Economic Consulting
Irish Construction and Chemical Sector Analysis Research Methods
Stephen Denham 1/1/2010
Table of Contents 1.
Introduction ........................................................................................................................1
2.
Methodology........................................................................................................................1
3.
Building and Construction Industry in Ireland.................................................................1 a.
Recent Developments .....................................................................................................1
b.
Contribution to GDP and GNP ......................................................................................2
c.
Inflation of House Prices ................................................................................................3
d.
Social Changes ...............................................................................................................4
4.
5.
6.
Chemical Industry in Ireland.............................................................................................4 a.
Major Transitions in Sector ...........................................................................................5
b.
Concerns in the Media ...................................................................................................7
c.
Social ..............................................................................................................................7 Comparison with Another EU Country - Germany ...........................................................7
a.
Building and Construction .............................................................................................7
b.
Chemical .........................................................................................................................7
Predictions ..........................................................................................................................8 a.
Building and Construction .............................................................................................8
b.
Chemical .........................................................................................................................8
7.
Conclusion ..........................................................................................................................9
8.
References .........................................................................................................................10
1. Introduction The Irish economy has been through many highs and lows in the last thirty years. These changes have had a huge bearing on culture and the type of country Ireland aims to be. As the economic downturn may be easing off, there is time now to reflect on what works and what doesn’t. This report analysis the construction and chemical industries in Ireland since the nineteen eighties, and compares contrasting performances. It looks at a number of topics to get a full a picture as possible. There are clearly very different in their inherent nature, but also in how they have changed. The report also contrasts Ireland to another EU country, Germany to gain another perspective of how the global economic downturn affected a more stable economy.
2. Methodology The report was compiled based on research of a number of different methods. A large body of quantitative data was extracted from the Central Statistics Office of Ireland’s public web database. Periodical articles were researched to gain an understanding of the public perception. Expert analysis was also sought through an interview with Frank Barry of the Trinity College School of Business.
3. Building and Construction Industry in Ireland a. Recent Developments Construction has been the hot topic in Ireland in the last two years. Ireland’s economy became too reliant on it in recent years and it was ultimately, unsustainable. The national accounts became dependent of properly taxes which have now fallen through (BBC, 2008). Figure one is a good indication of how during the boom years, unemployment dropped dramatically. Figure two shows the employment in construction since nineteen eighty. It is interesting to note that employment in this sector was strong in the nineteen eighties, even though the economy was slow at the time.
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Fig 1. Seasonally Adjusted Annual Average Standardised Unemployment Rates
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
1983
18 16 14 12 % 10 8 6 4 2 0
Year (CSO, 2010)
Fig 2. Annual Average Index of Employment in Constuction 180 160 140 120
Base 100 2000 80 = 100 60 40 20 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
0
Year (CSO, 2010)
b. Contribution to GDP and GNP Figure three and four show the portion of Gross Domestic Product and Gross National Product which was due to the constuction industry between two thousand and five (2005) and two thousand and nine (2009).
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Fig 3. Constuction's Contribution to Gross Domestic Product
Fig 4. Constuction's Contribution to Gross National Product
200000 180000 160000 â‚Ź 140000 million 120000 100000 80000 60000 40000 20000 0 2005 2006 2007 2008 2009
180000 160000 â‚Ź 140000 million 120000 100000 80000 60000 40000 20000 0
2005 2006 2007 2008 2009
Year
Year (CSO, 2010)
c. Inflation of House Prices Figure five shows how near the turn of the century, house prices began to spiral upward, just until two thousand and seven (2007) when the economic bubble burst.
Fig 5. Average Price of Houses Nationally 400000 New House Prices (Euro)
350000 300000
Index 250000 200000
Second Hand House Prices (Euro)
150000 100000 50000 0
Year (CSO, 2010)
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d. Social Changes The bursting of the construction industry bubble has had major social effects in Ireland. After the crash, a large amount of houses are unsalable or left incomplete in new suburban towns. An estimated thirty five thousand (35,000) new homes are vacant. These areas have become known as ghost towns (Oliver, 2010). The other side to this is that these houses may be made available to people on the edges of society. The following graph shows the increase in social affordable housing.
