The energy crisis is severely impacting the industry, particularly affecting basic chemicals manufacturers across Europe.
Fragmentation
Internationalization
Capital Intensity
Profitability
Strengths & Weaknesses
- wide range of end-markets reduces reliance on any single sector for purchases.
- The shift towards ecological sustainability opens up significant growth prospects in the biofuels sector, while other chemicals, particularly those for paper and cardboard production, will remain in strong demand within the packaging industry.
- Firms operating in the ‘Specialty Chemicals’ subsector benefit from substantial pricing power.
- Given the essential role of chemical products in global manufacturing, demand is consistently assured during periods of industrial activity.
- The rising production of electric vehicles presents a valuable opportunity for lithium producers, as lithium is crucial for electric battery manufacturing.
- Significant capital expenditures and research and development investments are essential for growth.
- This sector, known for its high energy consumption, is particularly susceptible to fluctuations in energy prices.
- The petrochemical industry faces potential revenue declines due to a projected decrease in the demand for plastics and their derivatives, driven by emerging environmental regulations.
- Agrochemical products are increasingly falling short of addressing public concerns regarding environmental safety.
- There is a considerable reputational risk along with numerous ESG-related challenges to navigate, including the need for decarbonization, safeguarding water and soil, and ensuring the health and safety of both employees and consumers, especially concerning chemicals used in the food sector.
Sector Overview
What to watch ?
- The duration and resolution of the conflict in Ukraine will significantly shape the geopolitical landscape of the region, which in turn will influence Europe’s economic stability and have a direct effect on various sectors.
- The strategies and support initiatives implemented by both governments and corporations will play a crucial role in ensuring that chemical companies can withstand and thrive during the ongoing energy crisis.
- Decline in chemical production is anticipated due to the global economic downturn, coupled with predictions of reduced consumer demand and weakened consumer confidence.
- Financing conditions are becoming more stringent as central banks maintain a strict monetary policy stance.
- With Russia accounting for approximately 34% of global fertilizer production, we foresee continued high prices for fertilizers, which will impact the food industry. Meanwhile, countries like the US and China are poised to increase their market share by compensating for the loss of Russian exports.
Global chemical production experienced a significant halt in 2020 due to the pandemic, but it rebounded swiftly in 2021 with the reopening of borders and facilities, stabilizing further in 2022. Despite these positive trends in the first half of the year, the latter half has seen a decline, primarily due to inflationary pressures and the cessation of Russian exports. The global economy is anticipated to weaken in the upcoming quarters, leading us to believe that demand for certain chemical products will likely decrease in 2023.
Simultaneously, Europe is grappling with an energy crisis, exacerbated by the reduction in Russian natural gas supplies following Western sanctions in response to the invasion of Ukraine. To address this shortfall, Europe is increasingly turning to liquefied natural gas (LNG) from the US, Qatar, and Nigeria, resulting in soaring energy costs across all sectors. The chemical industry, being one of the largest energy consumers, is particularly vulnerable. Unless energy prices stabilize and governments implement effective solutions, production costs will remain prohibitively high, with varying impacts across different sub-sectors.
The producers of commodity chemicals are facing significant challenges. The production of essential chemicals like ammonia and urea is heavily reliant on gas, which poses a problem as this sector lacks substantial pricing power, being positioned at the beginning of the supply chain. Additionally, the margins in the commodity chemicals market are constrained due to the low selling prices of these basic, unrefined products that offer little added value.
In contrast, specialty chemical producers enjoy greater pricing power. Their products are tailored to specific requirements and markets, allowing them to pass on increased production costs to consumers. For example, the surge in fertilizer prices can be attributed not only to Russia’s reduced exports of key chemicals like ammonia and potassium but also to the fact that European fertilizer manufacturers are among the largest gas consumers. Despite the rising costs, these companies continue to thrive due to the critical importance of fertilizers in food production.
Moreover, the petrochemical sector has seen substantial gains globally in 2022, with companies benefiting from exceptionally high prices for oil derivatives, particularly during the early months of the year when oil prices soared to levels not witnessed since 2007.
Geographically, U.S. chemical producers are capitalizing on relatively lower natural gas prices, giving them a competitive edge over their European counterparts. Meanwhile, China is ramping up its production capacity, especially for basic chemicals, to fill the market void left by Russia.
Subsectors
Basic or commodity chemicals:Chemical substances serve as essential building blocks for the creation of a diverse range of other chemicals. Notable examples include chlorine, which is widely utilized as a disinfectant and in water treatment processes; sulfuric acid, crucial in metallurgy, petroleum refining, and the production of explosives; and vinyl chloride, a key ingredient in the manufacture of PVC for applications like wall coverings, household items, and automotive components. Additionally, aluminum sulfate plays a vital role in water treatment, agriculture, and paper production, while sodium carbonate is integral to the creation of detergents, soaps, and paper products. Acetone is frequently employed in the pharmaceutical industry, and titanium dioxide finds its place in cosmetics and food products, among many others. Within this sector, a further classification exists—petrochemicals—defined by their raw material origins. Petrochemicals are organic compounds derived from crude oil and natural gas. Examples include olefins, methanol, butadiene, benzene, ethylene glycol, and polyethylene. These substances are fundamental in producing polymer products such as plastics, detergents, adhesives, rubber, tires, food packaging, and elastic bands.
Specialty chemicals:Specialty chemicals encompass a diverse array of compounds that are manufactured in smaller volumes compared to basic chemicals. These high-value products are distinguished by their functionality and specific formulations that render them unique. This sub-sector includes various classifications tailored to different end-markets, such as antibiotics, adhesives, pesticides, fertilizers, cleaners, inks, paints and coatings, fragrances, and food and beverage chemicals like additives and flavors. In the realm of commercial applications, specialty chemical producers focus on meeting the individual needs of their clients, often customizing production to precise specifications. This bespoke approach allows these chemicals to command premium prices in the market.
