Chemicals – Sector report – United Kingdom

Sector rating (Global): Sensitive Risk

Sector rating (United Kingdom): Low Risk

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Strengths	Weaknesses
Diversified end-markets even within each sub-segment, which reduces dependency on a particular sector.	Large investments are needed, particularly for research & development and machinery & equipment.
Companies in the ‘specialty chemicals’ and ‘food-chemicals’ subsectors enjoy relatively higher pricing power thanks to the specificity of the products they offer and the continuous demand.	Highly energy-intensive sector, which makes it very vulnerable to the volatility of energy prices.
Although demand is cyclical, chemical products are key to the development of other sectors: pharmaceuticals, food, consumer and household goods, packaging, etc. Therefore, it plays a primary role in the economy of each country.	High reputational risk and many ESG-linked challenges to cope with: decarbonisation, water and soil utilisation, employee’s and customer’s healthcare, among others.

What to watch? – Looking forward, we see a number of trends and challenges that will shape the industry in the short-term

Geopolitical risks: The conflict in Ukraine has lasted much longer than initially expected and chemicals production in Europe continues to be affected by above-usual energy prices. As long as the situation lasts, there will continue to be challenges and disruptions for the sector's supply chain on the continent.
Re-industrialisation: 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.
Still tight financing conditions in developed economies (Europe & US) to continue affecting companies in rolling over their debt.
Incorporation of Artificial Intelligence (AI) and Machine Learning (ML) to boost new products discovery and innovation, and improve production efficiencies.
The role of China: This country is the main consumer and producer of chemicals in the world. Its economic activity and level of self-sufficiency in chemicals will continue to have a great impact on the sector worldwide, especially for petrochemicals.
Growth opportunities arising from the decarbonisation plans of other sectors: The higher demand for biofuels represents a potential business expansion opportunity for players in the petrochemical sector. Also, lithium producers will gain a lot of demand from manufacturers of electric vehicles, while producers of chemicals used in the production of paper and cardboard will also continue to be highly demanded in the packaging industry.

Sector Overview

After a resilient performance in 2022, the chemicals sector experienced a marked deterioration in 2023, explained by decelerating demand for chemical products around the world. Global revenues in the sector fell by around -14% y/y last year, affected mainly by lower volumes and by lower prices to a lesser extent. China, which dominates this market both by capacity and consumption, had a weaker-than-expected reopening year, with chemicals demand not being at the very high levels observed before. China’s reopening also implied higher production capacity, which triggered a chemicals surplus that put downward pressure on prices. In the US and Europe, on top of inflationary issues affecting their economic activity, there were also recession fears, which particularly faded demand on the Old Continent. On top of the weak economic sentiment, companies around the world were overstocked over 2021 and 2022. As a result, many of them tried to use their excess of inventory during 2023 instead of buying more. By business segment, base chemicals suffered the most (-18% y/y), while intermediates & derivatives sales fell by -14% y/y and petrochemicals by around -12% y/y.

Chemicals Figure 1: Chemicals sales, global % change

Chemicals Figure 2: Annual chemical production growth by geography, % change

In terms of production, Europe also lost competitiveness and market share in 2023, recording a decline of -10.6% y/y, and falling behind the US and China (Figure 2). This regional decline was mainly explained by a drop in production of petrochemicals (-15.6% y/y) and polymers (-13.4% y/y); consumer chemicals was the only sub-sector that saw an increase in production (+3.4% y/y). This production decline was largely explained by the fact that natural gas and electricity accounts for around 65% of the total energy consumption for the European chemical industry. Thus, as energy prices remained high last year, many companies stopped production of certain products while others even closed some manufacturing plants.

The UK Market

With GBP30bn of value added to the UK economy, the chemicals sector represents the third biggest industry for the country, just after machinery and transport equipment. In the UK, the sector has managed to diversify enough to the point that the 4,500 companies operating in this industry cover all sub-segments: basic chemicals, petrochemicals, polymers, agro/food chemicals, paints, detergents and chemicals for personal care products, as well as specialties chemicals such as adhesives, flavors and fragrances. Besides, the sector also employed around 150,000 people in 2023 across the country. However, it has progressively become less important for UK exports. Figure 3 shows that 15 years ago, chemicals represented around 12% of total UK exports, while last year this figure was only 6%.

Chemicals Figure 3: Exports of chemical products as a percentage of total UK exports

The UK has had a negative chemicals balance of trade since 2016. Looking to the full picture of the UK’s performance in terms of foreign trade for chemicals, we notice that the country is becoming less and less self-sufficient, since it has been eight years in a row that the UK has imported more chemicals than it has exported to other nations in the world. In 2023, the whole country exported -3.2% fewer chemical products (GBP59.9bn in total) than in 2022 (GBP61.9bn), vastly explained by a decline of -8.8% y/y on chemical exports to the EU, its main trade partner for this industry, accounting for about 51% of UK’s exports last year. Furthermore, Figure 4 shows that the balance of trade of the country with the EU has always been negative, meaning that the UK is highly dependent on the continent for chemical products.

Chemicals Figure 4: Chemicals: Balance of trade UK vs EU

Certainly, 2023 was not a good year for companies in the sector. Revenues fell by around -11% y/y last year, given that the demand and production of chemicals slowed down, especially in countries vulnerable to the rise in the cost of energy, notably Europe and the UK. As seen in Figure 5, production in the country fell noticeably. While the output of petrochemicals, rubber and plastics declined by -13% y/y in December 2023, the output for other chemical products fell by -6% y/y.

Chemicals Figure 5: Chemical production in the UK, Index

As in other regions, the deterioration of the sector was largely explained by the high production costs derived from the political conflict in Ukraine. As seen in Figure 6, natural gas prices in the UK were abnormally high in 2022 and much of 2023. Positively, prices have since declined significantly back to the average level observed in the pre-invasion period (2018-2021), bringing relief to chemicals producers in the UK. Nevertheless, we do not expect a substantial recovery in this sector in the short-term, neither in the UK nor in Europe, since we believe that chemicals demand will remain weak in the first half of 2024 due to the weak economic outlook of the region. For the UK, for instance, we expect GDP growth of only +0.4% this year from +0.1% in 2023. Thus, we think that US players will be first to benefit from a recovery as they will continue having a competitive advantage over Europe, while China will continue its efforts to enlarge its production capacity (particularly for basic chemicals) in order to absorb all the market Russia has lost.