[European Chemical Industry] A Lost Path: When a Whale Falls, Life Blooms—Who Can Steadily Take Over?

In recent years, the European chemical industry has sunk deep into multiple, intractable crises and now faces an unprecedented historical test. The Russia-Ukraine conflict triggered a sharp surge in energy prices, continuously battering every link of Europe’s chemical supply chain—natural gas prices soared by 300% compared to pre-war levels. Chemical giants such as BASF and INEOS were forced to shut down high-energy-consuming facilities—including ammonia and TDI production—in Ludwigshafen (Germany) and Hull (UK), among other locations. At least a dozen of the world’s top 20 chemical enterprises have announced closures of their European plants, involving over 11 million tonnes of annual production capacity across diverse product lines. Moreover, the EU’s stringent environmental regulations have further intensified corporate production burdens. The Carbon Border Adjustment Mechanism (CBAM) is set to take effect in 2026, pushing up production costs even more. Meanwhile, regions such as Asia and the Middle East—benefiting from low-cost energy and more relaxed regulatory environments—have seized part of the market previously held by Europe. Europe’s share of global chemical output fell from 27% in 2000 to just 14% in 2025—and this downward trend is expected to continue. Demand-side conditions in Europe are also deteriorating: high inflation and rising interest rates have significantly dampened manufacturing activity. In 2023, EU chemical output declined by 8.7% year-on-year, with capacity utilization persistently below 80%. Although European companies are accelerating their shift toward specialty chemicals and circular economy models—and actively seeking policy support—the structural challenges of energy dependency, industrial hollowing-out, and loss of technical talent remain difficult to resolve in the short term. Today, the European chemical industry stands at a critical crossroads involving energy security, industrial competitiveness, and green transition—the battle for its very survival has fully commenced. We analyze the current state of Europe’s chemical industry from the following perspectives: 1. Energy Cost Crisis Triggered by the Russia-Ukraine Conflict The extreme volatility in energy prices caused by the Russia-Ukraine conflict hangs over Europe’s chemical industry like the ‘Sword of Damocles.’ After the conflict erupted in 2022, European natural gas prices spiked to USD 409/tonne (coal equivalent) and USD 137.71/barrel (Brent crude), causing production costs for gas-dependent chemical products to surge dramatically. Though energy prices eased slightly in 2023, long-term contract prices for European natural gas remain three to four times higher than U.S. shale gas prices—prompting top-20 global chemical firms including BASF and INEOS to announce plant closures across Europe. According to data from the European Chemical Industry Council (Cefic) for 2023–2025, over ten global chemical giants have declared closures of European facilities, affecting over 11 million tonnes/year of production capacity across various product categories. Most of these shuttered operations belong to the world’s top 20 chemical enterprises, spanning basic chemicals, polymers, and specialty materials—with olefins (ethylene, propylene) accounting for 26% and aromatics for 41% of affected capacity. Energy-intensive segments—including ethylene cracking and fertilizer production—were hit first and hardest. In 2023, EU chemical capacity utilization dropped to 76.4%, while Germany’s chemical output fell 12% year-on-year. 2. Escalating Environmental Regulations The implementation of the EU’s Carbon Border Adjustment Mechanism (CBAM) and the ‘Green Deal Industrial Plan’ has further eroded the overall competitiveness of Europe’s chemical industry. Once CBAM enters full force in 2026, export costs for high-carbon-footprint products—such as coal-based olefins—will rise by 10–15%.

Fundamentals of the Chemical Industry and Influencing Factors

1. During this year’s Two Sessions, clear numerical targets for carbon emissions were established: China aims to achieve peak carbon emissions by 2030. As this is the final Five-Year Plan period before that deadline, the urgency surrounding carbon reduction has intensified significantly—and government commitment has risen markedly. Supply-side restructuring is being advanced through targeted optimization of high-energy-consumption industries and enterprises. 2. Export tax rebate subsidies have been discontinued. Previously, the central government funded rebates to help certain enterprises break even. With subsidies withdrawn this year, unprofitable firms in these sectors will likely exit the market. Taken together, supply-side optimization—aimed at curbing destructive internal competition—is now more explicit and decisive than ever. Product Focus Areas Within the Chemical Industry: 1. MDI and Polyurethane: For example, MDI/TDA—widely used in thermal insulation for home appliances and automobiles—represents a classic case of high concentration within an environmentally driven sector. 2. Phosphorus-based chemicals 3. Coal-based chemicals Why Focus on Industry Leaders? 1. They can absorb larger capital inflows. 2. Investment rationale for the sector stems from shifts in supply-demand dynamics: when demand grows, supply rationalization—i.e., eliminating excess or inefficient capacity—leads to supply shortages, driving up product prices and, ultimately, boosting listed companies’ performance. Supply optimization eliminates laggard firms unable to ramp up capacity or generate profits. What About Chemical New Materials? This is a nascent, high-growth sector—still relatively small in scale but promising broad expansion potential. Investors should monitor both absolute market size and growth rate. Track the China Chemical Price Index (CCPI) and price trends closely. Also, be vigilant about sudden oil price spikes, which could negatively impact the sector (rising raw material costs without commensurate downstream demand). Conversely, once oil prices peak and begin falling, that may signal a key entry point—raw material costs decline while product prices remain elevated. Macroeconomic Perspective: Supply: Globally, China’s chemical industry accounted for 47% of total output in 2024. Historically, the U.S. and EU benefited from cheap Russian natural gas—but since the Russia-Ukraine conflict began, their energy costs have surged. Compounding this, the Iran–U.S. tensions have doubled natural gas prices. Meanwhile, domestic coal prices in China have remained stable, further widening the cost gap with Europe. Consequently, EU capacity has exited the market at an accelerating pace—creating opportunities for Chinese firms to gain market share. Geopolitical conflict in the Middle East has destroyed significant production capacity, leading to complete supply withdrawal in many cases. For chemical products where the Middle East holds high output shares, this triggers genuine global supply shortages—not only in crude oil, but also downstream derivatives such as sulfur and light hydrocarbons. This represents a real, structural improvement in supply—a core driver behind the current chemical sector rally. Demand: Domestic demand remains weak—essentially reflecting sluggish property markets. Until the real estate sector bottoms out nationwide, chemical demand remains uncertain. Therefore, investors should avoid sectors tightly coupled to the property cycle—especially those whose downstream demand relies almost exclusively on real estate, such as construction materials, glass, and cement. However, one exception exists: chemical subsectors benefiting from both stable external demand *and* marginal upward elasticity in domestic demand.

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Jim Ratcliffe Halts Production at Hull Chemical Plants Over High Gas Prices

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