European chemical companies are in another tough year after a difficult 2023--with demand weak, costs high, and customers destocking inventory. We forecast a gradual and only modest recovery this year, with destocking slowly stopping in most end markets in the first half of 2024. Here, we address frequently asked questions about the European chemical sector's performance in 2023 and our expectations for 2024.

Frequently Asked Questions

How did large European chemical companies we rate perform in 2023 and what is your forecast for them in 2024?

We see 2024 as another challenging year for Europe's chemical industry following a difficult 2023. Key factors are a prolonged slowdown in economic growth, still-elevated inflation, and high interest rates. The sector struggled with weak demand and customer destocking throughout 2023, which caused chemical prices to drop. Meanwhile, production costs remained high, particularly due to energy and feedstocks, exacerbated by high labor costs and regulatory burdens. This has had a harsh impact on Europe-based companies' financial results, and most of them see no significant upturn during 2024.

For most commodity chemical businesses (excluding fertilizers), volumes fell 5%-15% last year and prices declined a more severe 15%-25%. Most of these businesses reported more than 20% declines in sales and 20%-30% lower EBITDA in 2023, and we expect low single-digit organic sales growth for 2024.

For specialty chemicals, most companies suffered similar 5%-15% volume declines. However, most maintained their prices, with less than 5% price declines on average. Accordingly, most saw 10%-20% declines in revenue and 15%-30% lower EBITDA last year, and we foresee low- to mid-single-digit organic sales growth for 2024.

Most large European chemical companies we rate had already commenced robust measures to cut costs and improve operational efficiencies in the second half of 2023. We anticipate gains from these measures will already more than offset general cost inflation (from factors such as labor) and one-off restructuring expenses for many companies in 2024. This will support mid- to high-single-digit recoveries in EBITDA this year that outstrip topline growth. We expect the largest 15 European chemical companies we rate (see appendix for list of companies in the sample) to generate 5%-8% growth in S&P Global Ratings-adjusted EBITDA in 2024, rising a further 9%-12% in 2025 due to gradually recovering demand and benefits of higher cost efficiencies (see chart 1).

Chart 1

Is Europe's chemical industry recovering in 2024 after a difficult 2023? When will destocking end?

We forecast a gradual and only modest recovery for the chemical sector in 2024, with a likely flattish first half and moderate growth in the second half. Low GDP growth and sluggish demand will continue to hurt the chemical industry, accompanied by risk factors like geopolitical tensions and a slower-than-expected recovery in China, the largest market for chemicals.

In most end markets, many chemical producers believe destocking bottomed in the last quarter of 2023 and would gradually end in the first half of 2024. However, we see no sign of a turning point toward restocking or a considerable recovery in demand in 2024. One exception is the crop protection sector, where destocking began a bit later in the second half of 2023 and is still ongoing in regions such as Latin America and Europe.

Many companies forecast a sequential improvement in volumes throughout this year. Excluding precious metals, BASF SE reported 2.6% volume growth in the last quarter of 2023 and expects volume growth across business segments in 2024. Syensqo believes they saw the bottom in the last quarter of 2023 and forecasts a sequential rise to about 20% higher EBITDA in the first quarter of 2024, which will at least remain stable for the remaining quarters of this year.

Following low 2.3% growth in 2023, global chemical production is likely, in our view, to be below structural growth of more than 3.0% this year. For the EU, the European Chemical Industry Council (Cefic) cautiously predicts only 1% growth in chemical output in 2024. The outlook for Germany, home to Europe's biggest chemical industry, is even gloomier. Germany's chemical industry association VCI expects the country's chemical output and sales (excluding pharmaceuticals) to decline 1% and 5%, respectively, in 2024, and anticipates a further lack of orders.

However, we now see the first sign of a modest recovery for the EU. In January 2024, Cefic reported a slight decrease in stocks of finished products according to its managers assessment survey. Both overall order books and the chemicals confidence indicator for the 27 countries in the EU improved slightly, though still at a low level, according to Cefic.

