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

BARCELONA (ICIS)–Collapsing second quarter financial results show that the industry may face permanently low growth, driving the need for radical business model transformation. Q2 financial results show persistent downturn in sales, profitability Europe chemicals still plagued by China-driven global overcapacity, higher production costs, poor downstream demand BASF reports double-digit fall in net income, weighed by lower prices. Warns of second half risks from stronger price reduction, lower volume growth Dow CFO says consumer durables, building and construction will likely remain weak through the rest of the year Need for widespread closures to balance supply and demand Chemical companies need to adopt radical new business models End of China’s economic miracle means there will be no return to strong demand growth globally In this Think Tank podcast, Will Beacham interviews ICIS business solution specialist Nigel Davis, ICIS market development director John Richardson and Paul Hodges, chairman of New Normal Consulting. Editor’s note: This podcast is an opinion piece. The views expressed are those of the presenter and interviewees, and do not necessarily represent those of ICIS. ICIS is organising regular updates to help the industry understand current market trends. Register here . Read the latest issue of ICIS Chemical Business. Read Paul Hodges and John Richardson’s ICIS blogs.

SINGAPORE (ICIS)–Click here to see the latest blog post on Asian Chemical Connections by John Richardson. Warning: Don’t put sustainability in the equivalent of a broom cupboard in the basement of your chemicals company HQ because profits from green and circular chemicals are today thin on the ground. Companies in Europe, South Korea and Singapore etc. should perhaps instead focus on higher-value chemicals and polymers that address the challenges of reducing carbon and circularity. They may have to in parallel close their commodity chemicals capacities down in a world of declining consumption growth. Everything is connected. Don’t make the mistake of intellectually compartmentalising sustainability into, again, a broom cupboard as the energy and chemicals transitions are connected to other big picture changes. In summary, this is how the chemicals world could look in just a few years’ time: • Global chemicals demand has peaked and will from now on decline because of demographics, the end of the China “growth miracle,” downward pressures on consumption from sustainability, the impact of climate change on economies and maybe artificial intelligence. • As demand shrinks, the feedstock-advantaged Middle East and the US continue to add capacity to gain bigger slices of a shrinking pie. So does China for self-sufficiency reasons. • Chemicals companies elsewhere increasingly focus on niche, smaller-volume higher-value chemicals and polymers. They shut down commodities capacities and choose to import the commodities they need. • Japan serves as an example of a country that is already travelling down this path. Please don’t make the mistake of assuming that this is just another downcycle. The evidence instead points to a fundamental realignment of the chemicals industry. If you think otherwise, you must believe that the chemicals industry is divorced from the rest the world when, of course, it isn’t. Editor’s note: This blog post is an opinion piece. The views expressed are those of the author, and do not necessarily represent those of ICIS.

HOUSTON (ICIS)–US crops have continued to make steady progress with 77% of the corn acreage now silking with soybean blooming also at 77%, according to the latest US Department of Agriculture (USDA) weekly crop progress report. The current rate of silking does trail the 79% level achieved in 2023 but is slightly ahead of the five-year average of 76%. Corn having reached the dough stage is now at 30%, above both the 25% mark from last year and the five-year average of 22%. For corn conditions, there is still 3% rated very poor with 6% now listed as poor. There remains 23% considered fair with 52% now seen as good and 16% continuing to be viewed as excellent. For soybeans, there is 77% of the crop now blooming, which is just below the 79% from 2023 but is ahead of the five-year average of 74%. The amount of acreage setting pods has reached 44%, which is behind the 46% from last year, but it is above the five-year average of 40%. For soybean conditions, there remains 2% as very poor and 6% as poor. There is now 25% listed as fair with 54% as good and 13% as excellent. In harvesting updates, winter wheat is now at 82% completed, which is ahead of the 77% mark from 2023 and the five-year average of 80%.

