Is there any visibility in the outlook from Q1 results?

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Daniel Pelosi:

The volatility provoked by the discussion surrounding the tariffs really have been the critical dynamic in affecting demand or supply chain dynamics throughout the year to date.

The uncertainty is worse than having a clear view on where the direction of these dynamics will go. The fact that we can't rely on a set tariff level from today, or the fact that such measures are subject to quite volatile change from a day-to-day or week-to-week basis, really is weighing heavily on the potential short-term and long-term demand or supply across a few different markets.

Jameson Croteau:

Hello, and welcome to the latest edition of the Chemical Week podcast. I'm Jameson Croteau, and today we've got a panel to discuss the industry's first quarter 2025 results, which have been made turbulent by tariffs and the continued overcast macroeconomic and geopolitical environments.

I'm joined today by Chemical Week's new Editor-in-Chief, Ian Young, Senior Editor Vincent Valk, and S&P Global Commodity Insight's Senior Price Reporter, Daniel Pelosi.

Hey guys, how's everyone doing today?

Vincent Valk:

Hey Jameson.

Ian Young:

Hi, Jameson. Doing good.

Daniel Pelosi:

Hey Jameson, thanks for having us.

Jameson Croteau:

As we're stuck in the middle of the earnings season right now, and I think it's fair to say that the conversation has been dominated by tariff discussion, at least for the past month, S&P Global recently had just lowered its global GDP forecast for 2025 from 2.5% to 2.2%. And the other day SABIC, Saudi Aramco's chemicals business, likewise lowered its 2025 GDP growth forecast by the same amount due to the tariffs and potential market challenges facing the industry in the upcoming year.

So looking at the chemical sector, what has been the general impact of this tariff uncertainty on earnings? Are companies maintaining their guidance? Are they lowering it? We could swing this one around the horn. Starting with you, Vincent, how has the Americas shaken out?

Vincent Valk:

Yeah, sure. I'll take the second bit there first, about guidance. Some companies have cut guidance, Ashland being one that comes to mind, a specialties producer, but not as many as one may have expected. Specialties and coatings firms like Ecolab and Sherwin-Williams actually reaffirmed their guidance. So did Albemarle and DuPont. Analysts have revised down estimates for Dow and LyondellBasell, but the companies haven't really come out with anything.

But I think reading between the lines on management commentary, this is really more a matter of companies taking a wait and see approach to tariff-related uncertainty than it is about having much confidence in the outlook. Basically, no one has much confidence in the outlook, I think. Just to give a small little example, I ran several earnings transcripts through an AI, and asked how many times the words uncertain, uncertainty and similar phrases appeared. And it said 27 times. And that was for I think about half a dozen transcripts. And I asked how many times the word tariff appeared and that was 35 times. So both of those topics clearly very much on the mind of company executives, but I just don't think anyone really knows how this is going to shake out.

Which kind of gets to your first point, Jameson, about the ultimate impact. It's a bit of a cop-out, but it's tough to say. We haven't really been here before. I wrote this in our finance and strategy newsletter last month, but it's just really unusual that policy is so central in earnings discussions.

And I think it's quite clear that companies are looking at their supply chains. There was a lot of touting local for local production in earnings releases. And on the calls there has been some discussion of price hikes. Some companies like Ecolab have done tariff surcharges, and I'm sure we'll see more of that. And obviously all of this is putting a damper on demand and economic activity and the outlook, which we can discuss more later. But how much in what ways is a little hard to say right now.

Jameson Croteau:

Yeah, I would agree, Vincent. We're still in a wait and see period. And companies aren't quite committing to changing their guidance, whether it's tightening it or re-evaluating it.

And Ian, I know last week BSAF reported and again stuck to their guns about maintaining their guidance. It forecasted a global chemical production growth at 3% for 2025 and global GDP of 2.6%. What are you seeing across Europe otherwise?

Ian Young:

Well, yeah, thanks Jameson. Indeed, BASF did maintain their guidance. And I think really that was just due to a sheer lack of clarity about the near term and long-term future because of the uncertainty created by tariffs.

