The chemical industry remains in the longest trough in memory, affecting most value chains. Concurrently, the industry is navigating an unprecedentedly complex set of geopolitical and societal shifts.

Beyond pinched margins, volatility and uncertainty have essentially become “standard market conditions.” The result is a need to rearrange internal strategic priorities, with companies reassessing and redesigning their supply chains to become more resilient.

Deglobalization intensifies

A deglobalization trend has been gradually materializing in recent years and now we are seeing the first signs of global trade fragmentation. Lingering geopolitical tensions are a major contributor to this trend, creating a rise in bilateral/multilateral trade agreements and preferred partnerships, and potentially backing a decoupling of East-West economies, namely between the United States and China.

We are witnessing a reshuffling of alliances, and with it, a rearrangement of trade flows and investments. Trade blocs are on the rise amid the new US trade tariffs and retaliatory tariffs from its trade partners, with a high likelihood of escalation within a very short timeframe. As a result, efficient global progress across the industry will be hindered.

The chemical industry is highly trade-dependent, so evolving trade and investment flows and potentially shifting trade balances will inevitably affect chemical supply chains. That said, new ways to circumvent tariffs and secure new alliances will also arise—and with them, new opportunities for partnerships and investments.

The energy transition is on hold

The energy transition was once the major strategic focus for many chemical companies, but it has now largely been put on the back burner. Political shifts are rebutting transition-supportive policies. In particular, the US regulatory environment is changing significantly in 2025 due to a stronger emphasis on energy policy that favors fossil fuels, which will likely hinder clean energy investment.

Even economies where decarbonization remains a key driver are scaling back their approach to the transition and/or lengthening targets over energy security and affordability. Notably, the United States again decided to pull out of the Paris Agreement, and now New Zealand, once a climate initiative leader, is considering withdrawing also. In the European Union, leaked legislative documents seen by OPIS on 24 February point to significant upcoming changes to the Carbon Boarder Adjustment Mechanism (CBAM). These include a narrower scope of products covered and a one-year delay to the Definitive Period kickoff, which will reportedly shift to February 2027.

The current investment climate is also unfavorable to Paris Agreement targets. Private sector investment would have to significantly ramp up, but private finance groups have been stepping back from environmental, social, and governance (ESG) commitments: For example, BlackRock has withdrawn from the voluntary Net Zero Asset Managers initiative, causing the latter to suspend activities.

Digitalization accelerates

While AI has been around for longer than most people realize, its development and adoption in the chemical industry is accelerating, especially in chemical supply chains. Digitalization and AI solutions are expected to significantly improve efficiency, effectiveness, and productivity across the chemical industry. Several companies have invested in developing solutions based on proprietary data, as AI is viewed as an investment that could potentially enhance competitiveness in predictive decisions.

Given significant funding and attention, it is unsurprising that AI/digital tools are rapidly emerging as a strong disruptor to the industry as we know it.

Margins will remain pinched throughout this decade

For the last couple of years, the commodity chemical industry has been in a severe trough, with average annual margins declining steadily from the post–Covid-19 peak in 2021. Unfortunately, returns will remain low for a few more years, making this the longest chemical market slump on record.
Using Chemical Market Analytics data, we have plotted an assessment of the global chemical industry’s average margins.

There were two main takeaways from this exercise:

1) We have not yet reached the bottom of the trough, which is coming in 2025, and;
2) Margins will not return to historical levels, in real terms, within the present decade.

The data is largely driven by new chemical commodity capacity in mainland China, which is still being added or ramping up this year, spanning most major chemical value chains.

Prolonged low margins are an opportunity to reassess business strategy at its core: The biggest steps towards higher efficiencies and innovation are often taken when businesses struggle. To survive the trough, companies will continue to adapt, seeking differentiation through portfolio and client base reassessments, aiming for financial relief.

Multiple tactics can be used:

• Restructuring business models
• Finding new, high growth and/or niche demand segments
• Shifting product design and adding speciality products or new product variations/grades
• Targeting new markets/geographies

Demand centers are shifting

The market as we have known it is changing rapidly. Since the beginning of this century, the Chinese market has had a seemingly insatiable appetite for chemical imports. Now, China is maturing, and alternative demand hubs are emerging in its stead.

