The global situation of the chemical industry: challenges and outlook

The chemical industry is facing a number of challenges worldwide, in Europe, Germany and the USA, which are shaping its development and future prospects. The latest forecasts from the European Chemical Industry Council (Cefic) and the German Chemical Industry Association (VCI) make it clear that the industry is in a critical phase, characterized by low growth, declining production and difficult market conditions.

In Europe, the chemical industry has suffered a significant setback since the Russian invasion of Ukraine in February 2022, especially in key sectors such as petrochemicals, polymers in primary forms and inorganic base materials. One of the main reasons for this is the rise in energy prices following the loss of Russian gas supplies. Added to this is the decline in demand for goods as a result of the Covid-19 pandemic, inflation, falling purchasing power and a complex regulatory agenda. Marco Mensink, Director General of the European Chemical Industry Council (Cefic), points out that high energy and raw material costs are hampering Europe's competitiveness on the global chemical markets: "Energy costs are the Achilles heel of the European chemical industry. No other region in the world is as affected as ours." This is another reason why investments in Europe are under great pressure. Meanwhile, investment is increasing again in other regions, particularly in the USA and the Gulf region.

China, by far the largest global producer of chemicals, plays a decisive role as the EU27's largest trading partner for chemical products – and Europe's dependence on Chinese imports continues to grow. However, despite the difficult situation, the European Chemical Industry Council expects a gradual normalization of demand structures and an increase in purchasing power in 2024, which could boost private demand. Nevertheless, growth expectations for 2024 remain limited. According to Cefic estimates, chemical production in Europe could increase by 1% this year.

Germany is a special case

The situation is particularly critical in Germany, the largest chemical location in Europe. The German Chemical Industry Association (VCI) was disappointed across the board when it presented its annual report in December: excluding the pharmaceutical business, chemical production fell by 11% in 2023. At 77%, production capacity utilization was below the economically necessary basic capacity utilization of 82%. 15 percent of the approximately 1,900 member companies are already in the red, according to a member survey conducted by the association. "We are in the middle of a deep, long valley. And it is still unclear how long we have to get through it," says VCI President Markus Steilemann.

The outlook for the future is not promising either, with expectations of a continued decline in turnover and production figures. Companies are under pressure from declining sales, falling sales prices and high production costs. This has led to drastic measures, including the closure of production plants and the relocation of investments abroad.

BASF, a leading company in the German chemical industry, announced the closure of key production facilities at its Ludwigshafen plant to counter rising costs, particularly the high price of natural gas. This reflects the general trend in Germany, where companies are forced to adjust their cost structure and shift investments abroad.

USA and global competition win

In contrast, the chemical industry in the USA is showing a more positive trend thanks to recent legislation such as the Inflation Reduction Act and the Chips Act. In its November 2023 forecast, the US chemical association ACC predicted a decline in production of 1.9%, but expects slight growth for the US chemical industry again in 2024. According to ACC figures, global chemical production rose by 0.3% in 2023, and global growth could even reach 2.9% in 2024.

Although the US association also complains about the US government's excessive regulation of chemical production, member companies appear to be much more optimistic about the near future than their competitors in Germany: corporate investment rose by 4.1% in 2023. However, the association expects investment spending to fall in 2024 due to higher borrowing costs and expected lower consumer spending.

The fact that global chemical production was able to increase at all in 2023 despite weak figures from Europe and the USA is primarily due to the comparatively strong development of producers in the Asia-Pacific region, above all China: the increase here was a whopping 3.7%.

Challenges and light at the end of the tunnel

Overall, the global chemical industry is facing a whole range of challenges: Regionally varying energy and raw material costs, currently weak demand, stricter regulation and geopolitical uncertainty. The industry in Europe and Germany in particular is having a particularly difficult time, while the USA is in a more stable position thanks to political support, low-cost energy and raw materials (shale gas) and an overall positive investment environment.

The picture for the future is mixed: While there is overcapacity in some areas such as petrochemicals, innovation and technological advances could create new opportunities for growth. The chemical industry in Europe, especially in Germany, is likely to focus on increasing efficiency and developing new products and technologies (specialty chemicals) in order to meet the challenges of the energy transition and fulfill the requirements of the European Green Deal. Digitalization will play a crucial role in this context. The switch to more sustainable practices and the emphasis on the circular economy will also be important trends in the chemical industry. These developments could help to reduce dependence on fossil fuels while opening up new market opportunities.

In the US, the chemical industry is expected to continue to benefit from investments in clean energy and the strengthening of the domestic manufacturing base. However, the challenges posed by higher interest rates and the global economic slowdown will also be felt there. Globally, the chemical industry should recover in the long term as the overall global demand for chemicals increases. However, the industry must adapt to changing geopolitical scenarios and the need for greater localization and diversification of supply chains.

The pressure to adapt is particularly great in Germany and Europe – because the competitive disadvantages caused by high energy and raw material prices will not change in the near future.