HOUSTON (ICIS)–So far in the earnings season, US chemical producers have given up on a second half recovery and will rely on their own actions to increase earnings while they wait for interest rates to fall. US-based chlor-alkali producer Olin and specialty chemicals producer Eastman were the latest to abandon the prospect of a second-half recovery. Excluding the effects of Hurricane Beryl, Olin expects the second half of 2024 to resemble its first half in terms of adjusted earnings before interest, tax, depreciation and amortization (EBITDA). Eastman does not expect any improvement in primary demand in its key markets and geographies. US-based paints and coatings producer Sherwin-Williams flat-out said that it did not expect to get any help from the market during the company’s second half. Improvements will have to come from within Sherwin-Williams. Similarly, RPM International said it will rely on its margin achievement plan (MAP) to increase earnings in what it has called a no-growth and low-growth economy. Such self-help measures led Evonik to raise its guidance even though it noted the absence of any broad-based macroeconomic recovery. PPG lowered its full-year guidance because of lower auto production and uneven industrial production. However, PPG did break from the trend, in that it expected US economic activity to improve as the second half progressed. Growth should continue in Mexico. In China, PPG said growth should continue for the company during the second half but at a slower pace. Demand in Europe is uneven but stabilizing. Dow, meanwhile, expects a slower pace of recovery for some of its end markets for 2024. In an interview with ICIS, Dow’s CFO said consumer durables and building and construction will likely remain weak through the rest of the year. In North America, volumes for architectural coatings will not return to pre-pandemic levels until 2025, Dow said. HIGHER INTEREST RATES HOLD BACK KEY CHEM END MARKETSFor many key chemical end markets, elevated interest rates continue to suppress demand. The Federal Reserve has maintained the nation’s benchmark federal funds rate at a multiyear high of 5.25-5.50% as part of a campaign to lower inflation to its target of 2%. The elevated federal funds rate has raised interest rates throughout the US economy, making big-ticket items like homes, automobiles, appliances and furniture more expensive. The higher rates have had an additional effect on the existing home market. Consumers who have cheap mortgages are reluctant to sell their houses and assume a new 30-year loan with a much higher rate. These homeowners are hanging on to their houses, and this trend has battered the nation’s existing home market, bringing sales to a 30-year low. The slowdown in existing home sales has lowered demand for architectural coatings, furniture, mattresses and appliances. For these end markets to recover, Dow said that 30-year mortgage rates need to fall to about 5%. Right now, they are at 6.78%. SIGNS OF CONSUMER STRAINSherwin-Williams noted some signs of strain among US consumers. It is not just inflation, which remains above the Fed’s target of 2%. They have depleted savings and taken on debt. Business from insurance claims declined because consumers were reluctant to pay deductibles, the company said. It noted weakness in its do-it-yourself (DIY) products sold to consumers through third-party retail stores. These customers tend to be more sensitive to price than those that shop at Sherwin-Williams’ paint stores. Dow noted that sales to contractors were stronger than those to DIY consumers. RPM also warned of uncertain DIY demand. Companies outside of the chemical industry are also seeing signs of weakening consumer demand. The fast-food chain McDonald’s also noted consumer weakness. In the second quarter, global same-store sales fell by 1.0% and US same-store sales fell by 0.7%. The broadcaster CNBC said it was the first time that same-store sales fell since the fourth quarter of 2020. McDonald’s said that consumers have become more careful about how they spend their money. Real disposable incomes in the US barely grew in June following an increase of 0.3% the previous month. Growth in consumer spending also slowed down in June. RATE CUTS BECOME MORE LIKELYConsumers could get some relief in the upcoming months. The Federal Reserve could indicate that it is ready to start lowering the benchmark interest rate during its next meeting on 31 July. Inflation is showing signs of falling to its target of 2%. Many expect that the first rate cut will happen during the Federal Reserve’s meeting on 18 September. The anticipation of future rate cuts would trickle through the economy and lower rates for mortgages and other forms of debt. If the inflation continues to cool and if the Federal Reserve continues lowering rates, then mortgages could reach the 5% threshold that Dow said could lead to a sustained recovery for several key end markets. MORE CHEMS SCHEDULED TO DISCUSS OUTLOOKSMany more companies should reveal their guidance and outlook during the next two weeks as earnings season continues. So far, it looks like the industry will have to continue waiting for a sustained recovery. Insight article by Al Greenwood Thumbnail shows a torn dollar. Image by Shutterstock.

HOUSTON (ICIS)–Here are the top stories from ICIS News from the week ended 26 July. INSIGHT OUTLOOK: Next US president may upend EV policies, trade, regulations The US election could see Donald Trump return as president with majorities in both legislative chambers, which could bring a reduction in excessive red tape, weaker support for electric vehicles (EVs) and impose even more ponderous tariffs and trade restrictions. OUTLOOK: Red Sea diversions, tight capacity to pressure rates higher, but could ease in August Tight capacity as vessels continue to divert away from the Red Sea and Suez Canal for the longer voyage around the Cape of Good Hope is likely to keep upward pressure on ocean freight rates, but an early start and end to the typical peak season could provide some relief. INSIGHT: US chemical exports more exposed to China today as potential new trade war looms – ICIS analysis As campaigns heat up heading towards the US elections in November, trade wars and tariffs are now front and center in the minds of global chemical players. Producers and customers must brace for the prospects of higher tariffs, particularly on Chinese imports, as well as retaliatory tariffs by China. Dow sees B&C, consumer durables weakness persisting through 2024, rate cuts needed – CFO Weakness in building and construction, and consumer durables demand is expected to persist through 2024, likely pushing out a meaningful earnings recovery to 2025, Dow’s chief financial officer said on Thursday. INSIGHT: Venezuela’s petchems may finally get a chance – but unlikely to be under Maduro Venezuelans go to the polls on Sunday with the hope of a free and fair election, in which case President Nicolas Maduro is widely expected to lose office in a country where the economy has been battered by years of mismanagement, corruption, and US sanctions.

