The US$ 5.72 trillion global chemical market is currently reeling under a record oversupply due to sustained increases in production and a slowdown in consumption. On one hand, leading global economies, including China, have infused billions of dollars in capacity additions in recent years with the mushrooming of new production facilities. On the other hand, this new capacity continues to pile up at production units due to diminishing demand from downstream industries.
Reports estimate a global overcapacity of chemical building blocks at a record of over 220 million tonnes in the calendar year 2024, approximately 5 million tonnes more than the 215 million tonnes of overcapacity reported in the previous calendar year. Global overcapacity is expected to worsen further to 225 million tonnes in the calendar year 2025 due to several new units scheduled to commence commercial production next year. Experts fear that the record overcapacity has started marring the employment-intensive global chemical industry. If the current production trend continues and the downstream sector does not improve to support new demand, global producers will require production cuts from next year onwards.
Fitch Ratings estimates weak demand and oversupply will continue to pressure volumes and margins of global chemical producers in the calendar year 2024. The rating agency expects that conditions will not materially improve from the bottom-of-the-cycle levels that prevailed in 2023. Demand for chemical products will remain constrained by the slowdown of major economies affected by inflation and the high interest rates, while China continues to experience a slower-than-expected recovery. Significantly, new global capacity built in recent years has increased competition and put further pressure on the operating rates of chemical producers. This is likely to lead to the closure of uncompetitive assets, especially in regions disadvantaged by higher energy or feedstock costs.
| Global value-added output in chemicals in 2020 |
| Countries | Value (US$ billion) |
| China | 334 |
| United States of America | 210 |
| Japan | 64 |
| Germany | 57 |
| India | 38 |
| Korea | 36 |
| France | 26 |
| Saudi Arabia | 24 |
| Brazil | 20 |
| Italy | 17 |
| Rest of the world | 320 |
Sources: Information Technology and Innovation Foundation, United States, and Polymerupdate Research
Weakening demandThe chemical sector was one of the first to react to the dampening consumer spending in the calendar year 2022. Sustained elevated inflation, high interest rates, and record-high energy prices impacted consumer spending with household demand diminishing. Chemical manufacturers and the entire value chain responded very quickly with production cuts, lowering inventories, and operating capacity to align supply with demand. The industry’s average operating margins declined to unviable levels.
Simultaneously, high feedstock and energy costs impacted European producers’ short-term competitiveness and longer-term viability. Consequently, competition intensified from lower-cost producers such as the United States and the Middle East to fill the supply gap of European producers. Around the same time, China gained the status of a net exporter in some key chemicals and gained a foothold in higher-yield, specialist chemicals. Another challenge the virgin chemical sector faces is the supply of recycled materials and low-carbon-intensive products. The increasing pace of carbon-reduction legislation shaped the trading landscape. The chemical industry witnessed seismic changes to key industries such as automotive, where electric vehicles replace gasoline and diesel-powered vehicles.
China transitioning to a low-growth economyChina leads the world in terms of chemicals industry sales, accounting for over 40 percent of the global market, with much of this in basic chemicals. The United States is still strong in chemicals, especially with companies such as Dow Chemical and Dupont. Chinese companies, however, are making intense efforts to not only gain a competitive advantage in fine chemicals (and consumer chemicals) but also invest more in research and development (R&D) and become more innovative, with the government providing significant support.
China is already the largest chemicals market in the world, giving Chinese producers a key advantage in their home market. In 2022, China accounted for 44 percent of global chemical production and 46 percent of capital investment. Chinese chemical firms are strong in basic chemicals where innovation plays a lesser role, but are focusing on gaining global market share in fine chemicals and consumer chemicals. The common narrative is that China is a copier and the United States as the innovator. That narrative often supports a lackadaisical attitude toward technology and industrial policy.
The demand for virgin chemicals was impacted due to the adoption of modern and sound technologies, and significantly, China’s transition to a low-growth economy. As a result of the real estate bubble busting China began to witness a longer-term structural slowdown in 2021. This was supported by the ageing population and intensifying trade tensions with the West, especially with the United States. The significance of the Chinese supply can be felt with China still accounting for around half of the global demand for chemicals and petrochemicals. By using virgin chemicals, Chinese producers manufacture value-added products by utilizing home-grown downstream technologies and sell consumer products worldwide. Reports estimate China’s polyethylene consumption is equivalent to the rest of the developing world combined, despite having population of just, 30 percent.
Experts feel the need for businesses to adapt, incorporating flexibility into operating models to maximize short-term opportunities, and re-modelling to succeed in a drastically different trading landscape. Globally, the demand growth has begun to slow following an end to the largest government stimulus package on record, and with weak export markets. Additionally, a decreasing household-forming demographic has also acted as a barrier to the growth in consumer demand for chemicals. Admittedly, China’s consumption growth across most chemicals remained in low single-digit or even negative between the calendar year 2021 and 2023, despite the industry expected to be in the high single digits. As a consequence, the slowdown in China’s consumption growth contributed to the current oversupply. The ongoing weak consumption in China is likely to continue in the calendar years 2024 and 2025.
According to an estimate, the Chinese government launched a programme in 2009 to increase self-sufficiency in this high-value industry. Five years later, the surplus chemicals capacity started building in China from 2014. With the capital expenditure (capex) continuing, the high-value chemical industry is forecast to account for 38 percent of global capacity in the six chemicals-building blocks. China continued to dominate the global chemical supply with increasing production capacity and output continuously.
81% of additional capacity to come from ChinaA study reveals China to add approximately 20 million tonnes a year of chemical capacity in 2024, accounting for over 80 percent of the total global increase in capacity. In the calendar year 2024, China is projected to account for 25 percent of global ethylene capacity, which is categorized as the core building block for over 75 percent of petrochemical products. The sustained capacity increase has brought China to the level of the largest exporter of polyethylene terephthalate (PET) resins, purified terephthalate acid (PTA), polyvinyl chloride (PVC), and polyester fibres.
China’s focus on ramping up production on a larger scale has increased economies of scale and has led to China becoming a much larger producer of some fine and specialty chemicals including plastic additives. Study finds that the reliance of plastic compounds on additives for their manufacture, significant capacity increase will impact future supply chains and pricing of chemicals and additives.
DILIP KUMAR JHA
Editor
dilip.jha@polymerupdate.com