Fig 6. Households Assisted through Social and Affordable Housing Measures 20000 15000
Number of Houses
10000 5000 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Year (CSO, 2010)
4. Chemical Industry in Ireland The most significant part of the chemical industry in Ireland is pharmaceuticals (pharma). It began in the nineteen sixties (1960). Back then, it was involved in producing ingredients for other countries to process to the final product. Now the industry has evolved into a pillar of the Irish economy. Pharma is now the largest contributor to corporate tax (three billion annually) Ireland is the second largest net exporter of pharmaceuticals in the world, contributing to nearly half of all Ireland’s exports Twenty four and a half thousand (24,500) are directly employed by the industry
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(Irish Pharmaceutical Healthcare Association, 2010)
a. Major Transitions in Sector As seen here in figure seven, since the late nineties, the value of the goods produced by the sector has increased rapidly. Figure eight shows that the number of persons engaged in the industry has not increased by the same amount. This demonstrates part of the shift to more high-end of the market and higher value creation (Barry, 2008). Although there has been significant growth in this sector, it is not nearly enough to fill the void left by the collapse of the inflated construction industry (Frank Barry, 2010).
Fig 7. Chemical Production Value Indices 450
400 350 300 250 200 150 100 50 0 1980Q1 1981Q1 1982Q1 1983Q1 1984Q1 1985Q1 1986Q1 1987Q1 1988Q1 1989Q1 1990Q1 1991Q1 1992Q1 1993Q1 1994Q1 1995Q1 1996Q1 1997Q1 1998Q1 1999Q1 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1
Base 2005 = 100
Year (CSO, 2010)
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Fig 8. Persons Engaged by Industry 30
25 20
'000
15 10 5 1995Q1 1995Q3 1996Q1 1996Q3 1997Q1 1997Q3 1998Q1 1998Q3 1999Q1 1999Q3 2000Q1 2000Q3 2001Q1 2001Q3 2002Q1 2002Q3 2003Q1 2003Q3 2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1
0
Years/Quarters (CSO, 2010) Chemicals were also the highest valued type of product Ireland in two thousand and nine (2009). Basic pharmaceuticals were the fourth most valuable. This again reinforces the fact that although the chemical industry does not employ on the same scale as construction, is still produces highly valued assets.
Fig 10. Total Value of Products manufactured in Ireland and sold - 2009 25,000,000 20,000,000
EUR '000
15,000,000 10,000,000 5,000,000 0
Industry (CSO, 2009)
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Ireland has become an extremely attractive location for large pharmaceutical companies. This is due to our highly skilled work force and low corporation tax (Barry, 2008).
b. Concerns in the Media The media raised concerns recently after Pfizer cut seven hundred and eighty jobs the Irish plant (Gumuchian, 2010), though according to Frank Barry of Trinity College Dublin, this was simply part of the expected restructuring of the company after its high profile merger with Wyeth(McGeehan, 2009). According to Barry, Ireland lost relatively few jobs in this move compared to the size of the global restructuring.
c. Social There are risks involved in Ireland having a large chemical industry. Such large plants can cause pollution the environment. There have been incidents of this in the past (Deegan, 2009).
5. Comparison with Another EU Country - Germany When Ireland is compared to Germany there are many similarities, but also many differences. Thirty seven of the world’s largest five hundred corporations are registered in Germany. These are typically organically grown German companies. This is in contrast to the two Irish registered companies, CRH (which is organically Irish) and Accenture (which simply benefits from Ireland’s low corporation tax) (CNNMoney.com, 2010).
a. Building and Construction In stark contrast to Ireland, Germany’s construction industry is one of its most stable economic sectors. Ireland’s construction industry was centrally focused on the domestic housing market, while in Germany it has closer links with the manufacturing industry and production of building materials (Portal, 2010b). The construction industry in Ireland was inflated far above its natural level so it will be a long time before and growth is expected. In contrast, the German housing sector has recovered from the damage of the global economic crisis and is growing again (Portal, 2010b).
b. Chemical
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Germany has a long tradition of chemical production. Many of the large chemical company giants are German (CNNMoney.com, 2010). The chemical industry scame to Ireland in the nineteen sixties (Barry, 2008). Considering the large barriers to entry (Chandler, 2005), it is difficult to envisage such giants to emerge from Ireland. Today, the German industry targets consumer products for the end user(Portal, 2010a), while Ireland focuses on the high end drugs market (Frank Barry, 2010).
