Key Takeaways
- Growing demand for chemicals in Asia-Pacific is unlikely to significantly raise capacity utilization, keeping product spreads well below mid-cycle levels. Most rated entities have narrower rating buffers and elevated leverage, despite some improvement.
- Growing trade and economic uncertainties risk eroding profitability and inflating debt. Export-dependent commodity chemicals companies will face a tougher 2025 than peers.
- Rated entities may preserve some credit strength during the downturn by lowering exposure to commodity chemicals and prudently managing costs and capital spending.
Asia-Pacific's chemical sector will have a bleak 2025. Low capacity will continue to limit improvements in commodity chemical product spreads. High downside risks persist, due to China's continued capacity growth, ongoing property weakness, and low demand growth. Compounding this are trade tensions and potential tariffs, which dim the export outlook.
S&P Global Ratings believes further industry consolidation should occur in the coming years, driven by increased competition and China's push for self-sufficiency. This could have negative credit implications, particularly for the export-dependent commodity chemical companies we rate.
In our view, our rated companies will nevertheless grow revenue by focusing on higher value-added products and controlling capital expenditure and shareholder distributions.
Low Utilization Rates To Constrain Improving Product Spreads
Weak demand growth will keep utilization of major commodity chemicals low in 2025. This is despite our anticipation that capacity growth in China will moderate over 2024-2027 on average (see chart 1). This is particularly the case for ethylene and propylene and their derivatives, given the severe overcapacity and cost disadvantage for oil-based chemicals against their gas-based counterparts (see chart 2).
Demand growth is likely to remain sluggish amid slowing economic growth in Asia-Pacific. S&P Global Ratings forecasts that Asia-Pacific GDP growth will slow to 4.2% in 2025 and 4.1% in 2026, from 4.5% in 2024. This primarily stems from a sharp slowdown in China's growth, which we forecast to fall 4.1% in 2025 and further to 3.8% in 2026, from 5% in 2024. The forecast assumes that average U.S. tariff rates on Chinese imports will increase to 25% from 14%, and there will be no tariff hikes on other Asian nations.
Chart 1
Chart 2
Nonetheless, we expect that product spreads may inch up marginally in 2025. Better pricing discipline, slightly lower oil prices, and deep losses at high-cost producers underpin this assumption. The Chinese government's stimulus aims to promote private consumption and stabilize the property market, which is important to demand growth in China. The government is also likely to intervene to prevent irrational price competition amid lingering deflation.
Domestic Demand And Protections Key To Better Performance
Companies backed by sufficient domestic demand and market protection measures could perform better in 2025 (see chart 3 and 4). Indian commodity chemical companies, for instance, should continue to maintain much higher utilization than peers in other countries.
Conversely, Taiwanese companies suffer most from the current overcapacity because of their high dependence on exports. Utilization rates in Korea and other Southeast Asian countries are likely to trend largely in line with China, assuming no significant trade barriers imposed by the U.S. government.
Asia's oil-based chemical producers face competition from low-cost imports from gas-based chemical producers in the U.S. and the Middle East. Reflecting this, Taiwan has the lowest utilization of ethylene and methanol glycol in the region. Consequently, the utilization of olefins capacity in Taiwan will remain weaker than that of its regional peers over the next 12-24 months.
Chart 3
Chart 4
Multiple Risks Overshadow The Improvement In Sector Profitability
A likely slight improvement in product spreads, along with measures to counter chronic overcapacity, could nudge up overall margins and EBITDA of rated chemical companies in 2025-2026 (see chart 5).
To stem production gluts and shore up earnings, some companies have closed loss-making facilities. Nan Ya Plastics Corp. has temporarily closed its ethylene glycol (EG) and bisphenol A units in Taiwan. Korea-based LG Chem Ltd. has also closed its styrene monomer (SM) plant and shut down its ethylene oxide (EO) and EG production lines at its complex in Daesan. Additionally, the company is considering selling off its naphtha cracking facility, according to media reports.
In the meantime, rated companies are restructuring and upgrading their business, with increasing revenue from higher-end chemicals products. Examples include recycled plastics and fibers and fine chemicals for electronics and semiconductors. Rising EBITDA contributions from non-chemical businesses--such as LG Chem's advanced material business and Nan Ya's electronics materials--will also partly alleviate the weak profitability from commodity chemical sales.
Chart 5
Companies that focus on fine chemicals for specialized end applications will also see stronger and more resilient EBITDA growth. This includes companies such as Taiwan-based Chang Chun Petrochemical Co. Ltd. and Chang Chun Plastics Co. Ltd., which makes fine chemicals for semiconductor fabrication and packaging. Capacity additions from new major projects of petrochemicals and fine chemicals should also support revenue and EBITDA growth for Chinese companies, such as Wanhua Chemical Group Co. Ltd. and Shanghai Huayi Holdings Group Co. Ltd.
