Chemicals

Given the global economic slowdown anticipated this year (global GDP growth projected at 2.2% compared with 2.7% in 2024), the outlook for the chemical industry’s main client sectors is bleak. In particular, a recovery of the manufacturing sector in 2025 is uncertain. Driven by the anticipation of impending customs barriers, a surge in new orders bolstered the sector at the beginning of the year. However, weak demand in recent years and deteriorating business confidence stemming from the trade war are likely to damp any possibility of a robust recovery in manufacturing production. As a result, the recovery of the chemical sector is expected to be moderate in 2025, with corporate margins potentially starting to pick up during the year as shocks from the pandemic and the energy crisis are largely absorbed. However, companies in the sector will face significant challenges across the various segments, namely geopolitical risks, technological and regulatory developments, and the emergence of new competitive hubs. European companies, which are hampered by high production costs and strict regulations, and to a lesser extent US companies, must contend with increased competition from China and the Middle East, amid global overcapacity and the emergence of new producer countries.

New Asian capacities add to already excessive supply and weigh on petrochemical company margins

Weak demand and increased competition in the European petrochemical market have led to overcapacity, which, combined with high gas prices, has contributed to lower margins. In 2023 and 2024, several plant closures and job cuts were announced in the Netherlands, Germany and France. Although oil prices are expected to fall in 2025 – the average price of a barrel of Brent is estimated at USD 65 – production costs related to the use of naphtha, a petroleum derivative and the main feedstock in Europe and Asia, will be higher than those related to ethane. In addition, the price of European gas, which is used by certain flexible facilities, will continue to stay high. These factors will curb the competitiveness of European ethylene. With little prospect of a strong recovery in short-term demand, companies in the sector are likely to continue reducing the production rates of crackers or to shift to more competitive markets such as biofuels.

Meanwhile, the US and Saudi Arabia, which are both hydrocarbon producers, will continue to see their petrochemical activities grow. The US is an established industry player, but Saudi Arabia is stepping up the pace of its economic diversification as part of the Vision 2030 plan and is making massive investments in the sector. In addition to Saudi Arabia, significant additional capacity is expected in the Middle East, with, for example, the inauguration of a new plant in the United Arab Emirates in early February 2025, and progress on the Al-Faw complex in Iraq and the Ras Laffan project in Qatar. In the US, ethylene exports will be supported by the expansion of the Enterprise Products Partners' export terminal. An increase in global demand for polyethylene could provide some relief from the oversupply in the US, which earmarks 50% of its production for export. However, without significant growth in domestic demand or the opening of new markets, US exporters could continue to overproduce and incur pressure on their margins.

Asia, led by China (with India, South Korea and Japan), will continue to dominate growth in the petrochemical market, driven by increased capacity that will add to persistent global oversupply. New ethylene capacity will push down imports from this region. However, the prospect of a recovery in Chinese demand remains uncertain given the structural challenges facing its economy, notably a durable housing crisis, which is limiting real estate investment and activity in the construction sector. High inventories of certain products could lead to sales at reduced prices, which will further impact corporate profits.

To anticipate and adapt to increasing environmental regulations, companies in the chemical sector should gradually move towards using non-fossil raw materials and more efficient production processes, such as carbon capture and storage (CCS). However, some facilities, such as ethane crackers, are better suited to this transition than others. These differences could amplify a lack of global regulatory coordination and generate uneven transition costs for petrochemical companies.

Steady recovery in the fertiliser market

The recovery in consumption across all fertiliser categories (nitrogen, phosphorus, and potassium) is expected to continue. In 2024, prices for potash and nitrogen fertilisers remained at attractive levels for crops, unlike di-ammonium phosphate (DAP) fertilisers, which became less affordable compared to crop prices (particularly corn and soybeans). Although fertiliser prices have been relatively stable since September 2024, they are still above pre-energy crisis levels.

In 2025, nitrogen fertiliser prices are expected to fall on back of an increase in production capacity. Ammonia, in particular, will benefit from the new 1.3 million tonne capacity on the US Gulf Coast, while IRA tax incentives, if maintained by the US administration, could further stimulate investment in blue and green ammonia. Although it cannot serve the European market due to the European Commission-imposed sanctions on Russia, the new ammonia export terminal located at the port of Taman on the Black Sea, which is expected to begin operations by the end of 2024, will also support global supply.

Phosphate production and exports are also expected to increase significantly, driven notably by new capacities in Saudi Arabia, which has become a major player in a mere few years, and Morocco, which is believed to hold around 70% of global reserves. At the same time, the transition to electric vehicles through lithium iron phosphate (LFP) batteries will continue to drive demand for the limited phosphate resources and compete with the needs of the fertiliser industry. The DAP market is also affected by limited availability due to Chinese export restrictions, as well as by a gradual increase in demand to respond to agricultural needs.

Last, demand in the potash market should continue to be positive. Demand is mainly driven by China and Brazil, which import almost all their consumption. It should be met by increased production from established operators, with Canada's Esterhazy mine reaching full capacity in 2024, and from exports from Russia and Belarus which have been able to increase shipments to Asia and South America in spite of Western sanctions. Capacity increases are also expected in Laos, which has an ambitious aim to become the world's third-largest producer by 2040 thanks to its significant reserves. This would enable the country to meet Asian demand, particularly through the Laos-China rail network.

Sluggish recovery in demand from client sectors

As is the case with other segments, gross margins for specialty chemicals companies were very low in 2024. Gross margins are unlikely to decline further in 2025, but the recovery may be slow to materialise. Demand from the automotive industry, which is a key sector for chemicals, could suffer from softer sales of electric vehicles, which use a significant proportion of specialty chemicals. In addition, the automotive sector's prospects are being dampened by the trade war. A price decline in customer sectors could force specialty chemical producers to follow suit. However, demand from the paints and coatings sector may begin to recover, supported by growing demand for high-performance materials and the rebound in the construction sector on back of lower interest rates. Over the long term, specialty chemicals are expected to benefit from growing demand for semiconductor-related chemicals.