Germany chemical operating rates remain unsustainably low

LONDON (ICIS)–Germany’s chemical-pharmaceutical industry is operating at unsustainably low capacity utilization as it continues to face severe challenges, raising doubts over the sector’s long-term prospects, industry officials said at a webinar hosted by the chemical producers’ trade group.

• Operating rates remain below profitability threshold
• Bureaucracy and other challenges discourage production and investment
• Domestic demand weak as Europe’s growth engine has stalled

In the second quarter, the operating rate was only 75.1%, down from 78.1% in the first, according to the latest industry data.

It was the 11th consecutive quarter when the rate was below the long-term average of around 82%, which the industry needs to operate its assets profitably.

(Blue bars: capacity utilization; orange line: profitability threshold; source: VCI)

The low operating rates reflect the challenges the industry faces in producing in Germany and call into question the country’s long-term outlook for chemical production and investments. So said Christiane Kellermann, an economist at the German Chemicals Industry Association (VCI).

More capacity may need to be removed from the market as it does not make economic sense to run plants unprofitably in the long term, she said.

Meanwhile, companies are holding back on new domestic investments while shifting more investments abroad, she noted.

BUREAUCRACY
The burden from bureaucracy is the top challenge for chemical production in Germany, according to a recent survey of VCI member companies.

Bureaucracy is not an abstract concept, but rather a significant cost factor for companies, Kellermann said.

According to the survey, chemical companies estimate that the cost linked to bureaucracy, as a share of sales, comes to about 5% on average.

Other challenges are high energy and raw materials costs, a lack of qualified labor and geopolitical uncertainties, according to the survey.

Energy and material costs are down from 2022-2023 peak levels but remain high, with no significant further relief expected, Kellermann said.

WEAK DOMESTIC DEMAND
While chemical export demand has stabilized, domestic demand is weak.

Most of the major domestic customer industries, with the exception of food and paper, saw year-on-year sales declines in the first five months of 2024.

Germany’s GDP is expected to grow only marginally this year, said Jupp Zenzen, economist at the German Chamber of commerce, who also presented at the webinar.

Since early 2022, the country has been in a stagnation phase, which continues in 2024, Zenzen said, adding: “We won’t have growth this year.”

2024 GDP FORECASTS:

Government	+0.3%
Bundesbank	+0.3%
Government export council	+0.2%
Joint forecast by leading institutes	+0.1%
Chamber of Commerce	flat

(Compiled by the Chamber of Commerce)

For the second quarter, GDP fell by 0.1% from the first quarter, following a 0.2% quarter-on-quarter increase in the first quarter, according to data from the country’s federal statistics office on Tuesday.

Overall industrial production remains below pre-COVID levels and the chamber currently does not see an upward trend, Zenzen said.

Domestic new orders are trending down as demand is weak, he said.

Export demand seems to have stabilized as “the world economy is robust”, but this has yet to be reflected in the orderbooks of German industrial producers, he said.

Most of the big domestic industrial sectors are pessimistic about their business expectations, and their plans for domestic investments are largely “negative”, which is dimming the prospects for growth, he said.

CHEMICAL PRODUCTION
In contrast to overall industrial production, Germany’s chemical production recovered at the start of the year but since then has moved sideways, said Kellermann.

The trade group expects the country’s chemical production (excluding pharmaceuticals) to rise by 5.0% in 2024, which, if realized, would come after a 10.4% decline in 2023.

While at first glance a 5% increase may seem strong, production remains far from levels during 2010-2021, she said, and pointed to the following chart showing Germany’s chemical production (excluding pharma) since 2008:

Whereas chemical production recovered quickly after the 2008-2009 global financial crisis and after the pandemic, it has yet to recover from its collapse in 2022 in the wake of the Ukraine war, she said.

Currently, production is “incredibly” low, meaning that the expected 2024 growth would not mark a return to past production levels, she said.

Customer inventories may often be so low that even if customers produce only a little, they will have to order some chemicals and other materials – but this can hardly be described as a recovery, she noted.

Compared with weak sales in 2023, chemical producers expect an improvement in sales this year but are pessimistic about profits because of their high costs, according to the VCI survey.

Companies now expect that demand and chemical production could begin to recover in 2025-2026, according to the survey. Their previous expectation was for a recovery to get underway in the second half of 2024.

Thumbnail photo source: VCI

Focus article by Stefan Baumgarten

Please also visit Macroeconomics: Impact on Chemicals