Chemicals in a world of soft demand, overcapacities, and cost pressures
By Andreas Gocke, MD and Senior Partner; Frederik Flock, MD and Partner;
Susumu Hattori, MD and Senior Partner; Amit Gandhi, MD and Senior Partner;
Hasan Alkabeer, MD and Partner; Hubert Schönberger, Senior Director; Ilya Gorkov,
Project Leader; Abhrajit Guria, Senior Manager; and Marcin Jedrzejewski, Senior Advisor, BCG
After seeming to turn the corner during the previous five-year period, the global chemical industry’s value creation performance deteriorated, according to a recent BCG analysis. The industry’s total shareholder return (TSR) declined and fell below the median for all industries in the BCG Value Creators database.
However, while some sectors and regions witnessed significant value destruction — accompanied by low capacity utilization, price erosion, and unprecedented plant closures — others delivered standout performances. Similarly, while the average TSR performance of Middle East players was negatively affected by declining prices and margin pressure, there were also noticeable exceptions. A closer examination reveals that those Middle Eastern players which remained close to feedstock cost advantages, kept portfolio discipline, and constantly improved go-to-market models had the operational performance backbone to maintain decent TSR. (See the sidebar “How We Calculate and Report TSR.”)
Margin pressure key to the Middle East’s TSR performance
In our global report, the chemical industry delivered average annual TSR for the five years to December 2024 of 7%, compared with 12% from 2019 to 2023. The weakened performance puts the industry back at the level it experienced during the period from 2018 to 2022, when average annual TSR for chemicals was also 7%. Unlike in that earlier period, however, industry TSR in our latest global report fell below the 10% median performance for all industries. (See Exhibit 1.)
The starting point for TSR calculations has a material impact on overall five-year performance. The average share price for global chemical companies was lower at the beginning of 2019 than at the beginning of 2020, which helped the industry deliver better TSR performance from 2019 to 2023 than during the latest period. However, from 2022 to 2024, soft demand, overcapacity, and margin pressures held back industry TSR.
In particular, Middle Eastern companies exhibited a substantial drop in profit margins. Beyond overall product price erosion, this was driven by feedstock costs. In the Middle East, the price of natural gas and ethane is regulated and fixed over time, with upward adjustments observed recently. While Middle Eastern companies displayed an expansion in multiples and dividends, this was not enough to compensate for the squeeze on margins. As a result, the five-year TSR of Middle Eastern companies was negative.
For our global report, we analyzed data from 322 publicly listed chemical companies. We classified companies with a market value of more than USD 6 billion as large-cap players and those with a market value of USD 1 billion to USD 6 billion as mid-cap players.
Some markets and sectors saw shareholder value destruction
Focused specialty chemicals performed well at the sector level, as they have consistently done over the past 12 years, our global report found. Industrial gases and agrochemicals and fertilizers also performed strongly. On the other hand, two sectors — base chemicals and basic plastics as well as multispecialty chemicals — bore the brunt of industrial overcapacity and pricing pressures and delivered TSR of 3% and 5%, respectively.
Regionally, emerging market chemical companies were the strongest performers overall, delivering average five-year TSR of 12%. However, there were significant variations within this group. India was responsible for the group’s pole position. It delivered TSR of 28%, helped by robust domestic demand, policy tailwinds (including economic reforms and infrastructure investment), and strong growth fundamentals. Conversely, other emerging markets — including the Middle East, ASEAN, and Latin America — destroyed shareholder value, as a result of soft demand and overcapacity. (See Exhibit 2.)
A closer look at the Middle East reveals that commodity fertilizers, supported by gas and ammonia cost advantages, remains a strong play. While base chemicals and basic plastics underperformed overall, it still included an example of superior TSR performance. Incidentally, the Middle Eastern players that implemented comprehensive cost reduction and efficiency improvement programs delivered double-digit five-year TSR. Optimization of fixed costs including employment was pivotal to offset margin pressures and to ensure a lean and agile organization going forward.
Overcapacity and margin pressure
Several factors played a part in the global industry’s weaker TSR performance. End-market demand for chemicals remained soft from 2020 to 2024. Customers across a range of manufacturing sectors maintained high inventory levels and faced substantial pressure from rising energy, logistics, and regulatory costs. This combination led to tough price negotiations between manufacturing companies and their own customers, which in turn put pressure on chemical companies’ profit margins. Overall, most chemical companies did grow their top line, but only by compromising on their margins.
Structural overcapacity also contributed to pricing pressures in the global chemical industry. This has been a perennial problem for many parts of the industry. For example, since 2015, the growth in global capacity for bulk chemicals has exceeded demand by 1% to 1.5% per year — with the disparity particularly noticeable with olefins and polyolefins — pushing factory utilization rates to between 70% and 80%, below breakeven and historical levels.
