Business Register.


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3.2 Number of Enterprises

The EII sectors comprised 3515 enterprises in the year to end March 2011. The glass, ceramics chemicals, iron and steel and non-ferrous metals, and pulp and paper sectors together accounted for nearly 95% of the total (See Figure 4). As outlined in Section 2, each of these sectors is dominated by a small number of large companies, supplemented by many smaller enterprises. Petroleum and cement and lime sectors account for the remaining 5% and comprise a small

number of large companies and with far fewer small enterprises.

Figure 4: Proportional split of the number of EII enterprises in 2011

(Total EII enterprises: 3,515)

There was a decline in the number of ONS declared enterprises in all EII sectors, other than iron and steel, between 2009 and 2011 (See Figure 5). The largest percentage falls were in the petroleum and cement and lime sectors, although the largest absolute fall was in the glass sector, with a decrease of 160 enterprises (See Table 3). The ONS data should be interpreted with caution.

For example, British Glass indicate that given the relatively low number of actual EII enterprises in the UK glass sector (~18), the ONS quoted figure of 1,000 in 2009 can be seen to include other enterprises in the glass stakeholder chain.

Figure 5: Percentage change in number of EII enterprises between 2009 and 2011

Table 3: Change in number of EII enterprises, 2009-2011

2009 2011 Difference % change

All EIIs and potential EII-related sectors 17,635 15,780 -1855 -10.52%

Iron & steel 420 470 50 11.90%

Non ferrous metals 455 380 -75 -16.48%

Basic chemicals, fertilisers and nitrogen compounds 880 730 -150 -17.05%

Ceramics 770 645 -125 -16.23%

Glass 1,025 865 -160 -15.61%

Cement and lime 20 15 -5 -25.00%

Pulp and paper 270 250 -20 -7.41%

Petroleum 240 160 -80 -33.33%


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3.3 Employment

They employed in excess of 160,000 people in the UK in the year to end March 2011. More than four times this number are estimated to be employed in derivative supply chains.

EIIs are capital intensive rather than labour intensive. As such, they account for a smaller proportion of the UK manufacturing employment total than GVA or turnover (see Sections 3.4 and 3.5 below). EIIs account for 6% of UK manufacturing employment (See Figure 6).

Figure 6: EII employment as a proportion of total UK manufacturing

(Total manufacturing employment: 2,601,801)

The chemicals sector accounts for the largest proportion of employment at 1.6% of the UK manufacturing total, closely followed by iron and steel and non-ferrous metals, each accounting for

roughly 1%. Individual businesses within these sectors are generally large, and the dominant employer within their particular region.

The glass and ceramics sectors each account for about 1% of the UK manufacturing total albeit less

than the metals sectors. Petroleum and pulp and paper sectors account for less than 0.5%, whilst the cement and lime sector has the lowest employment numbers.

Although EII sector employment is relatively low as a proportion of the UK manufacturing total, a

far larger number of individuals are employed in downstream operations. For example, it is understood by industry that for every employee in the chemicals sector, there are a further five employed in derivative and related industries along the supply chain as well as in ancillary services. The figure for the ceramics sector is understood by the BCC to be a factor of three. Using estimated factors for each sector, EII direct and indirect employment is estimated to exceed 800,000 people.

Between March 2008 and 2009 all but the glass sector saw an increase in employment according to

the official statistics although this was not consistent with some trade association data e.g. ceramics. However, employment figures then fell substantially again in the two year period to 2011. With the exception of petroleum and iron and steel which saw slight increases in employees between 2008 and 2011, all other EII sectors have seen overall declines in employment numbers (See Figure 7).

Figure 7: Percentage change in EII official employment between 2008 and 2011


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There are a number of explanations for this overall decline in employment. In part this reflects the state of the economy, which has seen unemployment rise from around 1.6 million at the end of

2008 to over 2.6 million at the end of 20118. The cement and lime sector which has experienced the largest percentage change over this three year period, will almost certainly have been impacted by the decline in the construction sector. In part however, these changes will also reflect longer-term downward trends in employment within individual EII sectors. During our interviews,

we encountered numerous examples of companies moving operations abroad to benefit from more favourable business environments, or of losing business to imports from countries that are subject to less stringent energy and environmental constraints. The ceramics industry provides a specific example.

