Chemicals sector risk report

After a resilient performance in 2022, the chemical sector experienced a marked deterioration in 2023 explained by decelerated demand for chemical products around the world. While global chemicals output increased by +2.3% y/y (because of China’s reopening), global revenues fell by around -14% y/y last year, affected by lower volumes and by lower prices to a lesser extent. China, which dominates this market both by capacity and consumption, had a weaker-than-expected reopening year, with demand not being at the high levels observed before. Still, China’s reopening implied a higher chemicals production output (+9.6% y/y, the only region that saw positive growth), which triggered a chemicals surplus that put downward pressure on prices globally. This was particularly the case for petrochemicals, for which China alone accounted for nearly 60% of the global rise in petrochemical capacity in 2023, which led prices to decline from the peaks of 2021-2022.

Destocking and the weak economic sentiment have been the two main headwinds holding back the demand recovery. Furthermore, companies in end-markets around the world overstocked over 2021 and 2022. As a result, they prefered to use the excess inventory during 2023 instead of re-stocking. On top of destocking, the US and Europe have also been fighting against stubborn inflation, which has hit economic activity. This has in turn impacted local chemicals demand, which has been particularly weak on the Old Continent where recession fears were persistent throughout the year. By business segment, base chemicals suffered the largest sales deterioration (-18% y/y), while intermediates & derivatives sales fell by -14% y/y and petrochemicals by around -12% y/y.

The US is absorbing the market share that European companies have lost. Vastly affected by the conflict in Ukraine, Europe’s production fell by -8.0% y/y in 2023, falling behind the US (-1.0% y/y) and China (+9.6%). This regional loss of competitiveness was mainly explained by a drop in production of petrochemicals (-10.6% y/y) and polymers (-10.5% y/y), with consumer chemicals being the only sub-sector that increased production in the Old Continent (+3.2% y/y). The overall regional decline in production was largely explained by the fact that natural gas and electricity accounts for around 65% of the total energy consumption for the European chemical industry. As energy prices remained high last year, many companies stopped the production of certain products while others even closed some manufacturing plants. The production of fertilizers in particular relies a lot on natural gas as feedstock. As a result, many firms stopped producing ammonia and urea (the chemicals with highest exposure to natural gas and electricity prices), forcing farmers to cover their needs by buying imported fertilizers from other regions such as the US or Asia.

So far in 2024, the sector’s global capacity is still outpacing demand, making it difficult for companies to raise prices as much as they would like. But as consumer spending becomes more robust and the global economic outlook gradually recovers (towards the second half of the year), we should see a more noticeable improvement in chemicals demand and in companies margins, mostly in the US where the sector not only benefits from lower natural gas prices but also from easier access to energy.