Germany’s chemical sector stands as the main pillar of the country’s economy, ranking third behind automotive and mechanical engineering. It generates hundreds of billions in annual revenue and directly employs nearly half a million people.
However, the industry has been beset by crisis in recent years, under pressure from high energy costs, rising regulatory burdens, a persistently weak economy and intense competition from overseas.
Chemical production requires large amounts of energy, not only electricity but also heat, steam, and pressure. Therefore, when energy prices rise, it destroys companies’ global competitiveness and profitability.
Since Russia’s full-scale invasion of Ukraine in February 2022 and the resulting loss of cheap Russian gas, German chemical companies have faced the highest energy prices globally.
This year’s US-Israel war against Iran has heightened these challenges. This triggered another rise in energy prices, disrupting supply chains and creating shortages of key raw materials.
“Energy prices, especially natural gas, have doubled since the war began in Ukraine,” said Christoph Günther, managing director of InfraLeuna, the German infrastructure and services company that operates the Leuna Chemical Park, the country’s largest integrated chemical site.
“They and [energy prices] Temporarily doubled again due to war in Iran. “So, we are dealing with extremely high energy costs,” he told DW.
No sign of change this year for Germany’s chemical industry
Total revenue generated by German chemical companies is set to fall by about 22% from 2022 to €220 billion ($256 billion) in 2025, according to the German chemical industry association VCI.
The trade group, which represents about 2,300 companies, said there was no sign of change, with production likely to stagnate or fall further this year. It emphasizes that reducing the cost of natural gas is necessary to strengthen Germany as an industrial location.
VCI pointed out that natural gas is not just an energy source for the chemical sector. It is also a critical feedstock that cannot be replaced overnight, leaving companies facing constant price pressure.
“Alternatives such as biomethane can support the transition, but they are still in the ramp-up phase and are currently only available to a limited extent,” the association said in a statement to DW.
How to restore Germany’s competitiveness?
Anna Wolf, a chemicals industry expert at the IFO Institute, a Munich-based economic think tank, said the industry has done everything it can to address energy challenges, pointing to investments in energy-efficient production and recycling.
He stressed that the burden is now on policymakers to ensure that energy is available “in sufficient quantities, at internationally competitive prices, and through infrastructure that the chemical industry can truly rely on for its long investment horizons.”
“Without reliable, affordable energy and the infrastructure to deliver it, no other measures – whether on regulation, trade or innovation – will be enough to restore competitiveness,” the expert told DW.
Prolonged economic stagnation in Germany and rapid growth across Europe have exacerbated this crisis, resulting in reduced demand for chemical products in the region.
“Market conditions have become detrimental for the German chemical industry in recent years,” Martin Gornig, research director for industrial policy at the German Institute for Economic Research (DIW Berlin), told DW.
He pointed out that in addition to the energy crisis, this is mainly due to the weak economic demand for chemical products in Europe. “Should the domestic economy in Europe pick up again, the outlook for the German chemical industry will also improve.”
Germany is losing jobs and investment
The weak business environment has already prompted many companies to delay investments, reduce production and cut jobs in Germany.
For example, German chemical giant BASF has launched a major cost-cutting campaign in its home market, while investing aggressively overseas, especially in China. The company has also outlined plans to shift some back-office jobs from Germany to Asian countries such as India and Malaysia as part of a broader restructuring of its workforce.
Overall, the industry is projected to lose more than 13,000 jobs through 2022, Report from the expert portal in the chemical sector, chemEurope.com.
Despite the difficult conditions, Germany currently remains the center of the companies’ main chemical production operations.
And experts say that a full-scale relocation abroad is unlikely, given the complex and interconnected nature of industrial processes in the country and relationships with other companies.
However, if there is no improvement in the operating environment, businesses are likely to expand production capacity elsewhere.
Supply is at risk as production shifts overseas
But IFO expert Wolf stressed that Germany and Europe can no longer rely solely on market forces and accept that strategically important sectors such as chemicals will move abroad when they lose competitiveness.
“This logic works in an open world economy with trusted partners, but trusted partnerships have become rare,” he said.
In a world of increasingly fragile alliances and unreliable partners, losing systemically relevant industrial branches would risk weakening Europe’s security of supply, Wolf said.
To boost this sector, along with other energy-intensive industries, the German government wants to subsidize the cost of electricity.
It is also pushing for reforms to the EU’s carbon pricing system, which companies complain imposes an unfair burden on them. Berlin wants to make changes to the plan to ensure it protects industrial competitiveness while also advancing climate goals.
VCI welcomed the measures but said more was needed to encourage tax incentives and long-term gas supply guarantees. It also called for greater use of biomethane – a renewable fuel produced by removing CO2 and other impurities from raw biogas, which can be used as an alternative to natural gas.
It also called for addressing lengthy permitting processes and increasing regulatory burdens, saying they were deterring investment and production. “The industry urgently needs credible and internationally competitive framework conditions. Isolated measures are no longer sufficient.”
Sami Behbehani contributed to this article.
Edited by: Andreas Becker