In October 2009, SQW conducted a detailed survey of the ceramics industry in North Staffordshire which showed a steady decline in employment between 1999 and 2006, with the loss of almost 10,000 jobs (See Figure 8). This decline is attributed to the decline in demand driven by overseas competition and to a lesser extent, the arrival of new technologies that have resulted in human labour being replaced by machines. The North Staffordshire region experienced a particularly sharp fall from nearly 16,000 jobs (one third of the entire ceramics industry) to 6,500 (about a quarter of the total).

Figure 8: Employment in the Ceramics Sector9

3.4 Turnover

EIIs are amongst the largest contributors to national GDP. In the year to end March 2008, they demonstrated a combined turnover (sale of goods and services) of 95 billion and accounted for approximately 20% of the UK manufacturing total (See Figure 9).

Figure 9: EII turnover as a proportion of UK manufacturing (2008)

(Total manufacturing turnover: 478.2 billion)

8 ONS, Labour Market Statistics, 2012 9 SQW Consulting, 2009, Growing the Ceramics Cluster in North Staffordshire


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With a turnover of approximately 40 billion, petroleum is the largest EII sector, accounting for 9% of UK manufacturing turnover. Chemicals is the second largest sector, with a turnover of approximately 24 billion in 2008, rising to 27 billion in 2011 and accounting for 5% of the manufacturing total.

Iron and steel accounted for the third largest turnover at 12.5 billion in 2008 and 10 billion in

2011. Glass, ceramics, pulp and paper had turnover figures of 2 - 3.5 billion, whilst cement and lime has the lowest absolute turnover at under 1 billion per annum.

In the year to end March 2011, combined EII turnover had declined to 86 billion, reflecting falls in all sectors other than chemicals and pulp and paper (See Figure 10). However, these sectors continue to make a substantial contribution to the UK economy.

Figure 10: EII sector total turnover for 2008, 2009 and 2011

3.5 GVA

EIIs make a GVA contribution to the UK economy of 14 billion or 11% of the UK manufacturing total (See Figure 11).

Despite its high turnover, the petroleum products sector has one of the smallest GVAs at 1% of the UK manufacturing total. The chemicals sector provides the largest GVA at 4%; iron and steel and non-ferrous metals each contribute roughly 2%; with ceramics and glass contributing approximately 1%.

Figure 11: EII GVA as a proportion of UK total manufacturing (2008)

(Total manufacturing GVA: 139.5 billion)

3.6 Turnover and GVA per employee

EIIs are high value-added sectors on a per employee basis. Average turnover per employee is approximately 250,000 per year across all EIIs in 2011, and ranges from 100,000 in the


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ceramics sector to 770,000 in the chemicals sector. These are dwarfed by the petroleum sector which averages 3.7 million per employee (See Figure 12 and Figure 13).

Figure 12: EII turnover per employee, including petroleum (2008, 2009 and 2011)

Figure 13: EII turnover per employee, excluding petroleum (2008, 2009 and 2011)

In the year to end March 2008, GVA for individual EIIs ranged from approximately 35,000 per employee in the ceramics industry and 50,000 in the glass industry to 120,000 in chemicals and 150,000 in petroleum products. This compares with the UK average for the same period of 46,000 (See Figure 14).

Figure 14: EII GVA per employee (2008)

Although the cement and lime sector is the smallest in terms of GVA, on a per employee basis it is

third only to the petroleum and chemicals sectors.

2008 UK average 152,478

UK average 46,388


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Figure 15 below shows the contribution of EIIs, in terms of GVA and turnover per employee, relative to total employment numbers. The x axis indicates GVA per person, y axis indicates total

sector employment and the size of the bubble shows average turnover per employee. Those sectors towards the top right of this graphic make the largest contribution to the UK economy in terms of GVA.