And really it's been a similar picture across the board in Europe, companies have been maintaining their guidance, especially in the specialty chemicals industry, which is what Vincent alluded to. They believe that their business model is a little bit more robust because of the local for local production model.

However, Arkema, the big French specialty chemicals company, did get a little bit close to making a downgrade on its forecast. They issued results and they've gone a little bit vaguer on their outlook. Before they had a specific guidance range, now they've just given an approximation. So they've been very cautious in their outlook, and that's the nearest we have to a downgrade in the specialty chemicals industry.

In the basic sector, Covestro did actually downgrade their earnings outlook. So we do have one, but otherwise really no downgrades.

Companies talk about the sheer uncertainty and unpredictability. We don't know what will happen with China, we don't know whether there will be a resolution there and some sort of tariff deal between the US and China. And we also don't know what will happen when the current 90-day pause on US tariffs on other countries will end. So a lot of clarity and a lot of uncertainty, and that's reflected in companies' guidance and their earnings outlook.

And I think, to answer the first part of your question, Jameson, all of this makes it so hard for companies to plan. Things that they assume before April are no longer true, so this lack of visibility causes additional complexity. And let's face it, the industry was facing huge challenges even before April. It's just additional complexity and additional challenges faced by an industry that was in some difficulties already.

Jameson Croteau:

Indeed. Thanks for that, Ian. And Daniel, are you seeing anything different, or similar from a market's point of view?

Daniel Pelosi:

Very similar across the board. And I would reiterate the points made by Vincent and Ian with regards to the view on these results and the content of these results from the market's perspective. I think it comes as very little surprise to anyone who's involved in the chemicals markets on a day-to-day basis about the level uncertainty or disruption expressed by a variety of these companies during their earning reports.

And the fact that the tariffs have dominated each company's approach to the market and its reflection on the first quarter of the year really acts as a bit of a microcosm for the global chemicals' environment in its totality. It clearly has been the most dominant trend across the first quarter of the year, and has really weighed heavily across all market dynamics in Asia, Europe, and the Americas.

I think a particularly interesting dynamic is, as Ian alluded to on the European side, the fact that this is then pulling on some of the more regionalized market dynamics that we've seen develop over the last year or so. The companies that had much more localized supply chains or domestic consuming bases clearly reported a bit more stability in comparison to Q1 2024 when compared to those who are operational across the interregional dynamics.

And this extended across the value chain, so we saw this, as Ian mentioned, from, say, producers like BASF within Europe right down the chain to some end user industry reports, whether this be within the packaging, automotive or construction segments.

Having said which, I think it really has weighed heavily on the market view for the rest of the year. Towards the starts 2025 outlook was already quite uncertain, and the kind of stability, if not lowering of some looks by most companies for the rest of the year won't help improve sentiment regarding any improvement as we move into the latter stages of Q2 and the second half of 2025.

Jameson Croteau:

Great, thanks. We'll touch on the second half outlook in a bit here. But I guess, do you guys have a sense in the face of this tariff uncertainty what measures companies are taking to circumnavigate or alleviate this uncertainty? Vincent, we'll start with you on this one.

Vincent Valk:

Yeah, it's very early days and it's hard to say. And it's also probably worth bearing in mind that Ian referenced this, that demand was already kind of so-so in the industry is in an ongoing state of overcapacity due to the overhang in China. So to a certain extent it can be a little bit hard to parse out how much some of what companies are doing is related to tariffs and how much some of it is related to a sort of generally muted demand environment.

But some of the actions that we've seen so far, we've already talked about tariff surcharges and some general discussions of price hikes. And that's an obvious one. And really it's inevitable, a tariff is a tax, someone's got to pay it. And companies in specialty chemicals in particular, which do tend to produce local for local, have very much made a point of saying that in their earnings calls.

And I've even heard some chatter, some of it vaguely hopeful, about bringing production back to the US. Companies are definitely looking at localizing supply chains further. You can even see this as a continuance of some of the conversations that happened back during the supply chain crisis in 2021 and 2022. But that is easier said than done.

