Chemical industry transformation: a change of course

For decades, the industry was able to rely on predictable, internationally competitive energy prices, stable supply chains and growing sales markets. These conditions have changed fundamentally in a short time. The situation is the result of global economic weakness, geopolitical upheaval and deep-seated locational disadvantages. Turnover, employment and capacity utilisation have fallen significantly since 2022, and insolvencies have risen.

Capacity utilisation weighs particularly heavily. It is well below the profitability threshold of 82 per cent defined by the VCI. A plant that runs permanently below this threshold bears the full fixed costs without generating the contribution margin that justifies it. Insolvencies are also particularly critical in chemicals because they tear gaps in supply chains and trigger domino effects in the automotive, construction and pharmaceutical industries, which can hardly switch to alternatives in the short term.

A transformation that relies on relief from politics or the market therefore falls short. The set-up has to be sustainable under existing conditions.

The first cause is energy costs. Chemical production needs energy as electricity, process heat, steam and feedstock. Since cheap natural gas supplies ceased in 2022, costs have risen sharply. Behind this lies a systemic problem: the expansion of renewables was not matched by equivalent expansion of grids, storage and secure capacity available at any time. For energy-intensive production, this is a question of location.

The second cause is weak demand. Chemicals are an upstream industry, and important customers such as the automotive and construction industries have cut back production. The third cause is international overcapacity. China, the USA and the Middle East have massively expanded capacity, often in very large plants and on the basis of cheap raw materials. European plants are smaller and older. This disadvantage in size and raw materials feeds through to unit costs and squeezes margins.

The fourth cause has so far been underestimated: the erosion of integrated value chains. At integrated sites and chemical parks, one plant’s by-product is the next one’s raw material. If one building block disappears, for example through the shutdown of a cracker, downstream production has to buy precursors and by-products at market prices. A single closure can thus become a domino effect along entire sites.

The fifth cause is bureaucracy. Lengthy approval procedures and numerous regulatory requirements slow down necessary investment, and planning uncertainty itself becomes an investment risk. All five factors are to be treated as fixed conditions for the next five to ten years. The competition against the large plants in Asia, the USA and the Middle East cannot be won on capacity and price.

The large chemical groups act like a seismograph. They have launched and tightened savings programmes, cut jobs, closed sites and divested non-strategic areas. Some have eliminated management levels, others are transforming into pure speciality chemicals providers or relocating administrative services abroad. At the same time, large investments are flowing into new integrated sites outside Europe, while investments in Europe in some cases serve primarily for maintenance.

The pattern is clear: this is about fundamental realignment in global competition. Insolvencies of individual manufacturers show what is at stake.

The industry faces a conflict of objectives that calls for clear strategic leadership. Costs must fall so that the company remains profitable today. At the same time, considerable investment in research, new technologies and business models is needed. A joint study by BCG and VCI puts the necessary leap in productivity at 10 to 30 per cent. Those who only save lose the future. Those who only invest lose the present. The solution lies in coordinated management of both requirements: dual transformation.

For mid-sized companies, this does not mean a simple realignment towards specialities alone. Pure commodity volume remains particularly vulnerable to overcapacity and price pressure, but supposed speciality segments are also increasingly vulnerable without clear differentiation. The point is to redefine one’s own role in the value chain and to create value where the company is not interchangeable, for example through services, process integration or specific application expertise.

The lever therefore lies less in the molecule than in the position within the chain. A company that only supplies the precursor remains interchangeable and ends up at the bottom of the value distribution. A special case are politically supported demand niches for “critical chemicals” in the context of the European security and defence agenda, for which the association Cefic is calling for safeguards for the chemical industry. This field requires careful examination case by case.

First, no rescue is coming from outside. Even state aid and special funds will not permanently offset the fundamental locational disadvantages. Second, dual transformation is mandatory. Restructuring alone, without questioning the business model and today’s positioning, falls short. Third, imagination is required on the market side. Many companies lack the creativity to recognise new business areas and to develop them boldly.

Fourth, sustainability remains relevant. Besides ecological responsibility, the term also stands for economic viability and social responsibility. Ecological goals remain an important strategic framework, but must not be considered in isolation from competitiveness, the capacity to invest and employment prospects. In new business areas, what counts is a sustainable combination of ecological ambition, market potential and profitability. Fifth, time is the most critical factor: efficiency and productivity only come about when decisions are made quickly and measures are implemented swiftly.

The worldwide expansion of AI data centres affects the chemical industry in two directions. On the cost side, it exacerbates the industry’s central weakness, because in Europe data centres and energy-intensive chemicals compete for the same scarce and expensive energy. Whether this leads to a lasting price surge depends on grid expansion and generation.

On the portfolio side, the same trend opens up opportunities. AI hardware cannot be produced without speciality chemicals and speciality materials, from lithography optics through wafer and packaging chemicals to high-purity reagents, speciality gases and coolants. German and European providers are present in several of these niches. For mid-sized companies, what counts is the niche in which depth and quality decide who wins the contract. Every company should examine whether its own portfolio connects with these value chains and how energy costs can be secured at the same time.

Classic restructuring often falls short. It reduces costs on the surface without changing the structures that generate those costs. Re-dimensioning combines strategic and operational design. Before every measure, it asks what dimension the company, a division or the management structure needs today and in future. It involves the deliberate readjustment of market position, offering and organisational set-up. Re-dimensioning comes before restructuring. Ideally it makes restructuring unnecessary; otherwise it gears it more strongly towards the future.

The yardstick is fit. A company can be too large and cumbersome, but equally too small, too slow or set up wrongly in functional terms. What is examined is the actual size and performance of the organisation, the real value contribution of individual areas and roles, and over-, under- and mis-dimensioning beyond budgets and organisation charts. Pure efficiency programmes buy time, but do not solve the structural problem.

Where re-dimensioning is taken into account, restructuring becomes more focused and differentiated. A clear factual basis speeds up decisions, measures have a targeted effect, critical capabilities and key people are retained, and the transparent process creates acceptance.

The starting point is an analysis of the current cost structure. It shows which costs can be influenced in the short term, restructured in the medium term and changed structurally in the long term. A distinction is made between fixed costs, quasi-fixed costs and variable costs. The result is a cost map with prioritised levers.

In the first phase, organisation, processes and services are analysed, mirrored against benchmarks and aligned with the strategy so that savings do not jeopardise the strategic goals. The second phase translates the goals into a business model with clearly defined responsibilities, robust targets for positions and costs, and an implementation and change plan. The third phase is implementation with an integrated communication and change architecture, ongoing monitoring and handover to line management.

The scope depends on urgency and depth. Three to six months create cost transparency and initial quick savings, six to twelve months lead to a target picture and reorganisation planning, and twelve to 36 months to complete transformation. The guiding principle is: as much centralisation as necessary, as much decentralisation as possible.

In the acute crisis, stabilisation takes priority. Foresighted self-renewal is the horizon that opens up as soon as the situation is under control. It focuses on long-term resilience and considers five dimensions. The core is the triad of strategy, organisation and people, while progress is shaped by lived culture and effective leadership. The work follows causal chains of effect: from the enablers people, organisation, culture and technology through processes and markets to the financial result.

Crises also act as a catalyst. They create the pressure for decisions that would otherwise be postponed. Market observers such as Deloitte expect portfolio reassessments to trigger a wave of takeovers. Companies that set themselves up clearly at an early stage and have liquidity can turn from takeover target into buyer. Three steps are decisive: clarity about cost structure, competitive position and value contribution, a strategic target picture for three to five years, and the strength to implement and strong leadership.