Dusseldorf Bad news from the chemical industry is almost a daily occurrence: when industry leader BASF recently issued a profit warning, shares fell only slightly. Investors already expected the chemical giant to have to lower its targets for the year after the likes of Lanxess and Evonik raised targets.
Bader Bank analyst Markus Meyer commented that BASF’s profit warning was “pretty serious.”
The rest of the year is also unlikely to go well for the chemical industry: trade association VCI downgraded its forecast on Friday. After a disappointing first-half performance, the chemical pharmaceutical company’s overall sales could fall by 14% in 2023. Production is expected to drop by 8% — and could even drop by 11% without the pharmaceutical companies.
So far, the association is assuming a 7% decline in sales and a 5% decline in production.
“The figures for the first half of the year are in the red, and production costs in Germany are not competitive,” said Markus Steilemann, VCI president and chief executive of plastics maker Covestro. The chemical industry was the first domino to shake. “If we start off the value chain badly, others will get hit very quickly,” Steilemann said.
The current chemical industry is facing five major challenges:
1. High inventory
The biggest problem in the chemical industry is inventory. Last year, many customers had stocked up, but the output did not meet expectations. That’s why they still stock the usual purchases in their warehouse. These have to be mined before they can be bought again from chemical companies.
The destocking time is relatively long: according to some chemical companies, it takes up to ten months for customers to run out of inventory. In some early areas of the value chain, there has been a reduction since last August, such as the electronics industry or food additives. Analyst Mayer said the economy may recover soon.
“If things go against us at the beginning of the value chain, others will soon be affected too.”
(Photo: imago images/Rainer Unkel)
In other sectors, such as the auto industry or construction, inventories may take longer to run out.
2. Slow demand
“Global demand for chemical products remains weak,” the Ifo Institute confirmed recently. As a result, the order situation of many chemical companies, which are already burdened with high energy and production costs, has deteriorated.
Industry is seen as a bellwether of the world economy: almost everything consumers buy contains chemical raw materials. 95% of industrial products are based on basic chemicals. If fewer basic chemicals are produced and sold, this also indicates that the situation in the downstream value chain is deteriorating.
3. China’s economic recovery is slow
The drop in demand felt by the chemical industry is largely due to one country: China. The People’s Republic of China accounts for 45% of global demand for chemical products. If demand there weakens, it would hit the industry hard.
>> Read here: Big profit warning: Evonik doesn’t expect any recovery in 2023
However, the Chinese are currently still reluctant in terms of consumption: they would rather go to the movies or travel than buy products that are important to the chemical industry. On top of that, the Chinese construction industry, which is an important sales market for the industry, is currently weakening. However, there are signs that the Beijing government may support the construction industry.
4. Difficulties in the operation of agricultural enterprises
Things are not going well for agrochemical companies either, mainly because of the weather: “It’s been wet for a long time and then it’s dry,” said Mayer, an analyst at Bader Bank. “First farmers can’t go to the fields, and then the funds raised are reduced.”
Mayer explained that it may take a while for agrochemical business to pick up again, especially in crop protection products. That could also be why BASF has slashed its profit forecast – even if the Ludwigshafen-based company didn’t spell it out.
The business of agrochemical products is also not good.
(Photo: IMAGO/Martin Wagner)
US chemical company FMC, which mainly produces crop protection products, issued a profit warning in early July. Mayer expects the pharmaceutical and chemical group Bayer to follow suit soon.
>> Read also: Bayer “acquitted”?EU food authority sees no cancer risk from glyphosate
Financial analysts at investment banks Stifel and Berenberg think so too: Bayer’s profit warning appears all but certain, according to a recent Stifel report. Dry weather negatively impacted sales of herbicides and fungicides. In addition, falling glyphosate prices, combined with higher research and development spending by the pharmaceutical industry, could lead to “substantially lower earnings.”
5. High costs in Germany
According to the VCI, the situation in Germany in particular is getting worse. “Confidence in the site is waning,” said Covestro boss Steilemann. “The concentration of risk from high energy prices, high corporate taxes, weak infrastructure, shortages of skilled workers, digital backlogs and bureaucratic madness has decimated our entrepreneurs.”
Energy prices are the biggest headache: In a VCI survey in June, 88 percent of participating companies considered energy costs in Germany to be poor or very poor compared with other regions.
The VCI therefore also calls on the state to subsidize industrial electricity prices: the chemical industry relies on competitive electricity prices. Covestro boss Steilemann sees the controversial instrument in the Traffic Light Alliance as a bridge to the future “until we get enough energy from renewable sources”. When can this be done? If framework conditions improve, this may be possible by 2030, Steilemann explained.
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