A fall in the price of oil — from nearly USD 120 per barrel of Brent crude in mid-2022 to $70- $80 at the end of 2024 — intensified margin pressures for producers of key petrochemical categories, including polyethylene, polypropylene, and polyethylene terephthalate. This was clearly visible in the margin performance of Middle Eastern players, which were confronted with both falling product prices and the rising cost of regulated feedstocks (specifically natural gas and ethane).
Declining margins had a negative effect on valuation multiples in many markets, as investors adjusted their expectations for future profitability. In this challenging environment, shareholder returns depended on companies’ cash flow actions, such as dividend payouts and share buybacks, highlighting their critical importance in maintaining investor interest during periods of soft demand and weak margins.
Not all regions experienced downward pressure on valuation multiples though. Middle Eastern chemical companies saw their multiples rise by five percentage points on average—a sign of investor confidence in the region despite structural headwinds. In India, average multiples rose even higher, by 15 percentage points from 2020 to 2024 relative to the period from 2019 to 2023. This clearly reflects the growth potential in chemical demand across the Indian subcontinent, which is well above the annual growth rate seen in many product segments.
Electronic chemicals consistently top all subsectors
Examining the TSR performance of different industry subsectors over different periods at a global level reveals clear patterns and shifts. Because of the sustained challenges they face, petrochemicals and polymers sit at the bottom of the rankings over 5-, 10-, and 20-year time frames. By contrast, electronic chemicals have consistently ranked very high on our short- and long-term TSR rankings, thanks to technological advances and continued robust demand.
Other leading chemical subsectors, such as makers of vinyl chloride and PVC, have managed to deliver strong average annual TSR from 2020 to 2024 even though their margins declined in 2024. (See Exhibit 3.) But while many of these subsectors experienced declining margins, they benefited from valuation multiples in 2024 that were higher than their average annual five-year multiples.
Interestingly, the Middle East is clearly underrepresented in PVC. The region is a net importer and several players are not integrated forward in the polymer value chain, leaving a significant exposure to volatile EDC or VCM markets. This has been partially addressed by recent projects, which aim to combine the proximity of strong PVC demand in India with the energy and feedstock cost advantages of Middle Eastern players.
While European petrochemicals struggle, Middle East players bet on a brighter future
The European petrochemical subsector, in particular, faces severe structural pressures. These include overcapacity, weak demand, high energy and labor costs, regulatory-driven costs, and feedstock disadvantages (compared with the US or Middle East, which benefit from access to competitively priced gas and natural gas liquids). As a result of these forces, most global players are actively shrinking their petrochemical businesses in Europe by shuttering or selling assets.
By contrast, in the Middle East, state-owned investors are placing bets that the future for petrochemicals players will be brighter. Despite weaker margins and global overcapacity, Middle Eastern players have announced several world-class projects recently.
There are a few important lessons to be learned. Middle Eastern players are successful when they stay close to feedstock cost advantages. Drifting too far down the value chain creates potentially damaging exposure. Feedstock cost advantages, however, are not the only factor needed to succeed – fixed cost controls and go-to-market capabilities are equally important. There are individual examples of Middle Eastern players beating commodity index prices by more than 10%. This comes through carefully balancing all elements of a company’s value proposition – including product quality, logistics, and a seamless sales process – and requires superior organization capabilities.
How Middle Eastern chemical companies can chart a course for the future
As demonstrated by the increase in Middle Eastern companies’ valuation multiples, investors still have confidence in the region’s chemical industry. But this confidence needs to be supported by well-founded aspirations and execution discipline, in particular:
- A clear portfolio focus. Companies must have a complete and up-to-date view on portfolio performance and its underlying drivers, and take actions to reduce exposure to underperforming assets and regions. They should focus capex on projects with strong business fundamentals. For instance, players should aim for true feedstock cost advantages, not just feedstock availability, to avoid impact from global overcapacity. They should also close gaps in their portfolios to boost exposure to relevant value chains for full margin capture.
- Closer attention to go-to-market and commercial excellence. Both are critical given today’s oversupplied chemical markets. Hands-off off-take models, historically common in the Middle East, are no longer good enough. Understanding the competitive landscape in a given target market, selecting the right channels and logistics proposition, and technical product support are all key to finding a profitable destination for the product. Furthermore, by deploying digital tools and solutions to drive segmentation and pricing, players can take commercial excellence to the next level.
- Robust performance discipline and steady EBITDA. Operational excellence and fixed cash cost controls are paramount. This involves leveraging the blessing of growth to optimize the cost structures of existing assets; for example, by redeploying operational personnel while bridging gaps with automation. It also requires companies to challenge the cost of shared, general, and admin services, and reduce complexity and duplications within the organization. For a true business impact, players should deploy digital solutions.
Looking more broadly, a shakeout of petrochemical assets is necessary, which would result in all players having more disciplined portfolios and clearer asset management strategies. New projects need to be based on strong, rational business foundations. All these steps are essential for the chemical industry to regain its past robust levels of TSR performance.