Figure 15: GVA per employee by total employment and turnover per employee (2008)

The petroleum industry has the largest turnover and GVA per employee, but employs a smaller number of people than all other EII sectors, other than cement and lime.

The chemicals industry employs more people and has a higher unit turnover and GVA than all other EII sectors, closely followed by both iron and steel and non-ferrous metals sectors. All, other than

ceramics, have a higher GVA than the UK average. This clearly demonstrates that EIIs contribute significant value to the UK economy on a per employee basis.

3.7 Purchased goods materials and services

EIIs play an important role in sustaining their suppliers through the purchase of goods, materials and services. In the year to March 2008, EIIs purchased 68.6 billion of goods, materials and

services from their suppliers, equivalent to 21% of the UK manufacturing total.

The petroleum, chemicals and metals sectors dominate, accounting for 91% of this total (See Figure 16)

Figure 16: EII cost of purchased goods materials and services (2008)


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3.8 Wages and social security contributions

Employment costs, including wages, national insurance and pension contributions were in excess of 6.6 billion across all EIIs in 2008 (see Figure 17), or 38,000 per employee (See Figure 18).

Figure 17: EII total employment costs (2008)

Total employment costs across all EIIs comprise approximately 5.5 billion in wages and 500 million in each of national insurance and pension fund contributions.

The petroleum sector has the highest employment costs per unit labour at just over 57,000 per employee. Of this, contributions to pension funds account for 10,000, or approximately 17% of the total. The next highest costs are approximately 50,000 for the cement and lime industry, with a pension fund contribution of roughly 10%, and chemicals with 44,000 and a pension fund contribution of around 13%. The sector with the lowest per unit labour employment cost is

ceramics at 28,000 (See Figure 18).

Figure 18: EII total employment costs per employee (2008)

Across all EIIs the pay gap is relatively compressed in comparison to other industries, where it has been reported that the salary of a firms CEO can be well over 500 times and the average employee salary10.

3.9 Corporation taxes and levies

EIIs accounted for 47% of total UK manufacturing corporation taxes and levies (such as the Climate Change Levy) in the year to March 2008, with remittances in excess of 12 billion. These

payments are dominated by the petroleum sector which accounts for 11.7 billion of this total.

The contributions made by other sectors are shown in absolute numbers in Figure 19 and on a per employee basis in Figure 20.

The chemicals sector accounts is the second largest contributor to Government coffers with taxes and levies totalling 107 million, followed by the metals sectors and glass.

10 Guardian, 2009, Pay gap widens between executives and their staff

UK average 24,296


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Figure 19: EII total corporate taxes and levies (2008)

On a per employee basis, taxes and levies are more uniform, and range from 1,400 per ceramics sector employee to 2,600 per chemicals sector employee, reflecting the unit turnover and GVA of these industries.

It should be noted that these taxes reflect corporate tax and thus do not represent all forms of tax

that EIIs pay. They exclude for example employers national insurance contributions, which have been outlined above, other taxes such as import and export taxes and more importantly any VAT or environmental levies reflected in the costs of purchased goods, materials and services.

Figure 20: EII total corporate taxes and levies per employee (2008)

3.10 Regional variation

Although EIIs exist throughout the UK, specific sectors are often dominant in particular regions, reflecting access to important raw materials or the history of their development.

The regional bias of individual EII sectors has been described in Section 2, and important parliamentary constituencies for each EII are identified in the Appendix to this report.

The most recent official Office of National Statistics (ONS) data, Inter-Departmental Business Register (IDBR 2009 and 2011) would appear to have limitations at regional level for a number key metrics, such as turnover, with numbers often reflecting the location of a companys headquarters rather than manufacturing operations. A comparison of ONS IDBR data for 2009 and Annual

Business Survey (ABS) data for 2009, supplied to us by the Chemical Industries Association (CIA), provides an interesting example (See Figure 21), with a majority of the industry turnover attributed to the South East of England in the former and more accurately reflecting the manufacturing locations of the business in the latter. IDBR data for 2009 and 2011 present a similarly distorted view of the regional split of chemicals industry turnover.

