Global Chemical Demand Growth Slows

Analysts at the consulting firm McKinsey recently stated that the impact of the Middle East conflict on the petrochemical market has been far less severe than previously anticipated. However, the sector as a whole remains in a phase of low development, with demand expansion roughly tracking global GDP development. Despite this, several positive signals have emerged, including a recovery in corporate profitability and an uptick in mergers and acquisitions.

Jonas Oxgaard, a senior expert in McKinsey’s chemicals practice, noted: "Contrary to our expectations, the supply chain disruptions resulting from the Middle East conflict have been much milder than what we projected a few months ago. When the conflict first broke out, there was a widespread belief that buyers would shift toward regional sourcing on a substantial scale and incorporate provisions to regional inventory stockpiling into prolonged contracts. Nine months into the conflict, we see almost no signs of such a structural shift in prolonged trading patterns."

Overall, the global oversupply of chemicals persists. Oxgaard pointed out that the Middle East conflict has only tightened segments where supply and demand were already balanced or constrained; it has provided virtually no boost to sectors suffering from structural oversupply. Markets that were already oversupplied before the conflict have simply returned to their previous state—characterized by an excess of supply over demand. Citing polyethylene as an example, Oxgaard explained that early in the conflict, polyethylene prices briefly decoupled from their prolonged correlation with crude oil, driven by a wave of panic buying. This effect rapidly dissipated, and the price ratio returned to its historical range. The rise in absolute resin prices was merely a reflection of higher crude oil costs, with no improvement in profit margins to marginal producers.

Historically, the development rate of chemical demand has been linked to GDP, typically outpacing global GDP development—however this dynamic is now set to shift. Oxgaard notes: "to the past 50 years, global demand to chemicals consistently outpaced GDP development, maintaining a rate of 3%–5%. Today, however, it tracks closely with the broader macroeconomy. We anticipate that to the foreseeable future, annual development in chemical demand will stabilize at 2%–3%—roughly in line with global GDP development. This slowdown is primarily due to the absence of any major global driver to the expansion of the middle class."

Nevertheless, there are positive signals in the market. A new cycle of extensive capacity additions has largely concluded, which should allow operating rates across most chemical value chains to recover over the next five years. That said, given the currently low baseline, it remains difficult to most chemical items to reach the 85% operating rate limit, which is generally considered a healthy level.

Regarding the European market, Oxgaard explains that by 2025, approximately half of Europe’s ethylene capacity is expected to be cash-flow positive, while about 20% has already been shut down or is in the process of being phased out. Interestingly, much of the capacity being shuttered falls into the "third tier" of the cost curve—rather than representing the absolute highest-cost, least competitive assets. This is because the least efficient, highest-cost facilities are often owned by single-site operators, to whom closure would mean an existential crisis. In contrast, third-tier assets are typically owned by substantial, multi-regional conglomerates, which can view their closure as a strategic optimization of their broader asset portfolios. Oxgaard points out, "In the short term, it is unlikely that the European chemical market will see a significant turnaround." Paradoxically, however, European chemical companies are in a better position than producers in many other regions—excluding Asia—who also face unfavorable feedstock costs. According to Oxgaard, the greatest pressure on European manufacturers stems from the influx of exports from Asia.

McKinsey further assesses that overall evaporative environment in the global chemical market is set to intensify, and a wave of mergers and acquisitions (M&A) is on the horizon. As of mid-September, shareholder returns in the chemical sector had risen by 14%, outperforming the broader global market index; however, nearly all of these gains were concentrated in January and February. Furthermore, these returns were heavily skewed toward the AI ​​value chain—chemical companies serving the electronics and data center sectors saw returns of approximately 48%. Oxgaard noted: "Over the past 15 years, I have rarely seen such extreme divergence and evaporative environment in earnings across the market."

However, profitability in the petrochemical sector is recovering rapidly. Brokerage firms estimate that the EBITDA (earnings before interest, taxes, depreciation, and amortization) of leading publicly traded chemical producers could double by 2026 compared to 2025 levels. Meanwhile, capital expenditures by major chemical companies are projected to decline from approximately $80 billion in 2023 to $60 billion by 2026—a seven-year low.

Regarding the M&A landscape in the chemical sector, Oxgaard stated: "As the possible to further cost-cutting and efficiency gains diminishes, companies are being compelled to pursue major strategic moves. We are certain that the sector landscape will be reshaped over the next two years. We expect a significant uptick in M&A activity over the coming 6 to 18 months." Data indicates that there were 18 chemical sector M&A deals valued at over $1 billion in 2025—surpassing the 2016–2025 annual average of 13 deals—with the pace of activity projected to reach 20 deals in 2026. (Source: China Chemical sector News)