INDUSTRY INSIGHTThought Leadership

Global challenges weigh on downstream chemical markets in 2023

by Rob Gilfillan Head of Polymer & Fibres, Wood Mackenzie

Downstream chemical markets face a downbeat start to 2023 – long on supply, short on demand. But will demand recovery bring some much-needed relief to producer margins? Read our predictions for the year ahead.

Many of the challenges that shaped the chemical industry in 2022 are set to persist in 2023, not least high energy costs in Europe, Russia’s war on Ukraine and China’s response to Covid-19. This comes against a somewhat gloomy economic backdrop, as fears of a global recession continue to grow.

Downstream chemical markets are facing a challenging start to 2023 – long on supply, short on demand. Polymer and fibre demand are expected to remain weak through the first half of the year, in no small part due to high inflation rates across Europe and in the US. China’s road to recovery is expected to be slow as the country deals with the effects of easing its zero-Covid policy.

All signs, therefore, point to a tough H1 2023 for downstream chemicals. But could demand recovery in H2 bring some much-needed relief to producer margins? In Downstream chemical markets: five key themes for 2023 we share our predictions for the year ahead. Fill in the form for a complimentary copy and read on for an introduction.

1. Feedstocks: high costs put pressure on margins

Volatile or high-cost raw materials will continue to challenge downstream players, with margins remaining under pressure for H1 2023.

Polyolefin feedstock supply is healthy, but oversupply issues are likely to bite over the course of the year. In the polyester value chain, the uncertain market outlook for PTA and MEG – long on supply, short on demand – will result in precarious prices. Meanwhile, European natural gas prices and the ability to secure competitive gas are set to remain major constraints on the polyamide industry in 2023 (and beyond).

2. Recession fears weigh on packaging demand

The effects of Russia’s war on Ukraine are being acutely felt, particularly in Europe, where users typically purchase gas on a spot basis. Consumers are reining in spending as fears of a recession grow. Even packaging, usually a resilient end-use sector, is feeling the pinch from high inflation and the rising cost of living.

Inventory reduction measures through H2 2022 have led to weak demand across the packaging value chain.

3. China’s road to recovery: 2023 could be a slow burn for downstream demand

China is currently dealing with the initial wave of infections after the sudden relaxation of its zero-Covid policy. A second wave is widely expected following the Lunar New Year at the end of January. Consequently, we expect the recovery in China’s downstream chemicals demand to be a little bumpy and slow through H1 after a lacklustre 2022.

4. Recycled material supply remains a constraint

With demand for recycled material supply set to take off, limited supply will remain the key constraint. Circularity of waste to feedstocks is critical, requiring new technologies and partnerships to deliver the necessary investments along the entire value chain.

For packaging players, in particular, sourcing high-quality food-grade material will prove difficult. In 2023, brands will continue to allocate capital to their circularity goals, but any meaningful progress towards these targets will be hard to come by. Read the full report to see a chart on new recycled plastic (RPET) capacity.

5. Rising electric vehicle sales offer growth potential

Electric vehicles (EVs) consume 3-5% more units of plastic than traditional internal combustion engine (ICE) vehicles. As EV adoption increases, therefore, so will plastic consumption.

Global EV sales have seen rapid growth since 2020, aided by government incentives, notably in China, Europe and the US. The shift to EVs and lighter vehicles underpins demand for most polymers. Polypropylene is best placed to benefit, accounting for just over a third of all transport-sector plastic demand.