Germany’s chemical industry faces weak domestic demand and persistent structural issues – VCI

LONDON (ICIS)–Although Germany’s chemical-pharmaceutical sales and production are forecast to increase this year, after sharp declines in 2023, domestic demand remains weak and the industry’s structural problems persist, according to Henrik Meincke, chief economist of chemical producers’ trade group VCI.

• Weak domestic industrial demand
• Pre-crisis chemical production levels not in sight
• Low capacity utilization reflects structural problems

VCI’s 2024 forecast:

• Sales: +1.5%
• Export sales: +3.5%
• Domestic sales: -1.5%
• Chemical producer prices: -2.0%
• Production: +3.5%
• Production, excluding pharmaceuticals: +5.0%
• Employment: flat

DOMESTIC DEMAND
In the 2024 first quarter, domestic chemical-pharmaceutical sales fell 9.3% year on year, Meincke told participants in a webinar presentation that accompanied VCI’s recent Q1 report.

Excluding pharmaceuticals, the decline was even worse, at 11.3%, as most domestic customer industries curtailed production:

• Building and construction: -1.4%
• Plastics products sector: -3.6%
• Metal production: -2.3%
• Metal products sector: -6.4%
• Autos: -8.2%
• Food: +1.3%
• Glass and ceramics: -11.3%
• Paper: -0.8%
• Printing products: -7.2%
• Furniture: -10.9%
• Machinery: -7.1%
• Electrical equipment: -14.6%

CHEMICAL PRODUCTION
Despite a 5.4% year-on-year increase in 2024 first-quarter chemicals production (excluding pharma), production in the chemicals industry’s major segments remains below its levels from 2018, Meincke noted.

Production declines, from H2 2018 to H2 2023, by segment:

• Total chemicals: -19.8%
• Inorganic chemicals: -21.9%
• Petrochemicals: -24.1%
• Polymers: – 22.5%
• Fine and specialty chemicals: -16.8%
• Soap and detergents: -17.9%

In fact, Germany’s chemical production has fallen back to its level from 1995 and the gap between the country’s overall production and chemical production has widened, Meincke said.

Production trends
(red line: overall goods producing sector; blue line: chemicals; five-month moving average; 2021 = 100):

(source: VCI)

STRUCTURAL PROBLEMS
The main reasons for the decline in Germany’s chemicals production include high costs for labor, raw materials and energy, bureaucracy, a weak economy and a loss in international price competitiveness, Meincke said.

Although electricity and natural gas prices have somewhat normalized, they were still much higher than in 2019 and much higher than in countries such as China, the US or France – making it hard for Germany’s energy-intensive industry to compete internationally, he said.

The low capacity rates in the chemical industry reflect its “extremely difficult” situation, Meincke said.

Chemical-pharmaceutical capacity utilization in the 2024 first quarter was at 78.1% – a 10th consecutive quarter in which the industry is running “significantly” below normal rates of 82-85%, he said, adding that there were no signs of a significant improvement.

As the under-utilization continues quarter after quarter, companies will react by not restarting idled capacities but rather shift investments abroad, the economist said.

The crisis was so severe that it has triggered “structural effects”, he said.

Eric Heymann, senior economist at Deutsche Bank Research, who also presented at the webinar, spoke of an “investment leakage”, meaning that German companies will avoid making big energy-intensive investments in the country but rather invest abroad.

Heymann said one needed to distinguish between Germany’s problems as a location for industrial production and German industrial companies, which may invest in Germany or elsewhere.

Although domestic sales are forecast to fall this year, increased export sales should more than offset this and VCI therefore forecasts a 1.5% increase in total 2024 sales.

Production is expected to rise 3.5% in 2024. Production excluding pharmaceuticals should rise 5.0%, which would follow a 10.4% decline in 2023.

However, despite the expected year-on-year increase, production will remain far from pre-crisis levels, the industry’s structural problems will persist, and companies are not expecting a recovery any time soon, Meincke said.

Focus article by Stefan Baumgarten

Thumbnail photo of Steam cracker II at BASF’s Ludwigshafen site; source: BASF