Sic-education

According to the UK’s Office for National Statistics (ONS) the “Standard Industrial Classification provides a framework for the collection, tabulation, presentation and analysis of data and its use prompts uniformity. In addition it can be used for administrative purposes and by non-Government bodies as a convenient way of classifying industrial activities into a common structure”. More simply SIC’s are the tags used to identify sectors, and to help ensure that the various data-sets covering pricing, demand, labour etc. are matched appropriately, as indeed are comparable sectors across countries (the ‘apples with apples’ idea).

Every business activity has a numerical code, the format of which is covered more fully in answer to Q2. The system was first introduced in 1948, and has been revised regularly since. The current system is the 1997 classification, which built upon the 1992 structure, before which we had the less well defined 1980 system. The next change is not due before 2007.

To understand its precise detail the structure needs some explaining.

The SIC system is hierarchical. It begins with Sections. These have a combination of alphabetical and numerical codes, such as C (or 10-14), for mining and quarrying, D (or 15-37) for manufacturing, and G (50-52) for retailing and wholesaling. The system then moves into Sub-Sections, where a code of DA (15-16) denotes the production of food, beverages and tobacco. For our purposes we chose to focus on the system’s numerical classification.

Beyond the level of Sections and Sub-Sections, sectors are coded into Divisions, often referred to as the two-digit level. For example, the SIC system has a code of 25 for the production or processing of moulded rubber and plastics, and 52 for retailing. Below Divisions we come to Groups. For instance, the production or processing of moulded plastics has a code of 25.2, with the retail of durables a code of 52.4. However, most of our QuantMetriks analysis tends to be focused at the Class level, where each sector has a four-digit code. For example, 25.22 represents the production of plastic packaging, whilst 52.44, covers the retail of household furniture. In the UK, there are over 500 four digit Classes.

Importantly, the SIC Class structure agrees with the EU’s system of classification, the NACE Rev 1 (Nomenclature General des Activities Economiques dans les Communuantes europeennes). The NACE was launched in 1980, and revised in 1990 (see Q5).

The SIC structure does not however stop at four digit Classes. It actually moves down to Sub-Classes, which are represented by five-digit codes, and indeed extends to seven digits. For instance, 25.22/130 represents the production of rigid plastic packaging, whilst 25.22/120 covers the manufacture of flexible packaging. In total there are over 2000 seven digit categories.

To repeat, for the purposes of QuantMetriks much of the focus is at the level of Classes, which offer a sufficiently detailed breakdown to match most company activities.

Sadly mapping between SIC and most conventional classification is far from straightforward.

As we covered in answer to Q1 within the SIC structure there is a Division for chemicals, which has a code of 24. Furthermore, within this Division there are a number of Groups, including 24.2, which covers agro-chemicals, and 24.1, which represents industrial chemicals. Below the level of industrial chemical Group we have a number of Classes, these include producers of industrial gases (24.11), as well as manufacturers of dyes and pigments (24.12) and producers of primary plastics (24.16). Importantly, data at the Class level reveals quite different demand, cost and price cycles across the sectors at this detail of breakdown, and exposes the error of relying on Divisional or Group level data.

Let us now consider a number of companies operating in what is often described as chemical space. Whilst ICI, Syngenta and BOC share the same FTSE Europtop and SIC Divisional sectors, they have no common activities so far as our SIC Class structure is concerned. For instance, whilst ICI operate as a paint maker (SIC 24.3), Syngenta is involved in agro-chemical making (SICs 24.17 and 24.2) whilst BOC has activities centred in the production of industrial gases (SIC 24.11). In fact, the BOC’s activities overlap more with the German conglomerate engineer Linde than with ICI of the UK!

Consider now a similar disection of various FTSE Eurotop food producers. For the purposes of the FTSE classification, Unilever, Danone and Cadbury Schweppes are considered to reside in the same segment. However, even the most cursory inspection of their activities reveals little operational overlap between the three and actually none between Unilever and Cadbury Schweppes. Using SICs however we can place Cadbury Schweppes into Class 15.84, or the production of confectionery and Class 15.96, which represents the bottling of soft drinks. By contrast we place Unilever into Groups: 24.5, or the manufacture of consumer staples and toiletries; 15.2, the processing of fish; 15.4 the production of oil based spreads; and Class 15.52, the manufacture of ice cream and frozen desserts. Indeed, readers will have noticed that certain of Unilever’s activities straddle in the broad chemical Division, 24.

Quite simply, we would argue that existing FTSE, S&P, DJ and Morgan Stanley classification systems fail to be sufficiently detailed to adequately categorise companies.

The SIC system is designed to match companies to “the type of economic activity in which they are engaged”. Where a company’s operation covers more than one product a weighting system is used.

In trying to answer Q2 we covered how the UK SIC Class structure perfectly matched the EU’s NACE Rev 1 system. For the US matters are somewhat more complicated since they use a different nominal classification, the NAICS (the North American Industrial Classification System). The NAICS is largely based on the ISIC Rev 3 (International Standard Industrial Classification) system.

Throughout QuantMetriks we adopt the SIC system translating the US NAICS into its coding. Every effort is made to match sectors appropriately across countries.

SIC’s can be mixed to create more aggregated sectors. For instance, if we wished to consider the production of fertilisers and pesticides we would need to merge the SIC’s 24.17 and 24.2. However, there are two caveats. Firstly, because most data is indexed using a Laspeyes system, mixing sectors should be carried out with care. Secondly, this process requires weights to be attached to the sectors being merged.

Other constructs we have within QuantMetriks include the manufacture of cement, concrete and plaster-based building products (26.4-26.63) along with the production of steel products (27.1-27.3). We term these constructs Multi-Class sectors.

QuantMetrik’s coverage is currently confined to Classes across the Divisions 10 through 52.

Producer price data is available below the Class level, drilling down in fact to several thousand seven, and sometimes eight, digit level sectors. However, production data only rarely breaks below the four-digit level. Those instances where the system does have a full complement of detailed data include the manufacture of clay (26.4) and the production of concrete (26.61) building materials. For example, production data exists for the production of aerated (26.61/1131), lightweight (26.61/1132) and heavy concrete (26.61/1133) building blocks.

Another instance where we can confidently break below the Class level is the production of animal feedingstuffs (15.71), with data available at a level of detail for feedingstuffs for poultry, pigs, cattle and sheep.

On the whole we would recommend users focusing largely at the Class level of sector detail.

When the SIC structure was first introduced over half a century ago its emphasis was in areas such as textile making, metal fabrication and newspaper printing, each a far cry from the manufacture of telecom equipment and semi conductors, or the imprinting of CDs! However, with each restructuring since 1948 the focus has shifted from the areas originally emphasised towards emerging sectors.

 

The challenge over coming years is to move further into service and distribution sectors.