Chemicals

Three segments are the subject of our attention when it comes to the chemical sector: petrochemicals, specialty chemicals and fertilisers. Petrochemical products are more sensitive to changes in global economic conditions while specialty chemicals seem much more resilient. Last, fertilisers are more responsive to the vagaries affecting the agri-food sector.

In 2024, Coface predicts that petrochemicals will continue to suffer from geopolitical repercussions and the deterioration in the global economic situation, particularly as regards industrial activity. A jaws effect is affecting industrial margins: on the one hand we are seeing a drop in overall demand and, on the other, there have been increases in the price of inputs and energy. In addition, relocations as close as possible to energy sources as well as in-depth integration of the sector are looming and risk increasing the imbalances between supply and demand. Medium-term uncertainty is increasing as production capacities will increase in the coming years, particularly in Asia, the Middle East and North America.

Last, the path to carbon neutrality (Net Zero) will push companies in the sector to reduce their environmental footprint to secure access to financing, as well as to avoid litigation risks that are increasing due to growing pressure from activists.

Petrochemical companies will continue to suffer from falling global demand and high energy costs

The context of slowdown in the global economy anticipated by Coface this year (growth in global nominal GDP at 2.4% compared to 2.6% in 2023) implies less growth in demand as far as the chemicals industry is concerned, particularly in the main customer sectors (automotive and construction). In addition, some of these sectors are facing a destocking trend after the frenzy experienced in 2021-2022. This phenomenon tends to reduce demand for petrochemical products and the replenishment of inventories should not occur until the end of the first half of this year.

Inflationary tensions around energy will continue to constitute a risk for players in the sector who do not have easy access to inputs such as naphtha and ethane. In addition, energy prices are expected to remain high. Coface forecasts that the price of a barrel of Brent should average at USD 82 in 2024 (compared an average of USD 83 in 2023). This should weigh on companies in the petrochemical industry and in particular on the profitability of steam crackers using naphtha. The combined shocks of cost pressures and the slowdown in sales, which began in 2022 and are expected to continue this year, are squeezing the profitability of many sectors in Europe (fertilisers, petrochemicals and certain segments of the specialty chemical industry) and in Asia (polymers), and sending prices down.

Sustained until 2022 by solid margins, the incentives for investments in steam crackers in Europe are diminishing with the medium-term uncertainties associated with growth prospects and conflicts in Ukraine and the Middle East, as well as with high financing and refinancing costs. Hence, average monthly ethylene prices in Europe peaked at USD 2,500 per tonne in March 2022, before falling to USD 750/t in 2023. With the ongoing economic slowdown, this trend is expected to continue in 2024. In addition, the increase in ethylene production by 2026 is expected to be concentrated in the US and the Middle East, both of which are more competitive thanks to gas complexes supported by solid resource reserves.

After reaching high levels in 2021 following the post-pandemic demand shock, polyvinyl chloride (PVC) prices have collapsed since mid-2022, falling from 1,240 USD/t on average during this year to 776 USD/t in 2023. The difficult economic situation faced by the construction sector will continue to weigh on PVC prices in 2024. In addition, overcapacity in China for products made of PVC, which is a commodity product only differentiable by price, is expected to lead to ever-increasing competition between regions, with producers seeking to protect their market shares. The increase in production capacity in China, which is aiming towards self-sufficiency in ethylene and its derivatives, risks increasing the already significant imbalances.

Companies in the sector across all regions of the world will face difficulties in financing and refinancing their debt in 2024 and the ensuing years. This will be particularly pronounced for companies with a riskier credit profile (BB and lower), which will have to juggle weaker liquidity positions while managing steeper repayment obligations. In addition, companies that have contracted debt at variable rates, notably to finance their expansion plans will also face difficulties from 2024 when their commitments mature.

Fertiliser companies are more resilient

Fertiliser prices have decelerated sharply since the highs of 2021-2022, but nonetheless still remain high. Phosphate prices contracted by almost 30% between 2022 and 2023, falling from an average of USD 855/t to USD 611/t. Nevertheless, prices recovered at the end of 2023 due to more solid demand in view of the harvests of the 2024 season and declining supply. Urea and ammonium nitrate (UAN in English), which is another important fertiliser, saw average prices halved between 2022 and 2023 (USD 597/T compared to USD 308/T). Demand was relatively timorous in 2023, with customers having built up inventories amid a high price environment. However, inventories have dwindled in recent weeks, a sign that demand is likely to return in the coming months in preparation for the 2024 season.

The profitability of players in the fertiliser segment fell by more than 8 percentage points from its peak in the fourth quarter of 2022 (33.7%) to stand at 25.5% in the second quarter of 2023. It is expected to remain high in 2024, at least during the first half of the year, as indicated by the direction of prices of the main fertilisers. The increase has been prompted by declining supply and demand which will necessarily have to return to the market in order to prepare the fertilisation of agricultural land for the 2024 season.

Margins are shrinking for specialty chemicals

Segment profitability fell by almost 5 percentage points between Q3 2022 and Q3 2023. The fall was driven by the difficulties of companies operating in the sub-segments serving the automotive, consumer food and household products industries whose sales volumes suffered from the inflationary environment. In addition, companies supplying products for electric battery producers are facing lower growth in electric vehicle sales in China, the world's largest market ahead of Europe and the US. The other major factor explaining this weaker financial performance is the destocking taking place by battery-producing companies. With penetration rates normalising, particularly in Europe, we should expect to see lower sales volume growth in 2024. Last, electric vehicle manufacturers are lowering their prices so we expect them to force their suppliers to do the same to preserve their margins.

Sector reconfiguration will continue to be driven by regulation and changing consumer preferences

Like many sectors, the chemical industry faces stricter environmental regulations. The chemical sector is a major producer of carbon emissions and toxic by-products, making it a target for activists who are pushing to reduce its environmental footprint and impact on human health. These rules, which aim to limit environmental risks arising from production processes, contribute to increasing production costs due to the addition of several levels of complexity.

Several areas are in the mainframe, from worker safety to effects on climate and natural resources. Governments in many advanced and emerging economies are paying close attention to environmental considerations amid growing public concerns over climate change prevention and public health issues, prompting calls for changing production patterns used by companies in the sector.

For example, the European Chemical Sustainability Strategy (CSS) aims to limit the production of substances that have deleterious effects on human health in Europe.