Chemical industry: changing course in rough seas

The German mid-sized chemical industry is navigating the worst storm in its recent history. For decades the conditions were reliable: predictable and, above all, internationally competitive energy prices, stable supply chains, growing sales markets. That has changed fundamentally in a very short time.

These developments are not temporary disruptions. They are the expression of structural conditions: rising energy costs, international overcapacity, regulatory burden and weak demand are acting simultaneously and, foreseeably, cannot be influenced in the short term. The industry thus faces a structural turning point. Business models have to be realigned while operations continue.

A transformation that relies on external relief from politics or the market falls short. Companies must shape their set-up so that it is viable even under the existing conditions. If conditions improve later, that is an additional gain.

It is no longer enough simply to cut costs. What matters is actively managing the growing conflict between necessary cost discipline and strategic investment. What is needed is a genuine change of course that redefines strategic positioning, the business model and the product and service portfolio. Those who do not act decisively now will lose substance and be overtaken by faster competitors from China and the USA.

Crises are also a catalyst. They create the pressure to take decisions that would often be postponed under normal conditions.

The following chapters are aimed at decision-makers in mid-sized chemical companies. They describe the situation, name the decisive levers and show how targeted re-dimensioning and foresighted self-renewal help to survive the acute crisis and achieve a future-viable set-up for new, lucrative markets. The focus is on what this concretely means for the individual company.

The crisis in the German chemical industry is not a snapshot. It is the result of a combination of global economic slowdown, geopolitical upheaval and deep-rooted locational disadvantages. Four figures show the seriousness of the situation: revenue, capacity utilisation, employment and insolvencies.

The fall in revenue is dramatic. Since the record year of 2022, the industry has lost a considerable part of its revenue, and the decline has continued recently. In chemicals excluding pharmaceuticals it was steeper than in the industry as a whole.

Capacity utilisation remains at a historically low level. It is far below the 82 per cent threshold that the German Chemical Industry Association (VCI) defines as the profitability threshold, and at times fell lower than it had for decades. A plant that runs permanently below its utilisation threshold bears the full fixed costs without generating the contribution margin that justifies it.

The reduction in jobs underlines the seriousness of the situation. Since 2022 the industry has lost a considerable number of jobs. Many companies have so far shied away from larger waves of redundancies in order to retain skilled workers for an upturn. Hope of that is fading, and savings programmes with job cuts are becoming more likely.

Insolvencies have levelled off at a high level, well above the average of the first years of the decade. In chemicals they are particularly critical because they tear gaps in supply chains and trigger domino effects in the automotive, construction and pharmaceutical industries. These customers can hardly switch to alternatives at short notice.

The acute crisis is not a one-off event. Several factors are acting together and reinforcing each other.

Energy costs are the familiar and persistent Achilles heel. Chemical production is fundamentally dependent on energy, as electricity as well as process heat, steam and feedstock. Since the loss of cheap natural gas supplies in 2022, energy costs have risen dramatically. Geopolitical conflicts in the Middle East and the temporary blockade of the Strait of Hormuz have driven energy and raw material prices up again. Around 80 per cent of companies report negative consequences to the VCI.

Energy is thus becoming a board-level issue. Added to this is the review of the EU Emissions Trading Directive (ETS), which is regarded as another decisive moment for energy-intensive industries.

The real core goes deeper than the price level: Germany faces the threat of a structurally uncompetitive energy system. The expansion of renewables was pushed forward for years without linking it equally to grid expansion, storage capacity and secure, dispatchable capacity.

Renewable generation has so far borne hardly any responsibility for the stability of the overall system. The controllable reserve power plants needed as a back-up run only a few hours a year but must be kept available and financed permanently. As long as the interplay of generation, grid, storage and secure capacity does not work, the cost problem remains unsolved, looking ahead as well. For energy-intensive production this is a question of location, not a cyclical dip.

Weak demand acts as an amplifier. Chemicals are an upstream industry; their success is inseparably linked to that of their customers. Important customers, above all the automotive and construction industries, have cut their production. The hoped-for economic recovery has so far failed to materialise.

