Chemical market overcapacity and weakening demand: a perfect storm  

Given its importance in the production of manufactured goods, the chemical industry was one of the first to react when high inflation, rising interest rates and record energy prices began to dampen consumer spending in 2022. Chemical manufacturers and producers responded by cutting inventories and operating capacity.

At the same time, a longer-term structural slowdown had begun in China in 2021. This was the result of the country’s real estate bubble bursting, its ageing population and increasing trade tensions with the West. The impact of this is significant because China still accounts for nearly half of global demand for chemicals and petrochemicals. In 2024, the country is forecast to consume almost as much polyethylene as the rest of the developing world combined, despite having a population less than 30% of its size: 1.4 billion vs 5.3 billion.

Following an end to the largest government stimulus package on record, and with weak export markets and a decreasing household-forming demographic, demand growth has begun to slow. Growth in Chinese consumption across most chemicals was in the low single digits or even negative in 2021-2023 despite widely being expected to be in the high single digits, and this has contributed to the current oversupply. This pattern looks set to continue in 2024.

In 2024, global overcapacity in the six chemical building blocks¹ is forecast to reach 222m tonnes, the highest since ICIS Supply and Demand records began in 1978. This figure is expected to rise further to 226m tonnes in 2025.

Surplus chemicals capacity has been building in China since 2014, five years after the launch of a government programme to increase self-sufficiency in an industry perceived as high value. By 2030, China is forecast to account for 38% of global capacity in the six chemicals-building blocks¹.

Chinese domination in certain key chemicals is increasing rapidly:

Economies of scale have also led to China becoming a much larger producer in some fine and specialty chemicals such as plastics additives. Given the reliance of plastic compounds on additives for their manufacture, this development will significantly impact future supply chains and pricing.

Chemicals and petrochemicals account for an estimated 920m tonnes of CO² equivalent emissions each year, making these industries the third-largest industrial subsector in terms of direct CO² emissions. The increasing imperative to report Scope 3 emissions and reduce carbon footprint is therefore of critical importance. Automation, new technologies and AI are reshaping production processes and facilitating the development of new biodegradable and recyclable materials, while enabling chemicals producers to reduce emissions.

As the circular economy takes shape, underpinned by increasingly stringent regulation, demand for lower resource-intensive products and recycled materials, as well as a move towards lower consumption and reuse, are reframing longer-term trends.