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.