China has massively expanded its capacity in almost all core chemical areas and is pushing into Europe with cheap exports. The USA and the Middle East have also significantly increased their capacity. The new plants were often built on a world-scale and on the basis of cheap raw materials such as ethane from US shale gas.

By comparison, European and German plants are smaller and older. New large plants in the USA, the Middle East and Asia reach several times the annual capacity of an average European steam cracker. This size and feedstock disadvantage feeds directly into unit costs. It intensifies price pressure in the traditional export markets of the German chemical industry and squeezes margins further.

A hitherto underestimated effect, of which only the tip is visible, concerns integrated value chains. For decades Germany has benefited from tightly interlinked chains reaching down to basic materials, in integrated sites and chemical parks where one company's by-product forms the next company's raw material.

This depth of integration is eroding link by link. If one building block disappears, for example through the closure of a cracker, downstream production comes under pressure because intermediate and by-products are no longer available on site and have to be procured at market prices. A single closure can thus turn into a domino effect along entire sites.

Bureaucracy acts as a brake. Lengthy approval procedures and a multitude of regulations and regulatory requirements restrict flexibility and the capacity to innovate, and slow down urgently needed investment. The critical factor is time. Short-term relief is not in sight. Bureaucracy is therefore less an isolated problem than a structural condition in which companies have to operate permanently. Planning uncertainty thus itself becomes an investment risk.

The conclusion: energy costs, international overcapacity, bureaucracy and weak demand are fixed conditions for the next five to ten years. None of these factors will be resolved in the short term by political initiatives. Competition against world-scale suppliers from Asia, the USA and the Middle East cannot be won on capacity and price.

Those who consistently align their set-up with these conditions remain viable. Strategies must hold up under these conditions instead of hoping for improvement. The time for waiting is over: companies have their backs to the wall and are called upon to shape their own future and no longer postpone the transformation.

The responses of the large corporations show what is at stake and which measures are considered necessary.

One large chemical group has tightened its savings programme and cut jobs on a large scale at its main plant, which was making operating losses. At the same time it continues to invest in its home site and is building a new integrated site in China, the largest single investment in its history. Administrative services are increasingly being relocated to India, and one division is to be floated on the stock exchange.

A speciality chemicals group is cutting its costs with a programme whose central measure intervenes in the management structure: the divisional management level is being removed and the business units are led directly by the executive board. A considerable part of the associated job cuts affects Germany.

A plastics manufacturer is pursuing a multi-year savings programme. According to its executive board, investment in Germany and Europe currently serves mainly for maintenance. Another group is completing its transformation into a pure speciality chemicals supplier, exiting polymer production, imposing hiring freezes and closing energy-intensive units.

One chemical distributor has closed sites worldwide, another company has divested non-strategic units, and a third has adjusted capacity and investment to weak demand. A cautionary example is a foreign manufacturer whose German subsidiaries slid into insolvency together with the parent company. Several hundred employees at an eastern German chemical site are affected.

The pattern is clear: it is about survival and fundamental realignment in global competition; cosmetic corrections are no longer enough. Political support is also shifting, for example through a federal funding programme for the circular economy.

The industry faces a conflict of objectives that demands clear strategic leadership. On the one hand, costs urgently have to be cut in order to remain profitable under today's conditions. On the other hand, considerable investment in research, new technologies and business models is needed to remain competitive in the long term. A joint study by BCG and the 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 intelligently orchestrating both requirements: dual transformation.

The direction the portfolio should take is becoming apparent. In the most recent downturn, most speciality segments lost significantly less than petrochemicals, which slumped sharply. At the same time, companies with greener, differentiated portfolios achieve higher shareholder returns.

For mid-sized companies, this does not translate into a simple realignment solely towards specialised offerings. It is about redefining one's own role in the value chain and creating value specifically where one is not interchangeable, for example through services, process integration or specific application expertise. Pure commodity volume remains particularly vulnerable to global overcapacity and price pressure. Even supposed speciality segments are increasingly vulnerable without clear differentiation.

The lever therefore lies less in the molecule itself than in the position within the chain. Those who only supply the intermediate product remain interchangeable and end up at the lower end of the value distribution. What matters is at which point in the chain value is actually created and whether one's own company is positioned there or merely enables it without sharing in it. Those who occupy the processes, applications and services around the product, instead of relying solely on new product variants, remain competitive.

