Dusseldorf In the German chemical industry, the mood brightens for the first time towards the end of winter. Because of the significantly lower prices for energy and raw materials and sufficient gas reserves, manufacturers are confident that they will not have to reduce production any further, according to the outlook presented on Thursday by the VCI industry association.
After the slump in production last year, the VCI now seems to have bottomed out. However, a “powerful recovery” is not expected because customers in the processing industry are still very reluctant to place new orders. But just the prospect of surviving the winter without the feared gas shortage makes companies a little more confident.
The industry is now hoping for new orders. However, the chemical companies listed on the stock exchange, which have presented results and forecasts in the past few days, are not yet recognizing a boost in the market. Recently there have only been signs of a recovery from the automotive industry, but this is already ebbing away, according to the plastics manufacturer Covestro.
The world’s largest chemicals dealer, Brenntag, also reports hesitant new orders, especially in Europe. Because of the uncertain situation, many manufacturers were still covering their needs from high inventories. Brenntag CEO Christian Kohlpaintner expects this effect to continue in the first quarter.
The situation in the chemical industry is regarded as a leading indicator for overall economic development. The sector supplies almost all branches of industry with chemicals and plastics and senses changes in demand early on. According to estimates by large manufacturers, business in China – which used to be the engine of the chemical industry – is currently providing little impetus.
>> Read also: No all-clear: What falling raw material prices mean for industry
The German chemical industry has experienced a rapid decline within a year. The industry boomed in the first half of 2022 as customers stocked up in anticipation of supply shortages and further price increases. From the late summer, however, the economy weakened more and more – the slump in the chemical industry was correspondingly clear.
The development culminated in a disastrous fourth quarter, in which chemical production (excluding pharmaceuticals) in Germany fell by almost 25 percent. The number makes it clear how much the manufacturers have shut down the plants – also because many productions could no longer be operated economically due to the high energy costs.
The price increases that the chemical companies were still able to push through after the strong first half of the year did not change this. Viewed over the whole of 2022, the price premiums led to an increase in sales of 17 percent to 265 billion euros. However, chemical production fell by twelve percent year-on-year.
According to the VCI, profits are likely to have shrunk significantly, especially in medium-sized chemical companies, due to the high costs of energy and raw materials. Because the medium-sized companies with their production concentrated in Germany and Europe are fully affected by the higher energy prices – unlike large global corporations such as BASF or Evonik, which benefit from cheaper electricity and gas in Asia and the USA.
The VCI remains cautious for 2023 and is currently assuming a further decline in chemical production. Because sales prices will tend to fall, a drop in sales of seven percent is to be feared. All hopes are pinned on the economy picking up during the second quarter.
Basic chemical plants permanently shut down
The mood in the chemical industry is currently better than it was towards the end of 2022. However, chemical companies are concerned about the changed local conditions with energy prices at a permanently higher level. “The crises of the past few years have revealed the weaknesses of Germany as a location,” says VCI General Manager Wolfgang Große Entrup.
Especially in basic chemistry, which provides the basis for all other chemical production chains, it is foreseeable that some of the shut down plants will no longer be started up. The effects of the energy crisis can already be seen in the market leader BASF.
>> Read also: “Dismantling plants and cutting jobs is not yet a concept”: Sharp criticism of BASF’s savings plan
The group shut down its gas-intensive ammonia production at the large Verbund site in Ludwigshafen last year and will only start up part of it again. The group announced a few days ago that two other large-scale plants for primary products for plastics will be shut down and dismantled.
“Old certainties are gone,” says Christian Kullmann, CEO of Evonik in Essen. “It will never be like it was before.” It is unclear whether and to what extent the crisis will also permanently affect specialty chemicals, which are strong in Germany. It is less dependent on gas and also significantly reduced consumption again last year – for example through conversions and a “fuel switch” to oil in heating mode.
Unions demand competitive electricity prices
The price of electricity is more decisive for the production costs in many specialty chemical companies. According to the VCI, an industrial electricity price of five to ten cents per kilowatt hour is necessary to keep Germany internationally competitive as a chemical location. The federal government is currently subsidizing commercial electricity costs up to 13 cents per kilowatt hour via the price brake, the market price is 40 cents.
Federal Minister of Economics Robert Habeck (Greens) has announced that he will push a lasting market-based solution for a competitive industrial electricity price “very soon”. However, this is not happening fast enough for the manufacturers – and they know that the employees and unions are by their side.
Numerous protests were planned in German steel and chemical companies on Thursday. An industrial electricity price is needed that “stands up to European comparisons, is internationally competitive and ensures long-term planning,” said IG Metall, IG Bau and IG Bergbau, Chemie, Energie (IGBCE) in advance. Otherwise there would be a risk of job cuts and site closures, particularly in energy-intensive sectors such as the steel, chemical and building materials industries.
More: Chemical companies expect a drop in profits – Covestro cancels dividends and bonuses