Germany's chemical industry, a cornerstone of its economy, is once again facing a challenging year in 2026.
The German chemical industry association, VCI, recently announced that production is likely to fall again this year, confirming that a recovery has not yet begun. This isn't an isolated event but rather the result of several persistent pressures squeezing the industry from multiple directions. Let's look at the key causal factors.
First, there's the issue of high costs. Even after the major energy shock of 2022 subsided, European natural gas prices, benchmarked by the Dutch TTF, remain significantly higher than in the U.S. or the Middle East. On top of this, the cost of carbon allowances under the EU's Emissions Trading System (ETS) has risen, adding another layer of expense. These elevated input costs make it difficult for German chemical companies to compete on price in the global market.
Second, demand from key downstream sectors is weak. The chemical industry is a critical supplier to manufacturing and construction. Recent data shows Germany's manufacturing Purchasing Managers' Index (PMI) slipping, indicating a contraction in factory activity. Similarly, the construction sector has seen a sharp downturn. When car manufacturers, machinery producers, and construction companies reduce their output, their orders for polymers, coatings, and other chemical products naturally decline.
Third, the industry is grappling with intense global competition. Massive new production capacity, particularly in China, has led to global oversupply for many basic chemicals. This influx of cheaper imports puts a cap on how much European producers can charge, further compressing their profit margins, which are already strained by high domestic costs.
In response, the German government has received approval for a subsidy program to lower electricity prices for energy-intensive industries. However, the relief from this policy is expected to be gradual and won't provide an immediate fix. As a result, major companies like BASF are focusing on cutting costs rather than expanding production. The combination of these factors—high costs, weak demand, and global overcapacity—paints a picture of an industry stuck in a prolonged period of stagnation.
- VCI (Verband der Chemischen Industrie): The German chemical industry association, which represents the interests of chemical companies in Germany.
- PMI (Purchasing Managers' Index): An economic indicator derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, while a reading below 50 indicates contraction.
- TTF (Title Transfer Facility): A virtual trading point for natural gas in the Netherlands, which serves as the primary benchmark for gas prices in Europe.