However, without a sufficient increase in utilization rate, the sector's overall profitability is likely to stay below the 2019-2020 level in 2025-2026. Other factors could erode the profitability of the sector again in 2025. Among them is the lack of clarity on the new U.S. administration's trade policy. If the U.S. government imposes higher tariffs, it could hinder exports from Asia and indirectly reduce demand for chemicals, which serve as base materials for many industrial goods. Weaker private consumption and a lack of material improvement in China's property market could also strain chemical demand.
Divergence Among Rated Companies Could Persist In 2025
Most rated Taiwanese companies are likely to take longer to recover their profitability, because of higher exposure to commodity chemicals and dependence on exports (see chart 6 and 7). This contrasts with their stronger performance during the pandemic in 2020-2021 because of interruptions in the global supply chain. The companies' efforts to grow revenues from non-commodity chemical business could slightly lift their profitability over the next one to two years.
In contrast, the performance of rated Korean and Thailand companies was less volatile in 2020-2024. The latter derives support from domestic demand. And lower costs from the partial use of gas feedstock should support margins of PTT Global Chemical Public Co. Ltd.'s olefin operations over the next one to two years. LG Chem's advanced material business, including IT material and lithium battery material, could also partly bolster the company's margins.
The profitability of rated Chinese companies may improve modestly in the next two years from the low base in 2024. For oil and coal-based commodities chemicals and agrochemicals, the pace of recovery will diverge. The profitability of most commodity chemicals companies will remain subdued because of domestic overcapacity and soft demand. And it will take time for the higher profitability from their upgraded chemical facilities to provide more support.
On the other hand, rated agrochemical companies, mainly Syngenta Group Co. Ltd., will benefit from higher profitability resilience. This is due to more stable demand of agrochemicals, a large portfolio of patented products, and globally diversified operations.
Rated Australian companies together also generate relatively stable margins and have minimal exposure to China's oversupplied commodity chemicals.
Chart 6
Chart 7
Leverage May Improve In 2025...
We expect rated companies to improve their free operating cash flow and debt leverage in 2025, driven by higher EBITDA and continued cost and cash management, including careful capital spending.
The absence of large-scale commodity chemical projects and a shift toward more differentiated products will limit capex, particularly for rated companies outside of China.
In addition, we anticipate that companies under heavy rating pressure, such as Taiwan-based Formosa Plastics Corp. group, will take measures, including limiting shareholder distributions, to maintain adequate debt leverage in the face of chronic overcapacity.
Chart 8
...But It Will Stay High, With Downside Risks
Debt leverage will remain high for many rated companies. Our base case suggests the credit metrics of about 35% of rated companies will remain above the thresholds for their respective stand-alone credit profiles in 2025. About 13% of rated companies will have less than 10% financial headroom.
Downside risk to the sector's profitability and leverage to our base case also remains elevated, given obstacles ahead. These conditions underpin the significant negative outlook bias for the Asia-Pacific chemical sector, which stood at 50% at the end of December 2024.
Chart 9
A Sustainable Recovery Hinges On Capacity Rationalization
We anticipate the consolidation of the chemical sector will accelerate over the next one to two years. The Chinese government has taken measures to upgrade its chemicals industry, including setting higher energy efficiency standards on new and existing capacity, which should lead to some supply discipline. Chronic overcapacity and China's latest cost-efficient integrated facilities could also test the viability of aged and less integrated facilities in China and other Asian countries over the next two to three years.
However, capacity rationalization will take time, given the fragmented and heterogeneous nature of the industry, particularly in China. In addition, many chemical companies in China, especially those with local government ownership, may tend to sustain operations--even if loss-making--to support the local economy and employment.
Without material capacity rationalization in the region, growing revenue from higher value products is unlikely to fully restore the profitability of some the most affected commodity chemical companies.
The landscape of Asia's chemical industry is evolving. Rated companies that fail to adapt to this strategic shift risk major competitive disadvantages.
Editor: Lex Hall
Related Research
- Industry Credit Outlook 2025: Chemicals, Jan. 14, 2025
- 2025 Outlook -- China Commodities Watch: Commodity Chemicals Face A Tougher Road Back Than Agrochemicals, Jan. 9, 2025
- Credit Conditions Asia-Pacific Q1 2025: Bracing For Volatility, Dec. 12, 2024
- Economic Outlook Asia-Pacific Q1 2025: U.S. Trade Shift Blurs The Horizon, Nov. 24, 2024
- Asia-Pacific Credit Outlook 2025 | Cutting Through The Noise, Nov. 13, 2024
- Decarbonizing APAC Chemicals: A Looming Competitive Differentiator, Aug. 26, 2024
- China Commodities Watch: Trade Tensions Add To The Pain, June 3, 2024
This report does not constitute a rating action.
| Primary Credit Analysts: | Raymond Hsu, CFA, Taipei +886-2-2175-6827; raymond.hsu@spglobal.com |
| Betty Huang, Hong Kong (852) 2533-3526; betty.huang@spglobal.com | |
| Secondary Contacts: | Taehee Kim, Hong Kong +852 25333503; taehee.kim@spglobal.com |
| Ker liang Chan, Singapore (65) 6216-1068; Ker.liang.Chan@spglobal.com |
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