Skip to main content

Editorial comment

Recession looms for the European chemicals sector after gas-price shock


Register for free »
Get started now for absolutely FREE, no credit card required.


European industry has experienced unusually volatile trading conditions in the past two and a half years, from the pandemic and the resulting supply-chain disruptions to the energy-price shock made worse by Russia’s war in Ukraine – but the impact on companies has proved far from uniform.

Europe’s chemicals industry is a case in point, despite the sector having to grapple with sky-rocketing natural gas prices this year and more recently shortages of Russian-supplied gas.

The sector, which emerged in good financial shape after the pandemic, now faces a generalised worsening of credit quality this quarter and in the quarters ahead particularly if energy prices were to increase sharply again.

For specialty chemicals, the question is now how long consumer demand will cope with inflation; at some point, higher prices will feed through to lower demand and/or large specialty chemicals will have to absorb more of the cost increases. It is difficult to predict when this may happen, but it is possible the inflection point will arrive in 4Q22.

Large integrated players are adjusting operating rates by reducing production for those plants requiring larger proportions of natural gas, as costs rise. Covestro recently revised its likely energy bill for 2022 to around €2.2 billion from expectations of €1.5 billion only six months ago, which means costs will have more than doubled compared with €1.0 billion in 2021 and €0.6 billion in 2019.

The recession risk is material and will help determine chemical products demand. In the current conditions, low demand will be coupled with gradual fading out of pandemic-related supply disruptions, creating more available capacity to further exacerbate price competition and pressure on profit margins. Applications for some end use industries, such as consumer food or healthcare, may be less sensitive to slack demand, but, overall, chemicals sales volumes will come under pressure.

That said, large, diversified European firms look resilient – outside the fertilizer sector which is most exposed to high gas prices – unlike smaller producers of commoditised products which will struggle to absorb price increases if demand falls.

Even in the most extreme of the three scenarios of even higher gas prices and supply disruptions, most of Europe’s large chemicals companies would experience only a modest deterioration in profitability and credit metrics given broad product portfolios, strong balance sheets, and geographic diversity.

Risks vary across the sector. At LyondellBasell, a leading producer of olefins and polyolefins, the firm’s European crackers are mostly dependent on oil-based feedstocks so any disruption in gas supplies would eventually only affect a limited portion of its production.

BASF is facing one of the biggest challenges at its main site in Ludwigshafen (Germany), which uses large quantities of gas for power/steam but also as a feedstock (50%). Even so, BASF, with a large and diversified asset base, is looking at fuel replacement, geographically diversifying production, and using its pricing power to compensate.

Other companies with significant production in Germany, including Covestro and K+S, have calculated additional yearly costs of several hundred million euros under a hypothetical 25% cut in German gas supply, though not severe enough to disrupt their operations.

At the other end of the spectrum is Europe’s fertilizer sector. Lower demand from farmers and exorbitant product prices have forced producers to run facilities at low rates, with selected lines halted temporarily. Yara International has cut ammonia utilisation to 35% in Europe, while other smaller European players have even halted production, including Hungary’s Nitrogenmuvek.

Current gas prices have quite simply ruined the economics of the fertilizer business in Europe – or put producers at a huge disadvantage to American and Asian producers – and are likely to lead to prolonged production stoppages.