Germany’s Chemical Industry Woes Continue

The latest data from Germany spells unwelcome news for its chemical companies as the decline of what was once Europe’s economic powerhouse continues.

But exactly how bad is the news, what has gone wrong, and what possibility there is for recovery?

How Much is the German Chemical Industry Suffering?

For the first half of 2024 sales have dropped by 1%. This may sound insignificant, but across the range of the whole industry from feedstocks, cosmetics, pharmaceuticals, and polymers, it accounts for billions of Euros of lost revenue. In total, over the first six months of 2024 compared with the same period in 2023, German industrial chemical sales fell by €7 billion from €121 billion to €114 billion.

While production has increased, overseas competition has impacted prices, meaning that the industry has still not reached pre-pandemic levels. Reuters reporting that, “For the first half of the year, the chemical industry including pharmaceuticals recorded a 3% rise in industrial production - still 11% lower than in 2021 - while producer prices dropped by 4%.”

A Bloomberg report, also noticed the continued slide, stating that, “May’s output declined 2.5% from the previous month,” calling it, “the latest sign that the recovery in Europe’s biggest economy may be faltering.” While a recent report published by industrial chemical analysts at EverChem add that German chemical industry production has collapsed by 15% from 2021 to 2023.

Unfortunately, there seems little in the way of good news or signs that the chemical industry has reached the bottom of the curve. As Markus Steilemann, Covestro CEO and president of the German chemical industry federation (the VCI) made clear when he said, “… there can be no talk of a stable upward trend.”

The impact of a weaker German chemical industry is far reaching, with the sector functioning as the third largest in the country’s economy, employing almost half a million workers.

“To our knowledge,” the VCI president added, “around 300 companies in the chemical industry actually ceased operations last year.” While many of these closures will be smaller firms, other shutdowns include the bombshell announcement by BASF that it will stop ammonia production at its vast Ludwigshafen facility, with the site still looking for a buyer.

What has gone wrong for German chemical manufacturers?

In a nutshell, the problem is three-pronged: high energy prices, high wages, and a high regulatory burden.

High Energy Prices

“Energy prices are back at a more tolerable level,” noted Steilemann in a press conference announcing the latest data. “At the same time, it has to be said that we still do not have competitive industrial prices for the basic chemicals industry in Germany due to the overall international energy price situation.”

The overall economics of industrial chemical manufacturing is hampering German economic growth. With American competitors having access to cheaper shale gas feedstocks, while the Middle East continues to invest in refining facilities to become a larger exporter of chemical products rather than just crude oil, the supply of chemical feedstocks to Europe are becoming uneconomical. This, according Steilemann, “continues to put products manufactured in Germany at a competitive disadvantage.” As a result, “what Germany actually did very successfully in the chemicals sector for many decades up to 2016/2017 – the basic chemicals export model – has come to the end of its life for Germany.”

High Wages

High German wages and an advanced standard of living are often cited as a major disadvantage for the German economy. No where is this more true than in the chemical industry with its highly specialised staff commanding higher pay than their Asian or Middle Eastern counterparts.

Despite this the chemical industry workers union has achieved a wage increase with Germany's BAVC chemical industry association (which includes major chemical producers such as BASF, Bayer, and Evonik, as well as foreign chemical companies operating in Germany, such as Dow and LyondellBasell). The deal with union IGBCE equals a 6.85% pay increase over 20 months as well as an additional day off each year.

A High Regulatory Burden

Having already handled the costs of REACH implementation, the German chemical industry, alongside its European counterparts, is now having to adjust to even stricter chemical safety regulation and a shift to towards lower carbon emissions. This is further putting pressure on the profitability of German chemical production and has led the VCI to call for the establishment of an Industrial Deal which could support business while it works its way through environmental initiatives such as NetZero goals and the EU’s Green Deal.

“We need to put a business plan behind this transformation because, so far, it has led to more rules, more regulation – very fine-grained regulation,” Steilemann states. Specifically noting that the chemical industry had been impacted by 43 new laws put in place over the course of the last European legislative term. These laws combined to add as many as 600 new regulations on chemical manufacture, use, and safety.

Furthermore, because some of these rules have yet to be fully enacted, the true financial cost has not yet been absorbed.

“In this respect, no matter what approach the new Commission takes, we will initially see a knock-on effect from the legislation of the last Commission,” Steilemann noted.

All these factors combined has placed the German chemical industry in an unenviable position. As Steilemann observes, the structural disadvantages for German chemical companies are “too heavy a burden.” Adding that, “Those who recklessly assumed that production would return 1:1 after the energy crisis were wrong.”

Can the German chemical industry recover?

There is some good news for German chemical companies, as inorganic basic chemical production (such as hydrogen, chlorine, and sulphuric acid) has performed well recently, with a 12% increase in the first six months of 2024 compared to H1 2023. Petrochemical output has also gone up by 8.5%.

The reason, according to the VCI is a more stable energy situation following the shock to the market following the Russian invasion.

With lower energy prices and an end to the war in Ukraine, the outlook for the sector might improve in the short term. In fact, the VCI has even predicted that chemical output will increase by 3.5% over the whole year, with a sales rise of 1.5%. However, this may only reflect a short-term return to normal following COVID and the shock of sanctions on Russian oil and gas imports.

However, the long-term issues of high wages, expensive feedstocks, cheaper imports, and a lack of wider European economic growth all point to a weaker German chemical industry over the coming decades.

This means that the overall view still remains pessimistic. “The truth is that one in five companies still sees no light on the horizon and that economic recovery is a long way off,” observed Steilemann. As such, for the German chemical sector things will likely never be the same again. “Unfortunately,” he concludes, “for many companies, what’s gone is gone.”

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