Something I was thinking about yesterday is I remember a key point that a lot of industry groups made during the first round of Trump tariffs back in, I think it was, 2018 or thereabouts, and worth remembering those tariffs were much milder, that there are materials that it is almost impossible to source from outside China. Long-term maybe there's a solution to that, but I'm not sure there really is a short-term solution to that.

And I think if you look at what companies are going to do in response to tariffs, beyond the obvious raise prices, have a surcharge, try to localize production where you can, a lot of it is about what the ultimate impact is on demand. And that's kind of the key question and right now it's a little bit of an unknown.

Jameson Croteau:

Thanks Vincent. And Ian, are you seeing anything from the Europe perspective on alleviation measures or circumnavigation measures?

Ian Young:

The main ones we've seen so far have been mentioned by Vincent, surcharges. And this isn't just American companies, quite a few European companies have announced tariff surcharges on their sales in the US. So that's one thing.

One company in the chemical distribution sector, Azelis, they announced €20 million of annualized cost cuts in direct response to the tariffs. They looked at what's happening and then decided that they really need to have a bit more costs cut out of their business to equip them better to cope with what's going to happen going forward. So yes, they announced some cost cuts, but they're the only company as far as I know to do anything like that so far. And certainly there hasn't been anyone in the chemical manufacturing sector, but it's early days and it could happen.

In terms of what's happening with demand right now, just short-term demand, companies in their Q1 earnings results spoke about weaker consumer sentiment. They spoke about things like slower and more short-term buying patterns by their customers. And again, this is exactly what you'd expect at a time of great uncertainty.

So across the board it's very much a wait and see attitude, which again, Vincent mentioned. And all this translates into weaker or at least deferred or delayed demand, and I think that's what we're seeing right now.

Jameson Croteau:

Thanks, Ian. And Daniel, what about you?

Daniel Pelosi:

Yeah, as mentioned by Vincent and Ian, I think the context here is pretty critical. From a market perspective obviously we are just off the back of a year which was dominated by delayed trade flows and diverted trade flows, due to the security tensions in the Red Sea.

So to a certain extent from a European perspective, the market has been slightly shielded from the pressures of import and material to a degree. And we are existing in an environmental landscape at the moment where the dynamics of the markets across the different major regions have become quite localized when compared to conditions a couple of years ago.

Having said which, the volatility provoked by the discussion surrounding the tariffs really have been the critical dynamic in affecting demand or supply chain dynamics throughout the year to date. I think a comment I have quite often from sources in the market, and that was reflected by the comments from a variety of CEOs and major players at these companies during their earnings calls, is the idea that the uncertainty is worse than having a clear view on where the direction of these dynamics will go.

The fact that we can't rely on a set tariff level from today, or the fact that such measures are subject to quite volatile change from a day-to-day or week-to-week basis really is weighing heavily on market conditions. And as Ian mentioned, weighing heavily on the potential short-term and long-term demand or supply across a few different markets.

I think particularly from a downstream perspective as well, there are real implications to this volatility within the current context of the industry. To use an example within Europe, we've had a lot of talk and discourse surrounding the current state of construction or automotive derivatives. And I think the fact that this volatility is here, potential shifts in supply chain are on the horizon moving forward further exacerbates the pressures surrounding competitiveness or discussions against other regionals dynamics at the moment.

So certainly the uncertainty and the volatility really is the most tricky part here from the perspective of the markets at this stage, and it's led to quite an erratic Q1 from that perspective.

Jameson Croteau:

Great, great. Unfortunately it's better the tariff you know than the one coming down the corner. We'll put away tariff uncertainty for a moment. What are other key takeaways you guys had from the first quarter?

Vincent Valk:

Yeah, I'll jump in here. My first comment here probably is at least in part related to tariffs, just to continue on something Ian said about soft demand.

The US consumer, which has been the bright spot in the global economy over the past several years, is definitely weakening. University of Michigan's US consumer sentiment index fell 8.4% from March to April, and it was about 23% down through Q1. So that definitely gives you a sense of where things are going and this sort of hesitant attitude that I think Daniel referenced, and that a lot of companies are seeing and a lot of people in the market are seeing.