China’s economic growth has been noticeably dwindling for some time. GDP growth rates have declined from a historical 8% per year 20-year average to 4.4% in 2025, in turn impacting its domestic chemicals demand. Even prior to the pandemic, China’s economic growth had been gradually moderating, and this trend continued beyond the 2020–22 fluctuations.

Further lengthening the domestic market balance, China is adding significant new capacity across most chemical value chains, to the extent that it has created persistent global overhang.

As a result, China’s new integrated capacity additions combined with subdued domestic demand growth are affecting its trade position, and it is rapidly becoming less import dependent. The country is even shifting to a net export position for several key products, threatening to take market share from less integrated and/or less cost-effective exporters.

With China pointedly readjusting its trade strategy and its demand pull shifting to a lower paradigm, many global chemical companies will have to rethink their strategy. This will need to be either from the perspective of improving their cost competitiveness to brace against new Chinese exports or striving to find new demand centers for their exported products.

Regarding the latter, India, Southeast Asia, and Europe offer opportunities to fill the demand gap. Of course, these are smaller markets compared to the volumes China once absorbed, but they offer opportunities nonetheless.

Industry consolidation opportunities

Regardless of the focus shift to other regions with rapid demand growth, the market will remain oversupplied for the next few years, likely until the end of the decade. This is especially true for commodity chemicals markets. The resulting pinched margins will persist, and so will the wave of capacity rationalization and/or consolidation we have experienced in recent years.

Typically, when the industry faces a trough, mergers and acquisitions (M&A) emerge: Pinched margins for some mean opportunities for others, with stronger companies purchasing struggling assets at competitive prices. However, the prolonged margin downturn we are in is generating less M&A activity than would be expected.

While we have seen some deals in the last couple of years, the high uncertainty in the chemicals market stemming from elevated interest rates has capped agreements, particularly in the commodities space. Typically, 50% of chemical M&A would involve commodity assets; in the first half of 2024, this dropped to 35%. Notably, the appetite for M&A also differs significantly between regions. For instance, there were no commodity M&A deals in Europe during the first half of 2024, where capacity rationalization of older, less competitive assets persists rather than consolidation.

As the trough continues in 2025, and interest rates will likely come down further, new consolidation opportunities will arise. We project more activity in the chemicals deals space this year, and if this is not the case, then the market should expect another wave of capacity rationalization. Regardless of which path is ahead, 2025 should see a renewed reshaping of the competitive market landscape, which will affect trade balances and open new markets and/or partnerships to those who remain.

Supply chains take strategic center stage

We are crossing an era of supply chain re-evaluation and redesign. In a world of uncertainties, resilience and adaptability in supply chain configurations and partner networks has become progressively more critical to a successful business strategy, and it is a key differentiator. Once a concern of the lower levels of the corporate hierarchy, supply chains and logistics are now an executive responsibility.

A trustworthy, timely supplier becomes harder to secure in a time of volatility, and not all will be able to achieve the necessary resilience and responsiveness. Unsurprisingly, supply chains are now key to chemical companies’ competitiveness.

The strategic role of supply chains also translates to the growing importance of collaborative solutions. As oversupply and logistics disruptions magnify transaction risks for chemical producers, we expect an increasing reliance on distributors and other trade partners. These partnerships will be built to increase supply chain adaptability and flexibility (e.g., a more diverse supplier portfolio, more distribution hubs at choice, preferred shipping routes, etc.), ultimately mitigating unplanned disruptions.

The result may also be increasingly complex supply chains, which brings other challenges. Digitalization/AI tools can help with adapting to sudden market shifts by predicting and planning for multiple scenarios or increasing visibility through location tracking to respond to events. These tools can also enable supply chain carbon footprint measurements when the energy transition regains traction.

Tectonic shifts can create sturdy structures

Multiple “uncontrollable” factors are a risk to chemical industry operations as we know them. Uncertainty, volatility, and rising complexity have made the global market harder to navigate. Yet the industry has also taken great strides to adapt, by developing new tools, implementing new solutions, and agilely shifting strategic priorities.

Market participants should see these externalities and new business methods as opportunities for innovation and accordingly reassess their portfolios and business models to find solutions to differentiate, survive, and even thrive.