Fine Chemicals Sector 2025. Sectoral systems of innovation and the UK’s competitiveness

Executive Summary We are extremely grateful to Lord David Sainsbury and the Gatsby Charitable Foundation for generously supporting this sectoral study of the fine chemicals industry. It is a sector with significant contributions to the UK’s economy (both directly and by underpinning other sectors) but is facing multiple challenges within and outside the UK. As such, it deserves a closer inspection of its status and the development of potential interventions. We aimed to provide a diagnosis of the industry by looking at its landscape, productivity, skills requirements, technology, innovation, business, and regulatory environment. We coupled these with deep dives with UK chemical industry organisations to support our findings. Based on these analyses and stakeholder engagements, we developed our high-level conclusions, recommendations to stakeholders, and areas of further detailed study. Our key conclusions so far are the following: • The global fine chemicals industry is a thriving and growing industry marked by a competitive market, wherein the major players dominate at 40% to 45%. Most of the fine chemicals businesses are involved in manufacturing (80% of the market). Having R&D capabilities, manufacturing expertise & efficiency, supply chain management, global presence reach, and regulatory compliance are crucial competitive advantages in the global landscape. • Being the birthplace of fine chemicals, the UK’s industry has been well-established with highly diversified products. The UK’s fine chemicals sector interlinks its own bulk (or commodity) chemicals industry to various end-use sectors within the country and internationally. Our estimates show that fine chemicals contribute 40% of the GDP value of chemical manufacturing (£11bn to £12bn), which is commonly reported. • The UK’s broad chemicals industry (bulk + fine), while significant, has struggled with consistent productivity growth since the global financial crisis. The industry’s international competitiveness, particularly against countries like China and India, is being challenged by high energy prices, raw material shortages, and skilled labour shortages. Zooming in on the UK fine chemicals sector, it may in principle be insulated from these challenges due to its nature of business and the high value of its products. Drivers of productivity growth in the fine chemicals industry include technology and product innovation and scaling up, meeting skills requirements, an enabling business environment, and an enabling policy and regulatory environment. • Our calculations show that the UK’s fine chemicals industry has a Gross Value Added (GVA) of £33 billion and employs over 231,000 people, which translates into a labour productivity of £143,000 per employee as of 2024. The top five contributing subsectors are Catalysts, Contract chemicals, Specialty polymers, Pigments & dyes, and Construction chemicals. This highlights the fine chemicals sector’s importance, beyond its own KPIs, as it underpins other key industries of the UK including pharmaceuticals, agrochemicals, fast-moving consumer goods, automotive, aerospace, and building and construction. • The fine chemicals industry primarily uses chemical synthesis and biotechnology, with chemical synthesis being the focus of this report due to its extensive toolbox of available reactions. Fine chemicals production typically occurs in multi-purpose batch plants, which are designed to handle various chemical reactions and synthesis, and purification steps, allowing for efficient production of a diverse range of products. These plants, while costly, offer flexibility and cost-effectiveness, especially when compared to dedicated plants for each product. Key technology innovation and scale-up requirements include competency in synthesising complex fine chemicals, flexible manufacturing, process intensification, and increasing biotechnology integration. Drivers of innovation include product design, sustainability, the net-zero transition, biomass conversion, and synthetic biology. Digital technologies are another driver that will revolutionise sustainable manufacturing of fine chemicals whilst increasing efficiency and reducing costs. Lastly, the battery industry is another technology innovation driver, which driven by the net-zero transition, will create demand for innovative fine chemicals. • The current UK chemical industry requires skilled workers, particularly technicians with level 3 to level 5 qualifications. There is a shortage of a skilled workforce due to a “lost generation” and labour shortages. While the industry currently relies on external labour markets and in-house training, future skills requirements must be met; these include topics such as chemistry and engineering innovation, data analysis, and leadership, which are going to be crucial for addressing complex commercial challenges and opportunities brought about by the UK’s net-zero commitment and the advent of Industry 4.0. These emerging skills requirements reflect a transitioning chemicals industry requiring new thinking and strong leadership. • Business-to-business transactions, custom manufacturing, and R&D-driven fast-to-market products are integral in doing fine chemicals business. Considering these, enabling mechanisms for the UK fine chemicals sector include strategic procurement, government-supported logistics, market access support, prioritising IP ownership, and SME acceleration. These mechanisms aim to drive innovation, competitiveness, and economic growth within the sector. • Fine chemical manufacturers, both globally and in the UK, are subject to a range of regulations, including the Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH). While the UK REACH is largely aligned with the EU REACH, its potential divergence of standards and processes from internationally accepted regulations may pose additional overhead compliance and hamper trade, considering how chemical value chains are integrated across the globe. A new development in the EU is that of “Safe and Sustainable by Design” which may create additional opportunities for innovation in new chemicals and materials while also subjecting these to increased scrutiny. • Our deep dives with organisations in the UK’s chemical industry revealed insights that resonated with our review and analysis, to date. According to the Chemical Industry Association (CIA), the UK fine chemicals industry faces challenges including energy and feedstock costs, consistent sustainability reporting, and a skills gap. CIA recommends streamlining regulations, supporting alternative feedstocks, and regionalising policies as pathways toward better international competitiveness of the industry. On the other hand, the Society of Chemical Industry (SCI) reported that the UK chemical industry faces challenges in policy coordination and investments, despite its historical importance and innovations. SCI recommended that the UK must address industry structure, energy productivity, and regulatory alignment to capitalise on growth opportunities, especially from new chemistries and circular carbon, and overcome threats. Lastly, The Centre for Process Innovation (CPI) stated that the challenges of the UK chemical industry are due to declining domestic production and reliance on global supply chains. CPI recommended, to improve competitiveness, the UK should incentivise platform chemicals production, support disruptive technology adoption, and bridge the gap between academic research and industry application. We believe our recommendations to stakeholders (academia, industry, and government) are going to be a collective and collaborative effort. These can be grouped into six interconnected priorities to form a robust enabling ecosystem for the UK’s fine chemicals sector. Priority 1. Sector strategy planning: An agreed industry-led sector strategy is vital to address immediately the short-term challenges and create a supportive ecosystem in the long term. Priority 2. Economic and business development: An enabling chemical business environment to enhance the industry’s GVA and grow its global competitiveness. Priority 3. Regulation and policy: A more streamlined policy environment to prevent deviations from international standards and to foster innovations creating a competitive edge. Priority 4. Skills: A skills roadmap to meet both the skill required now, and the skills required in the future to ensure a globally competitive workforce. Priority 5. Innovation: A strong focus on the R&D of product innovation, flexible manufacturing and process intensification whilst ensuring the IP developed is exploited first within the UK. Priority 6. Mindset change: A need for greater recognition of our home-grown chemicals industry in terms of its importance and role in everyday life of British citizens.