Chart 2

Where are margins in Europe's chemical sector headed?

We expect the downturn in the commodity chemicals industry with lower prices and margin pressure to last through 2026. Weak demand coincides with significant additions of capacity in Asia and the U.S. in next few years. Although petrochemical prices have increased overall since the start of 2024 after bottoming out in December, margins remain near the bottom of the cycle across most commodity-chemical value chains due to overcapacity, according to S&P Global Commodity Insights. Naphtha cracking margins in Asia and Europe--regions where naphtha is the primary feedstock--will sit near zero through 2024 and 2025.

Chart 3

Specialty chemicals are likely to face increasing pressure on prices in 2024 given muted growth in demand and deflation in input costs. Despite efforts to maintain prices, most specialty producers will need to give customers back some of the pronounced price increases of the past two-to-three years amid a surge in cost inflation. This will lead to a diminishing contribution of price over cost to profits.

Nevertheless, we expect a slight increase in our adjusted EBITDA margin in 2024 for the largest 15 chemical companies we rate in Europe (see chart 4). In addition to lower energy costs compared with the last two years and a potential sideways move for raw material prices, extensive cost saving measures will support a flat-to-moderate increase in margins of most chemical companies in 2024, especially specialty players, from a weak basis in 2023 with low volumes and low capacity utilization.

Chart 4

Companies in Europe with disadvantages in energy and feedstock costs are forced to be relentless on cost position. Almost all chemical companies reiterated a continuous focus on strict cost control in earnings calls for the fourth quarter of 2023, accompanied by maintaining discipline in capital expenditures (capex) and working capital efficiency to protect free cash flow. Many announced extensive new or additional cost saving programs in response to persistently challenging market conditions in Europe.

After two significant cost reduction programs in 2022 and 2023, BASF eyes a further €1 billion in annual cost cuts by 2026 at its Ludwigshafen site, which lost €0.6 billion in EBITDA last year. New measures address both production and nonproduction areas and involve further job cuts. Evonik Industries AG has announced up to 2,000 job cuts globally, focusing on streamlining administrative activities, with about 1,500 of the job losses in Germany. The company expects about €400 million in annual cost reductions by 2026, with about 80% from workforce reductions. Akzo Nobel N.V. is executing a wide range of projects to increase operational efficiencies across plants and processes, with the goal to achieve €250 million in cost savings by 2027.

Will production shift from Europe to other regions?

High regional energy and feedstock costs and constrained demand, accompanied by heavy labor, regulatory, and decarbonization expenses, continue to weigh on the competitiveness of Europe's chemical industry. This is especially the case with commodity chemical producers including nitrogen fertilizers. This has prompted a number of companies to curb production or permanently close plants in the region. We expect this trend to continue in 2024 as companies face still-high energy costs, higher interest rates, cheaper imports, and muted growth in demand.

While the output of the entire manufacturing sector in the EU was down 1.4% in 2023 compared with 2022, the chemical industry reported the fifth-largest drop in production of 8%, according to Cefic. Petrochemical and polymer output was about 10.5% lower, whilst the drop in specialty chemicals (-6.3%) and basic inorganics (-5.2%) was more moderate. Besides the automotive sector, other EU customer industries faced a slowdown in 2023. Inflation, decreasing purchasing power, and complex and costly regulation are additional factors lowering chemical production in Europe. Despite a slight uptick in early 2024, the European chemical industry's capacity utilization remains far below the normal range of 82%-85% (about 76% now in Germany).

Chart 5

Since 2023 we have seen an increasing number of companies start rationalizing capacity at energy intensive upstream assets, triggered by declining demand and prices due to oversupply and high production costs. A year ago BASF announced its plan to close several plants at its Verbund site in Ludwigshafen, including ammonia and associated fertilizers, caprolactam, adipic acid-related facilities, and toluene diisocyanate-related assets. Following Clariant AG's announcement in December 2023 that it would shut its cellulosic ethanol plant in Romania, Ineos Group Ltd. in March 2024 proposed to close its U.K. ethanol plant by the first quarter of 2025. This was because this business had been operating at a loss for several years due to falling demand in Europe and rising pressure from imports produced in other regions.

