Chemical firms slow to face up to REACH risks

Many chemical firms remain unprepared for the EU's forthcoming chemicals registration regime (REACH), according to a report by an arm of HBOS bank. It advises companies to put strategies in place to maximise market opportunities and to avoid material financial risks.

Insight Investment, HBOS' socially responsible investment arm, has been examining the implications of REACH since the European Commission published its current proposal in 2003. An initial assessment that year prompted concern that chemical firms on its books were not well prepared for its introduction.

It wrote to 17 chemical firms asking for details of their strategies to deal with three potential impacts of REACH - loss of chemical products; loss of raw materials; the potential for innovation to devise "safer" chemical substitutes; and the increased risk of litigation as more data on risks are placed in the public domain.

Last year it confirmed on the basis of the responses it had received that, "while there were a few outstanding exceptions, many companies appeared unprepared for the introduction of REACH."

Of most concern from an investment point of view, Insight reported that "most were not in a position to give estimates of the financial impact but, nonetheless, many expressed confidence that the impact would not be material."

Many firms appeared not to see the potential for innovation. Insight describes this as "regrettable", given that it could significantly alter investors' long-term view of them.

Insight has now published a further study commissioned from the Centre for Environmental Strategy at Surrey University.1 This involved a desk-based analysis of the product portfolios of 19 chemical firms covered by Insight's UK and European analysts to determine the likely costs of REACH for them and their readiness to comply with it. The assessments have not been reviewed by the companies concerned.

Most of the companies produce between 500 and 2,000 substances that will be subject to REACH, with one producing 6,000. They range from high-volume suppliers to those making fine and speciality chemicals.

Insight acknowledges the uncertainties of projecting costs when the REACH Regulation remains in draft form. It based its analysis on the "most probable" regulatory demands and implementation scenarios.

It looked at the potential financial risks in several ways. It examined the worst-case scenarios of taking the registration and processing costs of REACH as a lump-sum at net present day value. It found that this typically led to direct costs amounting to 1% or less of annual turnover.

But compared with annual profits, the impacts look more dramatic. For several companies the cost could account for 20-35% of annual profits and for two firms - around two-thirds.

Insight also compared the registration cost to current annual R&D expenditures and found that for many firms these are projected to be well-below 10%, although for one firm they could rise to 62%.

Contrary to the belief expressed by many firms, Insight concludes that, if the cost estimates prove to be even broadly reliable "implementing REACH may significantly affect some companies' cost base and their future valuations."

To minimise such risks and maximise the competitive benefits of being prepared to comply and having products registered earlier than those of competitors, companies should be putting strategies into place now, Insight urges.

It found that some companies were taking steps such as establishing REACH governance committees, creating central databases, reviewing product portfolios, screening dangerous substances and establishing new mechanisms to communicate with customers and suppliers. However, "conversely, several companies did not appear to be either very knowledgeable or concerned with REACH."

Looking in more depth at seven firms' exposure to and readiness to comply with REACH, Insight concludes that just two - Ciba and Degussa - are well-prepared. Clariant and Yule Catto earn a medium rating for preparedness, while DSM, Givaudan and ICI merit only a low rating.

The investment firm concludes that the likely impact of REACH on each company will ultimately depend on its ability to balance five key factors: internalisation of costs; passing on costs; overcoming market obstacles; realising new markets; and maintaining international competitiveness.