Global Chemical Sector Outlook for 2024

The global chemicals sector faces a challenging landscape in 2024, characterized by weak demand and abundant supply, as per Fitch Ratings’ neutral outlook. Despite bottom-of-the-cycle conditions in 2023, the industry is expected to grapple with constrained volumes and margins, with little to no recovery anticipated. High uncertainty further adds complexity to the sector’s trajectory, setting the stage for nuanced dynamics.

Global Chemicals Sector Overview

Fitch Ratings paints a cautious picture for the global chemicals sector in 2024. The sluggish post-lockdown demand recovery in China, a key player in the industry, contributes to the deflation of global chemical prices and margins. Surplus capacity in Asia, North America, and the Middle East, boasting lower production costs, leads to significant imports into regions with weaker cost positions, notably Europe and Latin America.

Inflation, Interest Rates, and Demand Constraints

Persisting high inflation and interest rates are expected to continue constraining demand in 2024, particularly in the US and Europe, where weak growth expectations prevail. The construction sector, a crucial end-market for chemicals, is set to bear the brunt of these constraints, given its sensitivity to high-interest rates and government stimulus.

Saudi Arabia’s Chemical Industry Outlook

The head of Saudi Arabia’s largest chemicals producer, Sabic, warns of another challenging year in 2024. The global economic outlook’s weakness impacts the demand for chemicals. Sabic’s profit decline over five consecutive quarters reflects the broader industry challenges, with uncertainties prevailing regarding a potential pickup in 2024.

Indian Chemical Companies and Global Dynamics

Against the backdrop of capacity additions amid sluggish demand, concerns arise for Indian chemical companies. While demand struggles to revive, China’s aggressive capacity expansion poses a long-term threat. The global scenario of surplus capacity and weak demand compounds the challenges faced by Indian chemical firms.

Challenges and Revisions in Production Expectations

Despite initial expectations for a modest rebound in production in 2023, the chemical industry faced significant headwinds by mid-year. Global factors, including a European recession, inflation in the US, and a smaller-than-expected rebound in Chinese demand, contributed to the downturn. Over-ordering in 2021 and 2022 resulted in high inventory levels, leading to months of destocking.

US Chemical Industry’s Transition

While fears of an economic downturn in the United States have eased, economic growth is expected to slow down. Analysts project only a modest rebound in chemical production, with destocking transitioning to restocking. However, the underlying weakness in demand and overcapacity for certain products may persist. Chemical companies are focusing on cost reduction and efficiency improvement to offset the reduction in output.

Opportunities Amidst Changing Dynamics

The competitive landscape in the chemical sector is evolving, presenting both opportunities and vulnerabilities. Stakeholder pressure and government policies are driving investments in the energy transition, leading to a convergence of sectors. Some oil and gas companies are venturing into critical minerals mining, processing, agriculture, and chemicals. Similarly, chemical companies are exploring opportunities in lithium processing, battery manufacturing, and clean ammonia. These changes bring new opportunities but also introduce competition from sectors with stronger cash flows.

Indian Outperformers

Surprisingly, amidst the challenging sentiments in the chemical sector in 2023, several Indian chemical stocks displayed remarkable resilience and outstanding performance. Notable examples include:

These stocks not only weathered adverse market conditions but emerged as shining examples of success, reflecting resilience in a challenging year for the chemical industry.

Conclusion

The chemical sector’s outlook for 2024 strikes a delicate balance between challenges and opportunities. Global dynamics, encompassing weak demand, ample supply, and changing competitive landscapes, pose significant hurdles. Companies navigating these complexities must focus on cost reduction, efficiency improvement, and strategic investments to position themselves for success in a rapidly evolving environment.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.