LyondellBasell Industries N.V. is closing a large polypropylene resin unit in Italy while spending $500 million to buy into a Saudi Arabian petrochemical joint venture to build a new propane dehydrogenation/polypropylene complex. Trinseo PLC announced the shutdown of its ethylbenzene and styrene plant in the Netherlands and recently decided to initiate a process for potential closure of its polycarbonate (PC) production site in Germany in 2024. In January, Saudi Basic Industries Corp. (Sabic), the petrochemicals business of Saudi Aramco, also implemented the permanent closure of one of its two PC production lines in Spain. Celanese Corp. also plans to close its nylon 66 plant in Germany. And Mitsubishi Chemical Group has confirmed the closure of its methyl methacrylate plant in the U.K.

At the same time, companies look forward to investing in other regions, especially in the U.S., Asia, and the Gulf. In the U.S., the Inflation Reduction Act, which provides $369 billion in green subsidies, is attracting decarbonization-driven investments to the U.S., the impact of which might only just start to be felt across the globe. Despite announcing €4 billion in capex cuts for 2023-2027, BASF remains highly committed to its €10 billion investments in a new Verbund site in China, where about two thirds of growth in global chemical sales will be generated. Sabic, together with the Chinese state-owned Fujian Energy and Petrochemical Group Co., has started constructing a $6.4 billion ethylene cracker and derivatives complex in China with a nameplate capacity of 1.8 million metric tons per year to come on stream in the second half of 2026.

We have seen increasing political debates and calls from the chemical industry for decisive action to make Europe more competitive, resilient, and sustainable. Transformation of Europe into a global leader in provision of sufficient and affordable renewable energy would play a key role in the EU's green transition. For example, BASF is banking on electrifying the cracker at its Verbund site in Ludwigshafen using low-price green energy to create a sustainable future for the site. Europe's chemical industry could use the shift to net-zero technologies and natural resources to become one of the first sectors to deliver low-carbon and circular economy-related solutions, which could translate into new growth opportunities and better competitiveness in global markets. Chemicals flow into a lot of customer industries including manufacturing, which will be willing to pay premium prices for carbon-neutral products and solutions that help them decarbonize. Low-carbon mobility, circular products and packaging, and low-carbon agriculture and food supply are just some areas that could spur demand for new innovative chemical products. To achieve this, we see the urgency of creating supportive policies and regulatory frameworks in Europe as a single market through, among other things, streamlining legislation and simplifying EU rules for state aid.

How is disruption of global maritime trade routes affecting European chemical companies?

Chemical companies in Europe are experiencing higher supply-chain costs and delays as security issues in the Red Sea and sustained low water levels in the Panama Canal hamper global chemical shipments. Most producers view this as manageable and largely able to be mitigated while closely monitoring the situation.

In the next several months, these constraints will continue to provide a short-term tailwind for some segments, especially base chemicals. Tightened supply for a number of products in Europe have lifted chemical prices. Polypropylene has been particularly affected, with European prices climbing steadily since the start of the year, mainly because shipping constraints have reduced import availability from Asia and the Middle East, driving customers back to domestic sources and buoying spot levels. Tightness might continue to dominate the spot market across the first half of 2024. However, we view this as temporary and the positive effects of supply disruption might be limited as it is more about increased freight time and costs. Overall fundamental factors shaping demand remain weak in Europe amid subdued economies, which are likely to cap upward momentum in prices and margins for commodity chemicals.

