Why Chemical Sector is Not Performing Across the Globe And in Pakistan
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In 2023, the downstream chemical market grappled with uncertain demand in many areas. Rising production and transportation costs and increased pressure to lower carbon footprint decreased profitability and public and government pressures to produce more recyclable products, saw chemical companies shift their focus to more sustainable practices.
But will this uncertainty persist into 2024, and is there a positive outlook?
We've analyzed data and opinions from key industry reports to present the strongest predictions for 2024 for the chemicals industry.
2023 was a difficult time for the chemicals industry, particularly in Europe. The conflict in Ukraine, higher resulting energy prices, and high inflation dampened growth in the region and saw Europe import more chemicals than it exports, for the first time.
The conflict has, in turn, affected global chemical supplies; Ukraine is the world's largest supplier of noble gases and is Europe's biggest ammonia producer for fertilizer. On the other hand, Russia has been a significant exporter of materials used in vehicles, including platinum and palladium, as well as 22% and 14% of the world's supply of titanium and aluminum, respectively.
The rising cost of energy in Europe also had a considerable effect. The chemical industry is very energy intensive, requiring high levels of natural gas feedstock. With the shutdown of the EU's main gas supplies and the rising cost of gas from imports, many companies have struggled through increasing prices and tighter margins.
Chemicals company Dow experienced a huge decrease in their earnings for the third quarter, with their European olefin and polymer business even incurring a loss. Additionally, LyondellBasell Industries' earnings declined by 63%, Eastman Chemicals' by 26%, and Covestro's by 97%.
In the UK, the Chemical Industry Association's (CIA's) yearly survey revealed a dip in sales since the start of the pandemic, with more than 40% of chemical firms experiencing a decrease in sales in the first quarter of 2023. The trade body stated that energy prices, raw material costs and shortages, and labor costs were the main reasons for this slump and that these issues continue to become more serious.
There was however, some growth in the industry - mainly in the electronics, automotive, healthcare and agricultural sectors. For example, Kemira, based in Finland, supplies services to food, water and energy companies and has reported a 40% increase in revenue for 2023.
The US market has also seen challenges. A survey in August 2023 from the American Chemistry Council (ACC) reported that over 50% of manufacturers halted production because they could not deliver products to their customers, while 35% of respondents said customers cancelled their orders over concerns with deliveries.
Despite this, the US chemicals sector performed well compared to other regions. The lowered supply of chemical fertilizer from Ukraine has boosted prices and exports of US-produced fertilizer products. These producers also have a competitive advantage in energy, supplied by comparatively cheaper domestic US shale gas.
China, meanwhile, remained the world's largest producer and consumer of chemicals, accounting for about 45% of the global chemical market. After seeing year-on-year growth since 2010 (where the market share was around 26%), it has become a critical contribution to the country's GDP. The country is the biggest exporter in markets such as silicon, PVC, and many specialist chemicals.
Chinese chemical production decreased in 2022 as a result of COVID-19 restrictions. Chemical production is concentrated in areas like Shanghai. With more than 25% of the workforce under the effect of lockdown, factories were shut down or working at minimal volumes, with workforces quarantined to the factories. But this production came online in 2023 supply is healthy, but demand will put margins under pressure.
Chemical Industry Predictions for 2024
Several factors could contribute to the underperformance of the chemical sector in Pakistan. Here are some potential reasons:
Indeed, economic conditions such as high inflation, soaring energy prices, and a cost-of-living crisis can significantly impact the chemical sector, both in Pakistan and globally. Here's how these factors could specifically affect the chemical industry:
Cost Pressure:
High inflation and energy prices can increase the cost of production for chemical companies. Energy-intensive processes are common in the chemical industry, so any significant rise in energy prices can significantly impact their bottom line. Additionally, inflation can lead to higher prices for raw materials, transportation, and labor, further squeezing profit margins.
Reduced Consumer Spending:
A cost-of-living crisis leads to reduced consumer spending power. If consumers have less disposable income due to high prices for everyday goods and services, they may cut back on purchases of discretionary items, including products made by the chemical industry.
Investment Constraints:
Economic uncertainty stemming from high inflation and energy prices leads to reduced investment in the chemical sector. Investors may be hesitant to commit capital to projects in an environment of volatile prices and economic instability, leading to delays or cancellations of expansion plans or new ventures.
Supply Chain Disruptions:
Inflation and high energy prices can disrupt global supply chains, affecting the availability and cost of raw materials and intermediate products used in chemical manufacturing. Supply chain disruptions leads to production delays, increased lead times, and higher costs for manufacturers.
Export Challenges:
If the cost of production rises significantly due to inflation and energy prices, Pakistani chemical companies may struggle to compete in international markets where competitors benefit from lower production costs. This can lead to a decline in exports and further strain on the sector's profitability.
Policy Response: Government policies aimed at addressing inflation and energy prices also impact the chemical sector. For example, policies to subsidize energy costs or provide tax incentives for energy-efficient technologies could mitigate some of the challenges faced by chemical companies.
In response to these economic challenges, chemical companies may need to implement cost-saving measures, optimize operations, and diversify their product offerings or markets to remain competitive. Government intervention through supportive policies and measures to stabilize the economy could also help alleviate some of the pressures on the sector.
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