By Li Hua, Consulting Department of China National Chemical Information Center
Global market review 2022
Entering the end of 2022, several major economies in the world experienced economic slowdown. Global GDP growth slipped to 2.9% in 2022. The production of global chemicals grew by around 2.0% in 2022, significantly lower than the 5.2% growth in 2021.
The production of global chemicals increased by 5.2% in 2021, driven by fiscal stimulus measures of major economies to make economic recovery after the pandemic. After the surge in 2021, the production of the global industrial sector began to slow down in 2022, mainly because of the high energy prices and European energy crisis caused by geographical conflicts, bottlenecks of unrecovered global supply chains, and slowdown of Chinese market impacted by the pandemic. The above factors suppressed the production of factories around the world in 2022. According to the American Chemistry Council (ACC) estimates, global chemical production is expected to increase by about 2.0% in 2022.
1. North American market: The U.S. chemical industry saw a robust growth in 2022, the best year in a decade.
(1) Despite the highest inflation in nearly 40 years, the United States still has the healthy macroeconomic fundamentals, with 4.3% industrial production growth in 2022.
The U.S. industrial production growth had a robust rebound in the first half of 2022, but slowed down in the final months. Severe supply chain disruptions and shortages in the first half of 2022 led to excess inventory in many supply chains by the end of 2022. Customers built up inventories to mitigate supply disruptions and suppliers delayed deliveries, in the meantime, the market demand began to slow down. Therefore, U.S. industrial production grew by 4.3% in 2022, but is expected to decline by 0.5% in 2023.
The persistent global shortage of semiconductors hampered U.S. light vehicle sales. While the supply situation for chips has improved recently, U.S. vehicle production has only just returned to pre-COVID-19 levels. U.S. auto sales are expected to be merely 13.8 million units in 2022, being the lowest level since 2011. Sales are expected to rise to 14.9 million units by 2023, among which chemical-intensive EVs will account for a larger market share.
(2) Driven by strong domestic demand and export markets, U.S. chemical industry grew by 3.9% in 2022.
U.S. chemicals production had a robust rebound from the pandemic trough in 2022, increased by 3.9%. Chemicals trade was also strong, and U.S. chemical exports were expected to grow by 20.4% in 2022 to US$184 billion. Exports of natural gas-intensive chemicals such as fertilizers to Europe grew the most. In 2022, the European energy crisis triggered by regional conflicts caused many European chemical manufacturers to reduce or even stop production. However, the U.S. manufactures were very competitive in the global chemical market due to the relatively cheap price of natural gas.
2. European market: Affected by the energy crisis triggered by regional conflicts, in 2022, the European chemical industry had encountered the most severe challenge since the 1970s.
(1) The energy crisis triggered by high inflation and regional conflicts led to a significant slowdown in EU’s GDP growth in 2022.
The European Union is one of the most affected regions because of its geographical proximity to the war and its high dependence on fossil fuel imports. The actual GDP growth in the EU was beyond expectations in the first half of 2022, although rising inflation has dampened optimism over the end of the pandemic to some extent.
It is expected that the EU GDP will shrink in the fourth quarter of 2022, but the strong growth in the first half of 2022 will push the EU's overall actual GDP growth rate to 3.3% in 2022. Among them, Germany, a heavyweight economy in the EU region, has been hit hard by its macroeconomic and chemical industries because its industrial-driven economy is highly dependent on Russia's energy exports. According to the latest forecast data from the German government in November 2022, Germany's GDP will grow by 1.4% in 2022, and -0.4% in 2023.
The contraction of European economic activity will be continued in the first quarter of 2023. As a result, the EU, Eurozone and most member states are expected to experience a technical recession in the winter of 2022. Growth will be resumed in the spring of 2023 as inflation gradually loosens its grip on the economy. However, the growth of EU economy will be lackluster as strong economic downturns still dampen demand. For the whole of 2023, actual GDP is expected to increase by 0.3% in both the EU and the Eurozone.
(2) In 2022, the European chemical industry experienced a trade deficit for the first time, changing from a chemical net export area to a net import area.
