The German chemical industry remains mired in crisis despite a slight recovery in the spring. The moderate growth seen in some segments during the first quarter is not a sign of strength, but rather an expression of 'geopolitical hoarding' fueled by fears of escalating conflicts, said VCI Managing Director Wolfgang Grosse Entrup. 'We see no sign of a turnaround,' he emphasized, noting that the sector is under permanent stress. Overall, production in the chemical-pharmaceutical industry shrank by six percent in the first quarter compared to the same period last year. Revenue fell by 5.4 percent, the VCI industry association announced on Friday. However, compared to the previous quarter, it rose by 2.1 percent to 50.9 billion euros, marking the first increase in a year.

Due to the uncertainties caused by the Iran conflict, the association continues to refrain from providing a specific growth forecast for the full year. The burdens imposed by the Middle East conflict predominate, with nearly 80 percent of companies reporting negative consequences. Fundamentally, the VCI expects a further decline in production for 2024. While rising prices could support revenue, margins remain under pressure.

DEMAND RISES DUE TO HORMUZ BLOCKADE

While the pharmaceutical business slumped significantly at the start of the year with a production decline of over ten percent compared to the previous quarter, pure chemical production recorded a 2.0 percent increase. According to the VCI, the slump in pharmaceuticals is primarily attributable to special effects, as looming US tariffs had led to massive pull-forward effects in the previous year. Capacity utilization for the industry as a whole remained at an unprofitable level of 75.1 percent. The fact that demand in chemicals rose at all recently is due to the blockade of the Strait of Hormuz, according to the association: many customers replenished their inventories as a precaution. At the same time, the closure of the sea route is temporarily slowing down Asian competition. 'Once the situation in the Persian Gulf normalizes, competitive pressure will increase again,' Grosse Entrup explained.

The severity of the situation, particularly for small and medium-sized enterprises, is evidenced by a historically high insolvency rate, which is currently more than 50 percent above pre-pandemic levels. Furthermore, many firms are complaining of specific supply chain bottlenecks: there is a shortage of solvents, resins, and plastics. Some companies have already declared force majeure as they are no longer able to deliver.

The association called on policymakers for a radical reduction in bureaucracy and regulation. On Monday, industry leaders will meet for the second summit of the so-called 'Chemical Agenda' with Economy Minister Katherina Reiche and Federal Environment Minister Carsten Schneider to discuss relief measures. In addition to domestic structural disadvantages, the association also warned of growing international competitive pressure, such as state-subsidized overcapacities in China. However, the association rejected the idea of broad-based protectionism. Instead, existing trade defense instruments, such as anti-dumping proceedings, must be deployed more quickly and effectively.

(Report by Patricia Weiss, edited by Sabine Wollrab. For inquiries, please contact our editorial office at berlin.newsroom@thomsonreuters.com (for politics and economics) or frankfurt.newsroom@thomsonreuters.com (for companies and markets).)