UK average 3,684


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Figure 21: Comparison of IDBR and ABS data for regional split of chemicals industry turnover

A comparison of employment numbers from ONS IDBR data for 2011 and the Business Register and Employment Survey (BERS) for 2009 shows much greater correlation between these two data

sources. These figures appear to be more accurate and are supported by the CIA (see Figure 22).

Figure 22: Comparison of IDBR and BRES data for regional split of chemicals industry employment

For this reason, we have chosen to show the geographic regional distributions of all EIIs based on the ONS 2011 employment numbers rather than turnover (See Figure 23). This shows the tendency for the majority of manufacturing to be located in the Midlands and Northern England. However, although the use of IDBR employment data is deemed to be more accurate than the use of turnover, there are still some anomalies. For example, glass shows a high level of clustering in the West Midlands, whereas British Glass indicates that this is a distortion of the reality. Nonetheless, employment data appears to provide a more accurate view than alternative ONS data

options.


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Figure 23: UK EIIs regional employment (2011)

Note: regional data not available for cement and lime


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4. EIIs ROLE IN THE TRANSITION TO A LOW CARBON ECONOMY

4.1 Energy intensive but efficient

EIIs, by their very nature use a large amount of energy as feedstock or in their manufacturing processes. These include fossil fuels such as coal and natural gas, and grid electricity. DECC estimates that EIIs account for roughly 50% of UK industrial energy consumption (see Figure 24).

Figure 24: Energy consumption by main industrial groups 201011

Total final energy consumption by industry: 27.5 million tonnes of oil equivalent

The CO2 emissions of these industries are commensurately significant. Using Carbon Trust conversion factors for coal, natural gas and grid electricity, CO2 output can be estimated to be 55 million tonnes, equivalent to 66% of the UK industry total and 19% of the UK total (see Figure 25).

Figure 25: Millions tonnes CO2 per unit of energy (electricity, natural gas and coal) (2010)12,13,14

The following SIC (2007) codes were used by DECC in preparing this graph: Iron and steel: 24 (excluding: 24.4, 24.53, 24.54); Non-ferrous metals: 24.4 (excluding 24.46), 24.53, 24.54; Mineral products: 08, 23; Chemicals: 20-21; Paper, printing and publishing: 17-18; Other industries: 16, 22, 31-33, 36-39.

The energy intensity of industry is defined in a number of ways. Many within industry use a measure of energy costs relative to total manufacturing costs; whereas the Government prefers use energy cost as a percentage of turnover or GVA. Figure 26 shows BIS current estimates for a number of industries. Note: BIS is currently consulting with industry on energy intensity, and more specifically electricity intensity, in order to effectively target compensation as proposed in the

Chancellors Autumn Statement 2011 (see Section 5.3).

11 DECC, 2011, DUKES 12 DECC, 2011, DUKES 13 Carbon Trust, 2012, Resource conversion factors 14 Orion Innovations analysis


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Figure 26: Energy intensity of different UK manufacturing industries, 200915

The energy intensity of individual EII sub-sectors, and their exposure to energy price, is open to debate and depends upon how broadly the envelope is drawn around each sector. Government data, which often combines EIIs and their derivative operations in a common category, is widely regarded as flawed by industry stakeholders (see Figure 27).

Figure 27: Energy intensity of the British ceramics industry16

The British Ceramic Confederation (BCC) recently completed a rigorous bottom up analysis of the energy intensity of the ceramics sector after BIS estimates suggested that individual sub-sectors had energy intensities ranging, for example, from 4.6% of GVA for the manufacture of refractories,

to 15% for manufacture of bricks, tiles and construction products, in baked clay in the years 2004

and 2007. Data from some sectors were missing completely. BCC gathered information from its members for energy costs and GVA, using an independently verified bottom-up methodology ring-fencing UK manufacturing operations. This more accurate assessment revealed that energy intensity ranged from 24% to 31% for example, for the same two sub-sectors and the same years. BCC also gathered evidence for more recent years (2008 to 2010) and showed that in all but one sub-sector there has been a substantial rise in energy costs relative to GVA, with one sub-sector

seeing an almost 100% increase in energy intensity.