Before 2022, the EU is the world's largest exporter of chemicals. In 2021, the EU exported about Euro 459.1 billion of chemicals, with a trade surplus of about Euro 187.7 billion. However, with the outbreak of regional conflicts in 2022, the import volume and value of EU chemicals exceeded the export volume for the first time, and the trade deficit merely in the first half of 2022 had reached Euro 5.6 billion.
High natural gas prices in Europe in 2022 forced many of their chemicals to lose competitiveness in the global market (energy costs in Europe are 6-7 times higher than in the United States). In October 2022, Marco Mensink, Director General of the European Chemical Industry Council (Cefic), said: "We are approaching the point of no-return: if no emergency solution to the energy prices is provided to our sector, we are not far off the breaking point."
(3) Enterprises that use natural gas as raw material and energy-intensive companies have reduced production or even stopped production to cope with soaring production costs. Hundreds of chemical companies have already been on the edge of survival.
The current high natural gas prices across Europe are a common problem for all chemical companies. But prices are particularly high in Germany, because they previously had the highest reliance on Russian natural gas.
BASF, the world's largest chemical company headquartered in Germany, has announced that by the end of 2024, it plans to save Euro 500 million in "non-production areas" every year. The company's Ludwigshafen plant, the world's largest chemical base, will be responsible for more than half of the downsizing as the company streamlines its operations, service and R&D divisions and its corporate centre. In addition, BASF also announced that it will take "further structural measures". Industry experts analyse that this measure may mean that BASF will reduce its production of natural gas-based basic chemicals in Europe, especially the ammonia.
In addition, some German chemical companies are reducing production significantly. According to a recent regional survey by the German Chemical Industry Association (VCI), for example, in the important chemical region of North Rhine-Westphalia, 34% of companies have already reduced production, and 13% of companies plan to transfer production abroad. 56% of companies have reduced their planned investments in the coming year.
3. Asia-Pacific Market: In 2022, the chemical market in the Asia-Pacific region had no significant growth due to weak demand. At the same time, the profitability was being challenged due to the impact of newly increased production capacity.
(1) In 2022, the Asia-Pacific region's economic growth slowed down due to the global sluggish demand, inflation, and the pandemic impact in China.
In 2022, the growth of most developing economies in East Asia and the Pacific region started to rebound after the impact of the pandemic. Looking ahead, the region's economic performance is likely to be impacted by slowing global demand, rising debt, and reliance on short-term economic repairs to compensate rising food and fuel prices.
According to the World Bank's East Asia and Pacific Economic Update in October 2022, the growth rate of developing economies in East Asia and the Pacific, excluding China, is expected to accelerate from 2.6% in 2021 to 5.3% in 2022. China, which had previously led the region's recovery, is expected to grow by 2.7% in 2022, a plummet from 8.1% in 2021. China's GDP is expected to grow by 4.3% in 2023. For the region as a whole, growth is expected to slow down to 3.2% this year from 7.2% in 2021, and accelerate to 4.6% in 2023.
(2) In 2022, there was no significant growth in the chemical market in the Asia-Pacific region, but corporate profitability encountered challenges due to the impact of newly increased production capacity.
Market conditions in Asia have not worsened, but neither have they improved. In September 2022, Ken Lane, executive vice president of Global Olefins and Polyolefins (O&P) for LyondellBasell, pointed out at the Global Specialty and Basic Chemicals Conference held by Credit Suisse, "We don't see significant growth in the Asian market, we see profitability challenges."
Global chemical market outlook 2023
1. Global: The global chemical production is expected to grow at a rate of 2.9% in 2023, but trends vary by regions
Global GDP is expected to slow to 2.1% in 2023 from 2.9% in 2022. Europe could be trapped into recession because of historically high energy prices and demand destruction in the industrial sector. The U.S. economy is also losing steam, with a mild recession likely to begin in early 2023. Affected by the pandemic, China's recovery remains subdued. Emerging markets are grappling with higher imported energy and food costs and higher debt interest rates.
