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CHEMICALS

Challenging market environment, with a recovery unlikely in the short term

S

SENSITIVE RISK for entreprises

  • Fragmentation

  • Internationalization

  • Capital Intensity

  • Profitability

  • Fragmentation

  • Internationalization

  • Capital Intensity

  • Profitability

  • Very diversified end-markets, which limits dependence on purchases from a certain sector.
  • The ecological transition represents an opportunity for expansion in the biofuels business. Other chemicals, such as those used in the production of paper and cardboard, will also continue to be highly demanded in the packaging industry.
  • Companies in the ‘Specialty Chemicals’ subsector enjoy high pricing power.
  • Given the key role of chemical products in global manufacturing, demand will always be granted (in times of industrial activity).
  • The increased production of electric vehicles represents an opportunity for lithium producers (highly used for the manufacture of electric batteries).
  • Large amounts of investments on capex and research & development needed.
  • As an energy-intensive sector, highly vulnerable to energy prices.
  • Revenues for the petrochemical segment are threatened by the lower use of plastics and its derivatives in the years to come amid new environmental regulations.
  • Agrochemical products hardly meeting people’s higher concerns about environmental safety.
  • High reputational risk and many ESG-linked challenges to cope with: decarbonization, water and soil protection, ensuring there are no health problems for both employees and customers, notably with chemicals used in the food industry, among others.

What to watch ? 

  • War in Ukraine: The conflict has lasted much longer than initially expected. Europe in particular continues to be affected by high energy prices. Though they have fallen, they remain above pre-war levels.
  • The reopening of China will stimulate local production and demand for chemicals. Nevertheless, the speed and magnitude of the Chinese boost for the industry is uncertain.
  • Industrialization: The support measures and management decisions to be taken by governments and companies’ executives will be key in determining the resilience and evolution of the sector.
  • Continuation of the turnaround in chemical output (reduction) due to the global economic slowdown and expectations of lower consumer demand and weakened consumer sentiment.
  • Tighter financing conditions in developed economies (Europe & US) to continue affecting companies rolling over debt.
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The first half of 2022 was a period of consolidation for the sector after the sharp recovery observed over 2021, when chemicals sales grew by +40% y/y. However, market sentiment deteriorated by the end of the year as stubborn inflation (notably high energy prices), hawkish monetary policy in some regions and recession concerns slowed down business activity.

Overall, chemicals sales grew by +11% in 2022, driven by higher prices rather than by volume. Still, margins contracted, especially in Q4 due to the abrupt increase in production costs (notably energy and labor). By business segment, sales trends were different last year: while intermediates & derivatives grew by +15%, sales of base chemicals and petrochemicals grew by +9% and +4%, respectively.

With the degradation of the global economy, chemicals sales have been declining in 2023 (-16% y/y in Q1 and -26% y/y in Q2). Natural gas prices have declined compared to the peak reached in 2022, bringing relief to producers in Europe. Yet, we believe energy prices will remain higher than in the US and above their historical averages. As a result, we expect US chemical producers to continue enjoying a competitive advantage over European peers, while China will continue its efforts to enlarge its production capacity (notably for basic chemicals) in order to absorb all the market share Russia has lost.

Companies in the “commodity/basic chemicals” sub-sector are the most affected by the current weak market environment, with margins squeezed by the high energy requirements for production. These companies do not have much pricing power given the nature of the product (they are not transformed and have no extra value-added). In contrast, producers of “specialty chemicals” have higher pricing power. As their production is more complex (under certain specifications and quantities for certain specific end-markets), players in this segment can transfer higher production costs to their customers. Fertilizers, for instance, saw a huge price increase in 2022 (and they continue to be expensive so far in 2023). Yet, demand remained high due to the product's key role in the global agricultural sector.

The global economic outlook for 2024 appears gloomy, setting the stage for continued unfavorable demand for certain chemical products. As a result, we expect the decline in volumes to continue in the next two quarters, together with low prices.

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Basic or commodity chemicals: Chemical substances used as a starting material for the production of a wide variety of other chemicals. Examples include chlorine (used as a disinfectant and for water treatment), sulfuric acid (used in metallurgy, for refining petroleum products or the production of explosive materials), vinyl chloride (used to produce PVC for wall coverings, houseware and automotive parts), aluminum sulfate (used for water treatment, in agriculture and in paper production), sodium carbonate (used in the manufacture of detergents, soaps and paper), acetone (commonly used in pharmaceuticals) and titanium dioxide (used in the cosmetic and food industries), among others. Under this sub-sector, we find another distinction – petrochemicals - when looking to the origin of the raw material. Petrochemicals are also organic chemicals, but they are made from crude oil and natural gas. Examples include olefins, methanol, butadiene, benzene, ethylene glycol, polyethylene, etc. They are used as raw materials in the manufacture of polymer products such as plastic, detergent, adhesive, rubber, tires, food packaging and elastic bands.

Specialty chemicals: Specialty chemicals are a range of compounds that are produced in smaller quantities when compared to basic chemicals as they are high-value products that are sold based on functionality, and following certain formulations that make them “special”.  Under this sub-sector we can find a variety of classifications according to the end-market, such as antibiotics, adhesives, pesticides, fertilizers, cleaners, inks, paints and coatings, fragrances, chemicals for the food & beverage industry (food additives and flavors) etc. In terms of commercial applications, producers within the specialty chemicals sub-sector cater to the needs of their customers on an individual level (production is tailor-made under certain specifications), and because of this these chemicals can be sold at very high prices.

Contacts

 
Allianz Trade Economic Research
research@allianz-trade.com
Maria Latorre
Sector Advisor
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