We have conducted a simple survey of all EIIs in the context of this study. Responses from those that define energy intensity in terms of energy cost relative to total manufacturing costs, suggests

a range in energy intensity from 20% to 80% for individual EII sub-sectors. Those that define energy intensity in terms of energy cost relative to GVA suggest an energy intensity ranging from 15% to 65% (see Figure 28).

Figure 28: Energy intensity of selected UK EIIs17 Basic chemicals 10-80% Manufacturing costs

Cement 25-45% GVA

Lime 35-60% GVA

Glass 15-36% Manufacturing costs

Ceramics 10-65% GVA

Iron and steel Not made available

Non-ferrous metals Not made available

Pulp and paper Not made available

Petroleum Not made available

As the largest industrial energy consumers in the UK, there is often a mistaken assumption by

Government and the public that EIIs are energy inefficient. However, by virtue of the importance of energy to their overall costs, most EIIs have been driven to maximise the efficiency of their

15 Department for Business Innovation & Skills, 2010, BIS Economics Paper No. 10A, Manufacturing in the UK: An economic analysis of the sector 16 Telephone interviews conducted by Orion Innovations between November 2011 January 2012 17 EII industry associations


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operations over several decades. In many instances EIIs in the UK are believed to be best in class in terms of energy efficiency and environmental impact (See Figure 29).

Figure 29: Dudson Ltd, a global leader in energy efficiency in the ceramics sector

Dudson is a family-owned ceramics company based in Staffordshire that has been trading since 1800. The company has been at the forefront of initiatives within the ceramics sector to reduce environmental impact and energy intensity.

The company invested in the recycling of waste materials as early as the 1960s. In more recent years, the company has made substantial investments in technical innovations that have, for example, enabled products to be fired once as opposed to multiple times, and for shorter periods.

The company is believed to be at the forefront of the development of low carbon ceramics products and recently released a low carbon range called Evolution. According to independent testing by Endeka Ceramics Ltd on kiln firing processes, Evolution has the lowest carbon emissions of any ceramic hospitality tableware manufactured anywhere in the world.

The company believes that it is as efficient as current technology and economics will allow, and

describe themselves as being in a position of diminishing returns where only incremental improvements are possible. In a bid to mitigate the lack of step-change improvements, Dudson has

sought to become more vertically integrated enabling greater control over the environmental impact, emissions and costs associated with upstream activities such as sourcing of raw materials.

Companies in all sectors surveyed in the context of this study claim to have exhausted most, if not

all, opportunities for operational improvement, maintenance and incremental investment that deliver greater energy efficiency. Further energy efficiency improvements are often only minor, and are dependent upon significant capital investment to replace manufacturing plants with between 10 and 20 years operational life. In the absence of opportunities to improve manufacturing energy efficiency, some companies are investing substantial sums in decarbonising their energy supply through for example, the use of biofuels or carbon capture and sequestration (CSS). See Figure 30.

Realising greater energy efficiency is therefore intimately linked to industrial policy and a business

environment that encourages significant capital investment. The importance of capital investment, and the threat posed by high energy costs and policy uncertainty, is discussed in greater detail in Section 5.

Figure 30: Carbon reduction options for the steel sector (Carbon Trust, 2011


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4.2 Primary inputs to low carbon solutions

All EIIs are critical to realising a low carbon economy. They provide the raw materials, products and infrastructure needed to manufacture, install, maintain and operate renewable energy generation technologies such as wind turbines and solar panels. They and their derivative supply chains are responsible for products, such as insulation materials and light weight plastics, which deliver carbon emissions abatement benefits ranging from low-carbon buildings to light-weight and

energy efficient automotives. Furthermore, innovation in EII-based products and applications will play an important role in delivering the innovative solutions needed in order to realise a low carbon economy, such as light weight glass products or scientifically applied fertilisers.

