Dusseldorf Bad news from the chemical industry is almost the order of the day: when industry leader BASF recently issued a profit warning, the share only fell slightly. Investors had already expected that the chemical giant would have to adjust its targets for the current year downwards after companies such as Lanxess and Evonik had already presented them.
The profit warning from BASF was “quite severe”, commented Markus Mayer, analyst at Baader Bank.
The rest of the year is not likely to go well for the chemical industry either: the industry association VCI lowered its forecast on Friday. The first half of the year was disappointing, overall sales of chemical-pharmaceutical companies are likely to fall by 14 percent in 2023. Production is expected to fall by eight percent – without the pharmaceutical companies, it could even be eleven percent.
So far, the association had assumed a seven percent drop in sales and a five percent drop in production.
“The figures for the first half of the year are red and the production costs in Germany are not competitive,” says Markus Steilemann, VCI President and CEO of the plastics manufacturer Covestro. The chemical industry is the first domino to wobble. “If things are going badly for us at the beginning of the value chain, others will soon be hit too,” says Steilemann.
There are five major challenges the chemical industry is currently facing:
1. High inventories
The biggest problem in the chemical industry is inventory. In the past year, many customers had stocked up, but then didn’t produce as much as expected. That’s why they still have the products they usually buy in their warehouses. These have to be mined before they buy from the chemical companies again.
The destocking is taking a long time this time: According to some chemical companies, customers currently need up to ten months to use up their stocks. In some early areas of the value chain, the reduction has been underway since August last year, for example in the electronics sector or additives for food. A recovery could soon set in here, says analyst Mayer.
In other areas, such as the automotive industry or construction, it will probably take longer for stocks to be used up.
2. Slow demand
“Global demand for chemical products is still weak,” the Ifo Institute recently confirmed. As a result, the order situation of many chemical companies has deteriorated – which are already burdened by high energy and production costs.
Industry is seen as an indicator of the world economy: chemical raw materials are contained in virtually all products that consumers buy. 95 percent of all industrial products are based on basic chemicals. If fewer basic chemicals are produced and sold, this also indicates that things are going badly in later value chains.
3. Slow recovery in China
The drop in demand that the chemical industry is feeling is mainly due to one country: China. The People’s Republic accounts for 45 percent of global demand for chemical products. If demand there weakens, it hits the industry hard.
>> Read here: Drastic profit warning: Evonik does not expect any recovery in 2023
However, the Chinese are currently still reluctant when it comes to their spending: they prefer to go to the cinema or travel instead of buying products that are important for the chemical industry. Above all, the construction industry in China, an important sales market for the industry, is currently weakening. However, there are signs that the government in Beijing could support the construction industry.
4. Difficult agribusiness
Things are not going well for the companies in agrochemicals either, mainly because of the weather: “It was wet for a long time and then dry again,” says analyst Mayer from Baader Bank. “First the farmers couldn’t go to the fields, then fewer funds were raised.”
Mayer explains that it will probably take a while before business for agrochemical companies picks up again, especially when it comes to crop protection products. That could also be a reason why BASF has cut profit expectations so much – even if the Ludwigshafen-based company did not explicitly state this.
The US chemical company FMC Corporation, which mainly produces crop protection products, issued a profit warning at the beginning of July. Mayer assumes that the pharmaceutical and chemical group Bayer will soon follow with such a step.
>> Read also: “Acquittal” for Bayer? EU food authority sees no cancer risk from glyphosate
The financial analysts at the investment bank Stifel and Berenberg also see it this way: A profit warning at Bayer seems almost certain, says a recent report by Stifel. The dry weather had a negative impact on herbicide and fungicide sales. In addition, glyphosate prices have fallen, which combined with higher research and development spending in the pharmaceutical sector could lead to a “significant drop in earnings”.
5. High costs in Germany
According to the VCI, the situation in Germany in particular is getting worse and worse. “Belief in the location is waning,” says Covestro boss Steilemann. “This concentration of risk from high energy prices and corporate taxes, poor infrastructure, a shortage of skilled workers, digitization backlog and bureaucratic madness robs our entrepreneurs of their confidence.”
The energy prices are the most burdensome factor: In a VCI survey from June, 88 percent of the participating companies rated the costs for energy in Germany as bad or very bad compared to other locations.
The VCI is therefore also calling for a state-subsidized industrial electricity price: The chemical industry is dependent on competitive electricity prices. Covestro boss Steilemann sees the instrument, which is controversial in the traffic light coalition, as a bridge to the future “until we have enough energy from renewable sources”. When could that be? If the framework conditions improve, maybe in 2030, explains Steilemann.
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