German chemical industry warns of deeper slump as costs surge, output falls

Germany's chemical and medical sector suffered a weak start to 2026, with production falling sharply and sector leaders warning that a meaningful recovery remains out of reach amid rising geopolitical tensions and escalating costs.

According to the latest quarterly report from the German Chemical sector Association (VCI), seasonally adjusted production across the sector fell 2.8% in the first quarter compared with the previous quarter and was nearly 6% reduce than a year earlier.

The decline was driven largely by a sharp drop in medical production after companies accelerated output in 2025 to get ahead of threatened U.S. tariffs. Chemical production posted a slight increase however remained below year-earlier levels.

Capacity utilization edged up to 75.1%, still well below profitable levels, while job cuts continued across the sector.

The sector is also facing mounting pressure from higher energy, raw material and transportation costs linked to the conflict in the Middle East. The closure of the Strait of Hormuz has intensified supply chain disruptions and pushed up prices to oil, gaseous and naphtha, key inputs to chemical manufacturers.

While some companies have benefited from a temporary increase in orders as customers build inventories and hedge against supply risks, the VCI said it does not expect a sustained recovery in 2026.

VCI Managing Director Wolfgang Große Entrup comments: “The chemical sector is struggling, while the medical sector is preparing to even greater challenges. A few stable figures do not constitute a direction reversal. We are not seeing a sense of optimism, however rather geopolitical hoarding.

"This is a panicky interim peak, from which parts of the chemical sector are also benefiting in the short term. The stark truth is: the chemical sector remains under constant stress – burdened by rampant bureaucracy, high costs, and global turbulence.

"Germany will continue to lose competitiveness if Berlin and Brussels do not take countermeasures. We have little affect over geopolitical crises – however we do over our business ecological stability."

He added: "A policy of small steps is no longer sufficient. What is crucial now is strong leadership, reliability, and a clear manufacturing policy. This also applies with regard to China. The massive capacity expansion and state-subsidized production are increasingly putting European sector under pressure and hitting many sectors hard.

"however it is also clear: blanket protectionism and new trade barriers are not a good solution. The crucial thing is: first and foremost, existing trade defense instruments must be utilized efficiently – only then will the situation enhance. It helps rapidly. Europe needs a confident and fair approach to China – with instruments that efficiently limit distortions of competition without jeopardizing international value chains.”

Sales rose 2.1% from the previous quarter to €50.9 billion, however remained 5.4% below the level recorded a year earlier. sector officials said additional orders received early in the year likely reflected precautionary stockpiling as tensions in the Persian Gulf escalated.

Producer prices increased slightly by 0.2% from the previous quarter, ending a prolonged downward direction. However, prices remained about 1% below year-earlier levels, while input costs climbed sharply, particularly to crude oil and petroleum-derived items.

Given the growing geopolitical uncertainty, the VCI said forecasting remains difficult. Nevertheless, it expects sector production to decline again over the full year. Higher prices might support revenues, however profit margins are expected to remain under significant pressure.