The perfect storm of European chemicals pushes mergers in an industry of 635,000 million

In the European chemical industry, valued at 635,000 million eurosa perfect storm is beginning to brew that prepares the ground for waves of consolidation. Just look at what the sector is facing: weak demand, rising energy costs, dutya suffocating regulatory environment – with even stricter emissions standards planned for 2026 – and a relentless global competition.

Mounting losses in a key industry, essential for producing everything from cars and buildings to medicines, paints and everyday household goods, made chemistry the second worst performing sector of the main European stock index in 2025, only behind the media. Companies like IMCD NV, Symrise AG, Arkema SA and Lanxess AG have lost a quarter or more of its value.

These declines, together with the persistent deterioration of margins, are destined to drive more corporate operations to gain agility and economies of scale. In November, paint manufacturers Akzo Nobel NV and his American counterpart Axalta Coating Systems Ltd. detailed a merger to create a company 25 billionafter BASF SE divest its coatings business – valued at 7.7 billion euros– as part of an effort to reorient Europe’s largest chemical producer in the face of persistently high energy prices.

“Many consumers are postponing the purchase of durable goods such as laptops, furniture or cars, choosing instead to spend on travel, restaurants and other services,” he noted. Conrad Keijzerexecutive director of Clariant AGa Swiss specialty chemicals company whose products include catalysts and antifreeze fluids. “Combined with the challenging cost environment in Europe, this persistent weakness in demand makes industry consolidation inevitable.”

In Germany, the largest chemical producer in the region, production is approaching levels not seen since the 1990s. Only in the period 2023–2024They were destined to disappear 11 million tons capacityaffecting 21 facilitiesaccording to the European Chemical Industry Council, which implies the loss of between 10,000 and 20,000 jobs. Dow Inc. is closing two plants in Germany and Ineosof the United Kingdom, is cutting production.

And the worst is yet to come, according to Dirk ElvermannCFO of BASF. “A considerable number of chemical assets in Europe are currently operating at levels of profitability that are not sustainable,” he said recently on a call with analysts. All this creates an environment conducive to a profound shake-up of the sector, with possible mergers, acquisitions and restructuring on the horizon.

The proposed deal between Akzo Nobel and Axalta, as well as BASF’s sale of coatings assets, could lead other management teams to explore ways to create value through consolidation or divestiture, according to Geoff Haireanalyst UBS Group AG. In a report published this month, UBS identified Lanxess, Umicore SA and Victrex Plc as their least preferred companies, in the face of possible price drops and supply cuts.

With around 31,000 companies -mostly small and medium-sized-, the chemical sector is deeply rooted in the European industrial fabric. However, as costs have risen and the regulatory framework has tightened, the region has become increasingly less competitive, rapidly losing ground to its Chinese rivals.

In the last two decades, Europe’s share in global chemical production has been reduced by more than half, from 27 at 13%. In the same period, China’s share skyrocketed from 10 to 46%transforming Europe from an exporter of chemicals into net importer.

In the last five years alone, Chinese imports to the region more than doubledgoing from 7 to 18%according to UBS. China is also now contributing to a global excess supplywhich represents a key challenge for European producers, who struggle with increasingly high costs.

At the top of those costs are energy bills. Gas prices in Europe remain approximately double pre-pandemic levelsdue to the loss of cheap Russian gas pipeline supply following the invasion of Ukraine, and between three and five times higher than in the United States. Added to this is the cost of strict European Union regulations to reduce carbon emissions.

“We are in a deadly global competition,” he said. Stephan Müllerenergy sales manager in Germany for the British multinational chemical company Ineos. He pointed out that, only in its Cologne plant, the company pays 100 million euros annually in carbon taxesin addition to high labor costs. “These CO₂ costs do not exist in other parts of the world outside of Europe.”

Europe’s Carbon Border Adjustment Mechanism comes into force

Next year will bring even more difficulties for the sector. Europe’s Carbon Border Adjustment Mechanism, which will come into force at the beginning of 2026 and that imposes a price on emissions associated with imported products, has largely left chemicals out of the scheme. At the same time, free greenhouse gas permits that mitigated the impact of the EU emissions trading system are being phased out. Only this last measure will imply a 2.5% cost increase for chemical companies starting next year.

These increases make it impossible for European producers to be competitive. For example, BASF estimates that it will have to buy 1 billion euros in CO₂ permits between now and the end of the next decade to cover its emissions, expenses that its competitors abroad will not face.

“These are costs that we assume for manufacturing in Europe; costs that we would not have if we produced the same products in China, the United States or India,” said the BASF CEO, Markus Kamiethin October. This “shows the competitive disadvantage that a well-intentioned but poorly designed emissions trading system can generate in Europe.” Some German chemical companies, including BASF and ammonia producer SKW Stickstoffwerke Piesteritz GmbHdemand adjustments in the carbon market to level the playing field.

Still, there are some glimmers of hope. UBS’s Haire points to infrastructure stimulus in Germany, the possible imposition of anti-dumping tariffs on imports, the EU’s efforts to reduce carbon costs and the Chinese government’s moves to curb overcapacity as factors that could offer much-needed respite.

Still, none of this will help in the medium term. The sector is called to contract in the first quarter of 2026with a slow recovery that is only expected to 2027according to Oxford Economics. Even then, “it will remain on the current structurally lower trajectory, and we expect annual growth to peak at 1.7% in 2028which is really insufficient to significantly recover the ground lost in recent years,” he said. Nico Palescheconomist at the consulting firm.

In the context of the broader industrial crisis in Europe – including the automotive sector – and the uncertain environment created by tariffs and weak consumer spending, the chemical industry will have to take difficult decisions in 2026.