The deterioration of the economic environment in 2023 will affect the demand for most chemical products in the case of high cost raw materials and energy. In addition, supply is increased due to the significant capacity increase in Asia, and freight costs have fallen significantly, both of which will put much more pressure on global chemical margins. The American Chemistry Council expects global chemical production to grow at a rate of 2.9% in 2023, but the trend is different across regions. European producers will be the most affected region because of high regional energy costs, while U.S. and Middle Eastern producers will continue to benefit from lower domestic natural gas prices. Chinese producers' reliance on coal-based feedstock will lessen the impact of high oil prices, and it is expected that China’s supply and demand will recover in 2023.
After the downturn in 2023, the global economy is expected to continue to recover, and the demand for chemical products will further expand. Looking ahead, the U.S. chemical industry is likely to attract investment from global players headquartered in Europe, as well as from Asia, due to relatively low energy costs and aggressive tax incentives. At the same time, the European chemical industry will lose its advantage, if Europe cannot find an effective solution to the energy crisis and the shortage of natural gas supply.
Chemicals M&As (transaction value and trading volume) in 2022 fell from years of highs, as concerns over a global economic slowdown put increasing pressure on the deal market. Concerns about rising interest rates, the possibility of recession and geographic conflict are deepening and starting to weigh on M&A activity. Despite near-term headwinds, chemical companies with strong balance sheets will be well-positioned to drive a new wave of M&As once uncertainty lessens and valuations become attractive, which will be likely to happen before the second half of 2023.
The disruption of the global supply chain caused by the pandemic and the European energy crisis triggered by regional conflicts have led to a dynamic imbalance in the supply and demand of global chemicals. In response to the geopolitical turmoil, global chemical companies are moving their business closer to home country or to geopolitically safer locations to reduce risks. This may drive more cross-border M&As as acquirers expect to reshape their geographic footprints and realign supply chains.
Multinational corporations may also seek to establish redundant manufacturing capabilities in multiple regions or countries to cope with the new business environment of fragmented global supply chains. For the chemical industry, M&A is often the preferred way to achieve this strategic goal, as greenfield investments need to take longer time to implement.
2. North American market: The growth of the US chemical industry is expected to decline by 1.2% in 2023 due to sluggish domestic and international market demand. However, in terms of future development trends, chemical manufacturing in the United States will benefit from domestic energy advantages and will enjoy a long-term competitive advantage in the international market.
The U.S. GDP grew by 1.8% in 2022, and will be basically flat in 2023. Growth contraction at the beginning of the year will be recovered in the mid-term. With U.S. inflation peaking in the third quarter, consumer prices increased by an average of 8.1% in 2022. As interest rates continue to rise in the coming year, price growth will slow to 4.2% in 2023 and then will recover to between 2% and 2.5% in 2026.
Consumer spending remains unchanged in 2022, due in large part to savings accumulated during the pandemic. Consumer spending increased by 2.6% in 2022, following an 8.3% rise in 2021. After depleting the buffer of saving glut and experiencing the highest inflation in 40 years, consumers may cut spending. Therefore, consumer spending is expected to grow only 0.6% in 2023.
Capital expenditure by the U.S. chemical industry in 2022 increased by 9.0% to US$33.5 billion, with increased expenditure on capacity expansions, upgrades, and sustainability projects, including substantial investments in low-emissions technologies and advanced recycling technologies. The growth of capital expenditure is expected to slow down to 3.6% in 2023.
U.S. chemicals trade grew by 22% in 2022, hitting an all-time high of US$342 billion. Both imports and exports have increased significantly, reaching record highs. However, the growth of U.S. chemicals trade will be restricted in the coming year due to the slower growth of the U.S. economy and external markets. In general, chemical exports are expected to decline by 9.3% in 2023 due to slower growth, after which they may recover and reach US$193 billion in 2026.
Fitch Ratings forecasts that the revenue and profitability of chemical industry will face weak pricing pressure in 2023 due to rising interest rates, weak end-market demand and rising input costs. In addition, stronger U.S. dollar will also cause pressure on industry operating performance, as some U.S. chemical companies rely heavily on exports, especially to Europe and Latin America.