LONDON (ICIS)–Click here to see the latest blog post on Chemicals & The Economy by Paul Hodges, which looks at warning signs around the oil market. Editor’s note: This blog post is an opinion piece. The views expressed are those of the author and do not necessarily represent those of ICIS. Paul Hodges is the chairman of consultants New Normal Consulting.

LONDON (ICIS)–Here are some of the top stories from ICIS Europe for the week ended 26 July. BASF sees slowing electric vehicle sector, pauses Tarragona refinery plans BASF is moving to “de-risk” its exposure to the electric vehicles sector in response to slowing market dynamics, CEO Markus Kamieth said on Friday, pausing or deciding against several investments connected to the industry. Dow sees B&C, consumer durables weakness persisting through 2024, rate cuts needed – CFO Weakness in building and construction, and consumer durables demand is expected to persist through 2024, likely pushing out a meaningful earnings recovery to 2025, Dow’s chief financial officer said on Thursday. Eurozone private sector momentum slows further in July Eurozone private sector momentum almost slowed to a standstill in July, dropping to a five-month low as new orders fell and business confidence ebbed. Africa PE/PP demand to remain flat, supply picture difficult to predict Little is certain when it comes to African economics but it appears a fairly safe bet that underlying demand in the polymer markets will remain subdued for the second half of the year across the continent. EU announces provisional ADDs on biodiesel imports from China The EU has implemented provisional antidumping duties (ADDs) on biodiesel from China after deciding that a recent surge in imports has harmed the competitiveness of Europe-based operations. The European Commission has suggested a provisional tariff between 12.8% to 36.4% starting in mid-August.

SINGAPORE (ICIS)–Here are the top stories from ICIS News Asia and the Middle East for the week ended 26 July 2024. Typhoon Gaemi makes landfall in southern China; hits port operations By Nurluqman Suratman 26-Jul-24 10:36 SINGAPORE (ICIS)–Typhoon Gaemi slammed into Fujian province in southern China on the evening of 25 July, bringing heavy rains as it continues to move inland on Friday, with the strong downpour expected to last three days. PODCAST: Typhoon Gaemi to delay propane, butane cargo arrivals in China By Zhou Shihao 25-Jul-24 14:49 SINGAPORE (ICIS)–Typhoon Gaemi will test the resilience of the liquefied petroleum gas (LPG) supply chain, causing temporary shipment delays and port closures, but market prices and arrival schedules are expected to remain stable and manageable. PODCAST: Hydrogen – the critical blend for decarbonizing gas power in China By Yu Yunfeng 25-Jul-24 09:47 SINGAPORE (ICIS)–China’s installed capacity of gas power generation is projected to surpass 150 GW by 2025, representing roughly 6% of the country’s total installed power generation capacity. VIDEO: China’s LDPE market weakens as supply tightness eases By Joanne Wang 24-Jul-24 14:35 SINGAPORE (ICIS)–Watch ICIS senior industry analyst Joanne Wang discuss the driving factors behind the China’s low density polyethylene (LDPE) price fluctuations this year and briefly discuss prospects for the second half of this year. India cuts MDI import duty; plans six-month review of overall tariff structure By Nurluqman Suratman 23-Jul-24 18:04 SINGAPORE (ICIS)–India will cut import duties for methylene diphenyl diisocyanate (MDI) by 2.5 percentage points to 5.0% effective 24 July, with plans to review the country’s overall tariff structure in the next six months. OUTLOOK: China’s H2 refinery throughput to be weighed by economic slowdown, fuel substitution By Patricia Tao 23-Jul-24 11:21 SINGAPORE (ICIS)–China’s crude throughput is forecast to edge lower to 15.05 million barrels/day in the second half of 2024, about 0.4% lower year on year amid continued sluggishness of the domestic economy and the growing competition from alternative fuels. INSIGHT: China PE demand growth for 2024 to be slowed by weak consumer confidence By Amy Yu 22-Jul-24 17:41 SINGAPORE (ICIS)–China polyethylene (PE) demand is expected to shift to the traditional off-season in July, due to the impact of high temperatures and flood season.