As an example, McKinsey was recently employed by the International Council of Chemicals Associations (ICCA) in order to undertake a life cycle quantification of the carbon abatement solutions enabled by the chemicals industry18. They found that in 2005, the carbon emissions linked to the chemicals industry amounted to 3.3 Giga-tons CO2 (+/- 25%) on a global basis. A

majority of these emissions resulted from the chemicals manufacturing process, the remainder from the extraction of feedstocks. By contrast, the emissions abatement resulting from the use of chemical products was estimated to be between 6.9 and 8.5 Giga-tons CO2. In effect, for every ton

of CO2 emitted by the chemicals industry, between 2.1 and 2.6 tons were saved as a result of products and technologies provided to other industries. The biggest levers for these emissions savings were insulation materials for the construction industry, the use of chemical fertilizers and

crop protection in agriculture, and advanced lighting solutions such as fluorescent lamps. Further benefits result from the use of plastic packaging, marine antifouling coatings, synthetic textiles, automotive plastics, low-temperature detergents, engine efficient lubricants and plastic piping (See Figure 31). McKinsey goes on to estimate that emissions would have been 8% to 11% higher in 2005 without chemicals.

Looking out to 2030 the study forecasts that insulation will continue to deliver the greatest emissions savings. However, contributions from solar power, biofuels, wind power and CCS will

become more important. The uptake of these solutions will mean that world chemical output will double, offering great opportunities for countries that encourage investment in these areas.

Figure 31: Net CO2 emissions abatement that results from the use of chemicals products19

(MtCO2e per annum)

The pulp & paper sector has produced its own sector roadmap to achieve low carbon economy targets in 2050. This study highlights the role of existing technologies in meeting targets through to the 2030s but breakthrough technologies are required to reach the 2050 targets. With an operational life of at least 30 years for a new paper machine, these new technologies need to be developed and deployed now. A machine installed in the 2020s will still be active in 2050. With a new paper mill costing in the region of 300m, companies will be increasingly reluctant to invest in

the UK if Government polices run the risk of turning a site into a stranded asset, uneconomic to run yet with investment not yet covered.

18 Mckinsey and the ICCA (International Council of Chemical Associations), Innovations for Greenhouse Gas Reductions: A life cycle qualification of

carbon abatement solutions enabled by the chemical industry, July 2009 19 Mckinsey and the ICCA (International Council of Chemical Associations), Innovations for Greenhouse Gas Reductions: A life cycle qualification of

carbon abatement solutions enabled by the chemical industry, July 2009


33

We do not have the same analysis for all other EIIs. However similar anecdotal evidence has been given in support of their products and applications. These range from the use of glass20 in the

manufacture of solar panels, and steel used in the manufacture of wind turbines, to the use of cement and bricks in the construction of long-life low carbon buildings.

20 See www.glassforeurope.com for more information


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5. THE POLICY CHALLENGE

5.1 Introduction

Government policy towards EIIs should be driven by a common vision and reflected in a consistent approach by BIS, DECC, the Treasury and other policy stakeholders.

Given the importance of EIIs to the UK, both in terms of economic value and employment (see Section 3), and in terms of realising a low carbon future (see Section 4), we believe that this vision

should be to develop and grow the worlds most energy efficient EIIs in the UK.

Given the capital and energy intensity of the EIIs, and the international and commoditised nature of their markets, we believe that this requires policies that:

Maintain international competitiveness, in particular with regard to energy price;

Encourage investment for energy efficiency and emissions abatement;

Recognise multiple energy sources and multiple energy uses;

Avoid carbon leakage, in particular to countries with less stringent environmental constraints;

Reflect integrated industrial strategy, and government approach to innovation, energy and the

environment.

Each of these is discussed in more detail below.

5.2 Maintain international competitiveness

EIIs, by their very nature, are sensitive to energy price, and in particular price relative to competitor suppliers in the UK, Europe and the rest of the world.

Energy intensity, in terms of energy cost relative to manufacturing cost, GVA or turnover is an important indicator of a sectors sensitivity to energy price. However, it does not necessarily reveal the full significance of energy price to the well-being and international competitiveness of individual companies. Often these companies op

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