On the positive side, supply losses from reduced capacity in Europe due to high costs of natural gas and other feedstocks could outweigh the level of demand destruction. This would support exports and mitigate the negative impact of strong US dollar on prices. It would also provide an opportunity for U.S. producers to gain some market share, at least in the short term.
3. European market: It is difficult for natural gas prices to return to a competitive level in the short term, which will force the European chemical industry to actively transform.
According to the estimates of the International Energy Agency, the internationalization of natural gas prices may take 2 to 5 years to reach the level where Europe can become truly competitive in energy prices. Therefore, it is difficult for many Europe petrochemical products to participate in global competition. According to the 2022 S&P Global Commodity Insights data, ethylene, as a key raw material for a series of petrochemical products, the profit margin in Northwest Europe has dropped from about US$1 000/ton in June of that year to about US$100/ton in September. S&P Global analysts predict that downstream high-density polyethylene (HDPE) margins will fall from about US$600/ton in October to US$400/ton by the end of the year, and are expected to fall below US$100/ton by the end of 2023. The current low profit margin directly affects the global competitiveness of European petrochemical enterprises. Siaran Healy, an oil and petrochemical analyst of the International Energy Agency (IEA), said: "Historically, ethylene cracking in Europe is not the highest, but not the lowest, in terms of production costs in the world. But this time, some of their advantages over East Asian competitors will be lost due to higher energy costs and downstream problems." He added that many ethylene cracking units in Europe have reached the lowest operating load level technically.
Specialty chemicals’ price is based more on the functionality of the product than the cost of the components. Producers of specialty chemicals tend to have higher and more elastic profit margins than bulk commodity producers, because downstream users of specialty chemicals are much less price-sensitive than downstream users of bulk commodity chemicals. Therefore, in the next few years, while losing the competitiveness of bulk chemicals, the European chemical industry will more actively develop from energy-intensive bulk chemicals to high value-added specialty chemicals. It is expected that European chemical companies will continue to increase investment in specialty chemicals (such as R&D investment and mergers and acquisitions) in the next few years, and accelerate to cut the upstream bulk chemical business that has lost competitiveness.
The European energy crisis may change the EU's green transformation process. In June 2022, German Chancellor Olaf Scholz approved the restart of 27 coal-fired power plants by March 2024. In fact, the German government is not the only EU country that has made plans to restart coal-fired power plants. Countries such as Austria, Italy, the Netherlands and France have successively announced their intention to extend or restart shuttered power plants to meet demand for electricity in the winter of 2022.
Europe's green transition may have to skip natural gas. Before the geographic conflict, the EU had expected to use natural gas as a transition fuel in the 2020s before phasing it out in the late 2020s to early 2030s. Natural gas suppliers seek a commitment longer than 20 years, which conflicts with Europe's timeline for green transition. As a result, things aren't going well when the EU attempts to secure long-term LNG contracts from Qatar or other suppliers. Considering natural gas supply will be constrained until the mid-2020s, experts currently predict that gas consumption levels in the EU will not fully return to pre-pandemic levels, as large-scale deployment of renewables will directly replace coal in the mid-2020s. In light of this, Europe's proposal to expand its natural gas infrastructure envisages dual-use infrastructure that can be converted into hydrogen in the future. This strategy would increase the upfront costs of gas infrastructure, while also committing Europe to use hydrogen technology which is not yet proven in terms of efficiency or carbon neutrality, on the envisaged scale.
4. Asia-Pacific Market: It is expected that the supply and demand of the chemical industry in the Asia-Pacific region will achieve significant growth in 2023, but the overall weak global economy and the commissioning of a large number of new production capacity may exacerbate the degree of excess chemical production capacity in the region, which will further cause pressure on global chemical profits.
In 2023, as China emerges from the pandemic, economic activities will gradually resume. According to estimates from the World Bank, China's GDP is expected to grow by 4.3% in 2023. For East Asia and the Pacific as a whole, GDP growth is expected to accelerate from 3.2% in 2022 to 4.6% in 2023.
In 2023, the Asia-Pacific region, especially China, will have a large number of new production capacity put into operation, which will further exacerbate the overcapacity in the region. Excess production capacity will actively flow into the international market, especially the hard-hit European market.