One special case should be mentioned only briefly. Europe's security and defence agenda is creating politically supported niches of demand for “critical chemicals”. The European Chemical Industry Council Cefic expressly calls for chemicals to be secured as a full part of the “Readiness 2030” ambition. This field deserves careful, confidential case-by-case examination.

The situation gives rise to five uncomfortable truths for company management.

No rescue will come from outside. Even state aid and special funds do not permanently compensate for the fundamental locational disadvantages. Waiting for the rescue tug is not a strategy.

Dual transformation is mandatory, not optional. Restructuring alone, without putting the business model to the test, falls short. Today's positioning must be questioned, even if it is uncomfortable.

Imagination on the market side is called for. Many companies lack the creativity to recognise new business areas and develop them boldly. This is where long-term relevance is decided.

Sustainability remains a relevant issue. Even under enormous cost pressure, ecological and social aspects remain highly relevant alongside profitability, especially in chemicals. Public debate is increasingly focused on ecological responsibility. But the term sustainability (ESG) still also stands for economic viability and social responsibility.

For the chemical industry this means: ecological objectives 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, the focus is therefore on a viable combination of ecological ambition, market potential and profitability.

Time is the most critical factor. Efficiency and productivity for international competition only arise if decisions are taken quickly and measures are implemented swiftly.

One driver deserves particular attention because it could further aggravate the industry's central weakness, energy costs: the worldwide expansion of AI data centres. It affects chemicals in two directions at once.

On the cost side, the electricity demand of data centres is rising sharply and is likely to increase significantly further in the coming years. In Europe, which already bears much higher electricity prices than the USA, data centres and energy-intensive chemicals are thus competing for the same scarce, expensive energy. Whether this leads to a lasting price surge depends on whether grid expansion and generation keep pace.

On the portfolio side, the same trend opens up opportunities. No AI hardware is made without speciality chemicals and speciality materials: from lithography optics through wafer and packaging chemistry to high-purity reagents, speciality gases and coolants. The market for electronic chemicals is large, and German and European suppliers are present in several of these niches.

For mid-sized companies, what counts is the niche in which depth and quality win the contract, rather than volume. The AI trend thus becomes an object lesson in the dual conflict of objectives. Every company should examine whether its own portfolio offers a point of connection to these value chains and how the energy cost side can be secured at the same time.

Classic restructuring too often falls short. It cuts costs on the surface without changing the structures that generate these costs. What is needed is re-dimensioning: the intelligent combination of strategic and operational design in every serious restructuring.

Re-dimensioning asks the right questions before measures are taken: what dimension does the company, a unit or the management structure need today and in future? It combines strategic thinking with operational action. It covers more than cost-cutting, namely the deliberate readjustment of market position, range of services and organisational set-up under changed conditions.

Timing is decisive. Re-dimensioning comes before restructuring. Ideally, it makes restructuring unnecessary in the first place. Where restructuring is unavoidable, it leads to a much more future-oriented restructuring instead of a pure cost cut.

This is about the right fit, not cutbacks at any price. A company can be too large and cumbersome, but equally too small, too slow or functionally wrongly set up for the future it is aiming for. Re-dimensioning analyses the actual size and performance of the organisation and structures, the real value contribution of individual units and roles, and over-, under- and mis-dimensioning beyond budgets and organisation charts.

Companies that stabilise themselves solely through efficiency programmes gain time but do not solve the structural problem. What matters is redefining one's own role in the market.

Where re-dimensioning is taken into account, restructurings become focused instead of blanket, differentiated instead of across the board, and faster in decision-making with more stable implementation. For decision-makers this has four consequences. Decisions are made faster because a clear factual basis overcomes paralysis and endless loops. Precision increases because measures are applied where they really have an effect, instead of being spread with a watering can.

Collateral damage decreases because differentiated interventions spare critical capabilities and key people who are needed for the future. Acceptance grows because a transparent, fact-based process creates trust internally and externally. The ambition behind this: reducing complexity without trivialising it, and creating the ability to decide before measures escalate.

