Investment drought may stretch chemical downcycle into 2026

The downcycle across the chemical industry has entered yet another year in 2026 due to a lack of investment amid ongoing geopolitical uncertainty arising from the Russia–Ukraine and Israel–Hamas conflicts, with the potential involvement of the wider Western world, the Middle East, and major Asian economies. Geopolitical tensions in Europe and the Middle East, along with persistent trade frictions, are likely to reshape supply chains, delay investment decisions, and reduce trade volumes.

Deloitte, a leading global professional services firm offering audit, consulting, tax, and advisory services, forecasts global chemical industry growth to stabilise at 2 percent in 2026, slightly higher than 1.9 percent in the previous year. The industry entered a prolonged downcycle after earlier expectations of a gradual recovery in the first half of the year, when global chemical production growth was projected at 3.5 percent. The downcycle has been reinforced by forecasts of weak global economic growth, ongoing geopolitical and trade tensions, and shifts in profitability.

Pillars of the industry growth
Global gross domestic product (GDP) growth forecasts have declined due to a combination of factors, including elevated uncertainty, a shifting trade landscape, and geopolitical events. Global GDP growth is now projected at 3 percent in 2025 and 3.1 percent in 2026, with U.S. growth slowing to 1.8 percent and 1.4 percent, respectively.

In addition, geopolitical tensions in Europe and the Middle East, along with ongoing trade frictions, are likely to reshape supply chains, delay investment decisions, and reduce trade volumes. In 2025, U.S. chemical imports are projected to fall to their lowest level since 2020, while exports are expected to decline to their lowest since 2021. Heading into 2026, the chemical industry is approaching the bottom of a capital cycle. Despite showing resilience through pandemic-related disruptions and inflationary pressures, the sector now faces challenges such as overcapacity, weak demand, and heightened global uncertainty.

The regulatory environment has also become increasingly fragmented across regions. In Europe, policymakers have scaled back elements of the sustainability agenda through an omnibus package. Meanwhile, in the United States, several key regulations are being amended or rolled back, easing certain compliance requirements while altering the economics of some planned projects.

Preserving cash
In a downcycle, cash preservation can help companies maintain liquidity, ensure operational continuity, and instil confidence among investors. Free cash flow (FCF) rose slightly in 2024 but declined in the first half of 2025. Deloitte expects FCF to improve in 2026 as companies leverage technology and data to strengthen cash management practices.

For instance, operating expenditures remained flat in the first half of 2025 compared with 2024, while selling, general and administrative (SG&A) expenses fell by 2.3 percent amid cost-cutting measures such as layoffs and deferred maintenance. Similarly, capital expenditures declined by 8.4 percent year on year in 2024, and early earnings results indicate a further drop in 2025. Continued efforts to improve operational efficiency, optimise capital expenditure, and manage net working capital could support higher FCF in 2026.

Transforming portfolios
Companies are reassessing their portfolios across assets, products, and geographies, rationalising underperforming assets and prioritising high cash-flow businesses. Global overcapacity in basic chemicals continues to grow. New ethylene and polyethylene plants are expected to come on stream in 2026 in the United States and Qatar, where low-cost feedstocks are readily available.

Similarly, China continues to build polypropylene capacity, driven by self-sufficiency policies. In contrast, Europe and parts of Asia face cost disadvantages, leading to lower plant utilisation rates and multiple announcements of plant closures and divestments. Some newer plants are being designed to rely on U.S. ethane rather than naphtha to remain competitive. However, with a weak demand recovery and new capacity coming online, further shutdowns are likely.

Meanwhile, specialty chemicals are demonstrating higher margins due to their tailored products. These chemicals are typically less commoditised and avoid the intense competition seen in commodity chemicals markets. As a result, several companies have announced plans to shift their portfolios from basic petrochemicals to specialty chemicals or to expand into adjacent specialty segments to capture higher margins.

With thin margins and persistent oversupply, the current market lacks both buyers and attractive assets. Only 243 deals were completed in the first half of 2025, the lowest for any half-year since the pre-Covid period. While significant merger and acquisition (M&A) growth is unlikely until market stability returns, ongoing portfolio re-evaluations could trigger a wave of consolidation after 2026.

Supply chain resilience
The chemical industry has long adapted its supply chains to demand fluctuations, regulatory changes, and energy price volatility by managing risks, building flexibility, and enhancing resilience. Companies are expected to continue implementing these measures to respond to current uncertainties. In April 2025, the Global Economic Policy Uncertainty Index reached a record high following the April 2 announcement of reciprocal tariffs, leaving companies uncertain about potential supply chain impacts. While subsequent trade agreements and related announcements have provided some clarity, ongoing uncertainty could stall certain investments in 2026.

The United States is both a major importer and exporter of chemicals, making the sector highly sensitive to tariff shifts. However, the degree of exposure varies widely depending on supply chain structures, prompting companies to respond in different ways. Tax and supply chain teams are managing tariff changes by rerouting product flows, adjusting transfer pricing, and pursuing duty-drawback credits. Companies are expected to further strengthen these strategies through 2026 by deploying digital tools to optimise supply chains in line with evolving trade policies.

U.S. chemical imports fell 8 percent year on year in the second quarter of 2025, with imports from China declining by nearly 30 percent. For certain products, such as resins, fibres, and basic chemicals, some Southeast Asian countries have emerged to fill the gap. However, as tariff policies continue to evolve, supply chains are expected to undergo further reshuffling in 2026.

Outlook
The outlook for 2026 appears slightly weaker than that for 2025. U.S. production volumes are expected to contract by 0.2 percent in 2026, following two years of subdued growth. Demand is likely to remain uneven across key end markets, while persistent overcapacity in basic chemicals continues to pressure operating rates and profit margins. To navigate these challenges while positioning for long-term success, chemical companies may consider aligning their strategies around five key trends.

After averaging 5.8 percent between 2000 and 2020, net profit margins fell sharply in 2023 and remained low through the first half of 2025. In response, chemical companies began implementing measures such as cost reductions, restructurings, plant closures, and divestments in 2023. To continue addressing these challenges in 2026, companies are expected to intensify their focus on cash generation and portfolio rebalancing in a more strategic and data-driven manner.


DILIP KUMAR JHA
Editor
dilip.jha@polymerupdate.com