Risks rising for Germany’s chemical industry, say economists

LONDON (ICIS)–The risks for Germany’s chemical industry keep rising, economists said during a webinar hosted by chemical producers’ trade group VCI, and noted:

• Weak demand, domestically and abroad
• Investments stall
• Geopolitical uncertainty

Contrary to hopes at the start of the year, Europe’s largest economy is likely to shrink for a second straight year in 2024, the government said this week in revising its previous 0.3% GDP growth projection to a 0.2% decline.

The economy shrank 0.3% in 2023 and has not been able to generate strong growth since 2018.

Weak or negative GDP trends translate into lower demand for chemicals.

So far this year, demand for chemicals from nearly all domestic key customer industries, except food and paper, has been weak, said VCI economist Christiane Kellermann.

Year-on-year % changes in domestic chemical sales, by major customer markets, January-August 2024:

• Construction: -3.9%
• Plastics: -4.5%
• Metal products: -7.4%
• Autos: -5.8%
• Food: +1.5%
• Glass, ceramics: -7.8%
• Paper: +0.9%
• Printing products: -7.3%
• Furniture: -7.3%
• Machinery: -8.3%
• Electrical equipment: -16.1%

Source: VCI

Many of the chemical industry’s customers in manufacturing are curbing their production, and in the important construction end market there is no noticeable recovery.

Meanwhile, export sales of German chemicals were weak in most regions, with the exception of Asia, Kellermann said.

Year-on-year % changes in chemical exports, by region, January-July:

• EU: -2.5%
• Non-EU Europe: -1.1%
• Asia: +1.8%
• North America: -3.6%
• Latin America: -3.4%

Source: VCI

INVESTMENTS
The low demand translates into low production rates and low capacity utilization.

In fact, over the past two-and-half years chemical producers have been running plants at utilization levels that were below profitability thresholds, Kellermann said.

As companies suffer low demand in Germany, with little prospect of improvement, and cannot run existing plants and equipment at profitable levels, it does not make sense for them to invest in new plants, she said.

In a recent VCI survey, 74% of chemical companies said they were unlikely to invest in expanding production in Germany, she noted.

Only 15% said they were likely to invest in expanding production while 9% were undecided, according to the survey.

Companies cited the country’s bureaucracy and long project permitting processes, high energy and labor costs, and high and complicated corporate taxes as key obstacles to investing in Germany.

Only 13% said that a lack of trained workers deterred them from investing in the country.

With little or no new investment, “import pressures” rise and the chemical industry’s export capabilities will decline in coming years, she said.

Germany’s chemical industry loses in international competitiveness, in particular in energy-intensive basic chemicals, she added.

GEOPOLITICAL RISKS
Michael Gromling, an economist from the German Economic Institute in Cologne, who was also presenting at the VCI webinar, estimated that in order to return to a meaningful growth path and achieve a recovery (“Aufschwung”), Germany needed to generate annual average GDP growth of 2.5% from 2025 through 2030.

This, however, was “not realistic”, given the weakness across all industries and the geopolitical and structural challenges companies face, he said.

The country’s industries were export-dependent and therefore sensitive to geopolitical tensions, trade conflicts and protectionism, he said.

Geopolitical tensions were holding back investment decisions, and without a detente it would be very difficult for Germany to achieve its Aufschwung, he said.

An end to the Ukraine war and peace in the Middle East would be a “game changer”, creating an opportunity for reviving the global investment cycle, he added.

However, rather than relaxing, tensions could further sharpen after the 5 November US presidential election, he said.

Gromling did not say which candidate – current Vice President Kamala Harris or former President Donald Trump – he sees as the greater risk.

For the time being, VCI maintains its 2024 growth forecast for the country’s chemical-pharmaceutical production unchanged at 3.5% (excluding pharma: +5.0%). If realized, the increase would only partially offset last year’s 7.9% production decline (excluding pharma: -10.4%).

However, VCI may cut its 2024 sales forecast of 1.5% as exports were trending weaker than expected, Kellermann indicated.

Focus article by Stefan Baumgarten

Thumbnail image source: VCI