The approach can be adapted modularly to the urgency and depth of the challenge, from a rapid diagnosis to a complete transformation. Three levels of expansion are envisaged.

The short level, running for three to six months, quickly creates cost transparency and realises first quick wins, for example in purchasing, external services, licences and projects, without deep intervention in the structure. The result is a 90-day action roadmap and first quantified savings potentials.

The medium level, over six to twelve months, systematically validates savings potentials and translates them into a viable business model for organisation, processes and roles, with FTE and cost targets and a robust change plan. The long level, over 12 to 36 months, accompanies the complete path from analysis to sustainable implementation, including governance, change support and continuous impact monitoring.

In terms of content, the approach follows three steps, preceded by a lean analysis of the current cost structure. The aim of this analysis is transparency about cost logic and controllability, not just about the level of costs. What matters is the ability to influence costs in the short term, restructure them in the medium term and change them 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 control levers.

In the first phase, the analysis, organisation, processes and services are examined, compared against benchmarks and best practices and aligned with the strategy so that savings measures do not jeopardise the achievement of strategic goals. This produces a transparent assessment of the current organisation and a clear picture of the cost and efficiency potentials.

In the second phase, target picture and planning, strategic goals are translated into organisational requirements and converted into a clear business model with defined allocations of responsibility. Processes are optimised, redundancies eliminated and personnel measures derived on the basis of facts. The result is robust FTE and cost targets and a detailed implementation and change plan.

The third phase is implementation, because a plan is only as good as its execution. The roll-out runs through suitable workstreams and an integrated communication and change architecture. Measures running in parallel secure short-term effects. Continuous monitoring and corrective action secure success through to a clean handover to line management.

Clear organisational principles guide the work: flat hierarchies, the ability to decide quickly, clear target agreements with consistent monitoring of results, and delegation of responsibility. The credo is: as much centralisation as necessary, as much decentralisation as possible.

In the current crisis, stabilisation takes priority. Many companies currently lack the room for far-reaching planning for the future. Self-renewal is therefore not an additional programme for today. It is the horizon that opens up as soon as the acute situation is under control. For this step, transformis works with the concept of foresighted self-renewal (VSE), which focuses on long-term resilience.

For a successful transformation, five central “approach paths” are considered. The core is the triad of strategy, organisation and people. Progress is decisively influenced by lived culture and effective leadership.

Strategy is about clarifying positioning, markets and the business model: which competitive advantages are sustainable and which new fields offer growth. Organisation covers structures, hierarchies and decision-making routines that actually support the strategy. In people, the focus is on recruitment, qualification and targeted release of staff on the basis of a clear competency model.

Leadership means empowering the leadership system, as well as alignment and teamwork as a prerequisite for effective change. The lived culture should be an enabler rather than a brake. Without cultural change, structural measures remain piecemeal.

The work follows causal chains of effect: from the enablers people, organisation, culture and technology through processes and markets to the financial result. The focus is on impact. In this systemic, holistic view, measures never act in isolation; they set the entire organisation in motion.

The forecasts remain gloomy. In view of the geopolitical uncertainties, the VCI refrains from a specific annual forecast and expects production to continue stagnating or declining. Deloitte sees the global chemical industry at the bottom of a capital cycle, marked by weak demand, persistent overcapacity and global uncertainty.

Crises are nevertheless catalysts. Those who act boldly now can gain positions that would be out of reach in better times. Consolidation offers opportunities for those who are well positioned. New technologies, from the hydrogen economy through biotechnology to AI-supported process optimisation, open up further business areas. Waiting is not an option. The only open question is how the transformation will succeed.

This consolidation can be actively shaped instead of merely endured. Market observers such as Deloitte expect portfolio reassessments to trigger a wave of acquisitions. The market still lacks both buyers and attractive targets. Those who are clearly positioned early and have liquidity can turn from acquisition target into active buyer, for example of carve-outs and non-core businesses that larger competitors divest as they sharpen their focus.

Three steps make the difference. The first is clarity about the starting situation: an unsparing analysis of cost structure, competitive position and value contribution. The second is a strategic target picture: where the company should be in three to five years and which markets and models will carry the future. The third is implementation strength and strong leadership, because the best strategy fails if it is not implemented.