6. Predictions a. Building and Construction In two thousand and eight (2008), it was predicted that there would be no signs of any recovery in the Western Europe construction sector until two thousand and eleven (2011) (RTE, 2008). At the moment, the indications are that the sector is contracting at a slower rate so recovery is still may be on the horizon (Burke-Kenned, 2010). There has been growth in a black market of construction. In a measure to combat this and stimulate growth, the Construction Industry Federation (CID) has suggested the abolishment of stamp duty ahead of the new budget release.
b. Chemical The pharma industry will go through a changing time. Two major patents are running out. This will badly affect the larger firms based in Ireland as the production of these drugs will move to generics in Asia (Frank Barry, 2010). The big contrast between the pharma and construction industry is that pharma has been expecting these market changes for a long time. According to Barry of TCD, the pharma industry is shifting towards biotechnology. Though not a chemical industry, it seems to be large pharma’s strategy to cope with losses in revenue due to the finishing of major patents. Ireland is well positioned still, to adjust to this change (Frank Barry, 2010). If one were to do a SWOT analysis of Ireland (Strengths, Weaknesses, Opportunities, and Threats), there is a new threat. Ireland’s low corporation tax may be in jeopardy from the EU. As a move to help small and medium enterprises, the EU is considering one standard corporation tax. This would have a huge impact on Ireland’s economy. (Oliver, 2010). Such a move would be so damaging to the Irish economy, it is unlikely it would be passed in the short-term. 8
7. Conclusion The chemical industry in Ireland is a relatively stable sector of the Irish economy. Although it may have some challenges ahead, it is in a strong position to face those challenges given its commitment to attracting large corporations, particularly large pharmaceuticals. The consistency of the chemical industry is in stark contrast to the turbulent construction industry with has gone through a major downturn in the last three years. The recession may be bottoming out but this is not certain and beyond the scope of this report. In Germany on the other hand, both the construction and chemical sectors weathered the global economic storm and are back track for stable growth. In terms of recovery, the building and construction industry will have a long wait. The outlook for the chemical industry, with pharmaceuticals in particular in mind, is more positive. It too has challenges ahead but it has been preparing for them for a long time now. Unfortunately, a large growth in the chemical industry would still not be able to fill the gap left from the collapse of the Irish construction sector.
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8. References BARRY, C. V. E. F. 2008. The Irish Pharmaceutical Industry over the Boom Period and Beyond. National Institute for Regional and Spatial Analysis. BBC. 2008. Irish economy goes into recession. 25 September. BURKE-KENNED, E. 2010. Construction sector contracts at slower rate. The Irish Times, Tuesday, July 13. CHANDLER, A. D. 2005. Shaping the Industrial Century: The Remarkable Story of the Evolution of the Modern Chemical and Pharmaceutical Industries, Harvard University Press. CNNMONEY.COM 2010. Our annual ranking of the world's largest corporations. CSO 2009. Total Value of Products manufactured in Ireland and sold - 2009 PRODCOM Product Sales â‚Ź000's. Central Statistics Office of Ireland. CSO 2010. In: OFFICE, C. S. (ed.). DEEGAN, G. 2009. Chemical firm guilty over factory plume emission. The Irish Times, July 23. FRANK BARRY, T. 2010. RE: Interview on the Irish Pharma Industry. Type to DENHAM, S. GUMUCHIAN, M.-L. 2010. Pfizer job cuts deal blow to recovering Ireland. Reuters. IRISH PHARMACEUTICAL HEALTHCARE ASSOCIATION, I. 2010. Pharmaceutical Healthcare, Facts and Figures. MCGEEHAN, P. 2009. Thousands of Job Cuts Likely After Drug Merger. New York Times. OLIVER, E. 2010. EU threatens to target our key tax break for foreign firms. Irish Independent, September 9. PORTAL, G. B. 2010a. Chemical Industry - Making the Right Mix for You. PORTAL, G. B. 2010b. Construction Industry - Building on Solid Ground. Federal Ministry of Economics and Technology. RTE 2008. Construction sector won't recover until 2011.
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