Despite current logistic challenges, low-cost Chinese imports are increasing competitive pressure on EU producers, which might persist because China will export oversupply and Europe is a key destination. Capacity expansion has been large in China, leading to oversupply in domestic markets given sluggish growth in domestic demand amid a slow economic recovery. China's polymer imports continued to decline in 2023, and its polymer exports continued to grow, according to Chemical Week. The shift aligns with steadily expanding domestic production capacity that has made China increasingly self-sufficient. This trend encompasses all major resins, including polymers of ethylene, propylene and other olefins, styrene, and halogenated olefins such as vinyl chloride. Among the grades of polyethylene, high-density polyethylene has suffered the sharpest decline in net imports in China. Many companies like BASF are citing increasing imports from China across many product lines. Syensqo also mentioned competitive pressure in its aroma business due to oversupply in China. Partly driving our downgrade of Envalior Finance GmbH due to severe underperformance in 2023 was a temporary surge in low-cost imports of PA6 base resins from China.

What is the outlook for European fertilizer and crop science companies?

Limited capacity additions beyond 2024, reduced levels of Chinese exports, stable demand, and persistent high feedstock costs for the European producers will likely lead to broadly stable nitrogen fertilizer prices in 2024 and 2025. Potash prices will find support, we believe, at levels slightly below those in the fourth quarter of 2023, driven by more balanced supply and demand. Specifically, we think underapplication in previous years will underpin a recovery in demand, while persisting logistical constraints will gradually abate as Belarusian trade is rerouted through rail networks to China or finds access to Russian ports. In the phosphate market, prices rebounded in the second half of 2023, partly due to curtailed production and disrupted supply routes (e.g., in the Panama Canal). We think disciplined capacity additions will also support stable prices in 2024.

Finally, we expect conditions for the crop protection market to improve modestly in 2024 thanks to still-reasonable farmer margins. At the same time, we foresee continuing challenges in market fundamentals in the near term, namely a supply surplus and an uncertain pace of stock replenishment. Driving our expectation of modest growth of about 2% per annum is a steady rise in volume and stabilization of prices for active ingredients at their levels prior to COVID-19, following a correction from exceptional prices in 2022.

What do rating positions of large European chemical producers look like?

Following a very difficult 2023, we see considerably reduced headroom in our ratings on most investment-grade chemical companies. However, their performance is still within the range commensurate with the ratings (see chart 7). For our ratings on most specialty producers, we see a slight increase in headroom this year, in line with our expectation of a modest demand recovery and moderate earnings growth. We expect to see broadly-based improvement in 2025, supported by a gradual recovery in demand and companies' efforts to cut costs and improve operating efficiency. An exception is Clariant, which has less rating headroom in 2024, driven by the large acquisition of Lucas Meyer Cosmetics Canada Inc. it is due to complete this year. It confirms that supportive financial policy, including well-controlled capex and highly disciplined M&A and shareholder remuneration, is key to recovering headroom in credit metrics. This especially pertains to commodity producers, given continuous pressure on price and margin. We foresee some divergence in the evolution of rating headroom in 2024, for commodity businesses in particular if the magnitude of their cuts to capex and dividends will be sufficient to offset operational challenges.

Chart 6

Which companies face most downward pressure on ratings?

Over 25% of chemical companies we rate in Europe have a negative outlook or are on CreditWatch with negative implications (see table 1). While refinancing risks at Nitrogenmuvek Zrt. and OQ Chemicals International Holding GmbH drove our downgrades of those companies, negative outlooks in most cases reflect minimal headroom in key credit metrics with one or more downside triggers breached and, although not our base case, tangible risks of failure to deliver swift recoveries in the next 12 months. We also view some entities with stable outlooks as vulnerable to a market downturn due to limited headroom versus downside triggers. That said, other mitigants not fully factored into the triggers support our confidence in the recovery path in 2024. This includes supportive financial policy and public commitment to reducing net debt to EBITDA (Akzo Nobel), very low financial debt excluding long-term asset retirement obligations (K+S AG), a high cash balance not used to net from adjusted debt (Fire (BC) S.a.r.l. [Italmatch]), or a return to positive free operating cash flow omitting high nonrecurring separation costs (Herens Midco S.a.r.l. [Arxada]).

Table 1

Appendix 1

Table 2

Appendix 2

Table 3

Related Research

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• Europe's Chemical Sector Feels The Chill In A Cooling Economy, Sept. 13, 2023