Beyond that, a couple things that I'll pull out here. There are secular growth drivers in some businesses, for example, electronic chemicals due to the increasing importance of semiconductor production, and that's continuing. DuPont's electronics business saw a double-digit rise in sales on strong demand, and they do expect that to continue. So that can be a bit of a bright spot.

Another theme that I am starting to see, although it hasn't maybe come up as directly in the earnings season, is the evolution of energy transition. I mean, I know we'll talk about capital investment in a bit, but we've seen air products pull back in a big way from hydrogen. Jameson, I know you did some reporting on that, and Dow was pausing their net-zero cracker in Alberta, but at the same time Dow was pretty adamant that the Alberta project will continue when the market improves.

LyondellBasell is moving ahead with its MoReTec, I hope I'm pronouncing that right, advanced recycling project. The lithium prices have been in the doldrums for a while now, but Albemarle is still guiding volumes up. And US policy around a lot of this is shifting. There's the whole issue of the fate of the IRA with the Trump administration. It's really come under fire from Trump and congressional Republicans. And I think what's happening right now is companies are looking at these energy transition investments and trying to figure out what makes sense and what doesn't.

But at the end of the day, there is enough of an economic rationale and enough momentum behind at least some of this that I don't think it's going to just disappear. And if you look behind the hype cycles, and we definitely did see a hype cycle around energy transition a few years ago, and sort of wild policy swings, I think we're starting to get a picture of what the industry looks like when this is just a normal part of running a business.

And I think if you look out in the long term, I think that's an interesting kind of under the radar thing to keep an eye on. I know the tariffs have been the big headline, but the energy transition is still happening, it's just changing and evolving.

Jameson Croteau:

Yeah. We just ran a piece in our last issue about net-zero commitments and that sort of has stagnated and plateaued over the past couple years. More companies, they're not committing to more ambitious goals, they're sitting and not spending as much as they were maybe when those hype cycles were starting.

But Ian, back on earnings, how do you view Europe's key takeaways?

Ian Young:

Well, firstly, let's face it, the first quarter seems quite a long time ago. The world has changed since then. So much has altered in the world of business in general, in the chemical industry in particular.

But just looking back at what happened in the first quarter, certainly speaking from a European perspective, there was still a very challenging environment, particularly in the petrochemical industry. High costs, lots of red tape, bureaucracy, expensive energy, expensive feedstocks, weak demand. Those all continued in the first quarter.

Recovery seemed a long way off, even though for some products and for some companies there was a measure of volume improvement, but really nowhere near where the industry wants to be.

So I'm just wondering where we stand now in relation to the first quarter, because it's hard to imagine any improvement soon since then and maybe the recovery is now even further away. So definitely tough times still in the first quarter and clearly those will continue.

Jameson Croteau:

Daniel, we'll pass this one on to you. Any other key takeaways you have?

Daniel Pelosi:

Yeah, similar themes maybe. I think the key point really is beyond the headline, that some of these underlying conditions that have been the main concerns of players throughout the global industry certainly haven't gone away. I think seeing some of the companies reflect on demand both within their immediate chemical portfolios and beyond this to the downstream, we continue to see themes of global supply and demand imbalances across different regions.

And I think this is ultimately the critical point in analyzing the current industry landscape beyond the tariff dynamics that really have dominated the discussion across Q2 to date, as we've seen so far in this podcast.

I think the discussion surrounding rationalization and the closure of various units remains one of the big talking points. So we've seen this in a couple of the company results specifically within Europe. I think Dow reiterated plans to idle or shut down three assets in Europe, alongside Total confirming their plans to shutter their Antwerp cracker by 2027.

And I think that's the important thing here. The volatility of the tariff discussion is clearly drawing the eyes and dominating the conversations, but some of these key fundamental discussions certainly haven't gone away and remain the other key takeaways from across the early stages of the year.

Jameson Croteau:

Great, thanks Daniel. Vincent, we'll just touch on this real quick, but are you seeing any slowdown or weakness in M&A? How is capital expenditure looking over the first quarter?

I know on the industrial gases side, we already touched a bit on air products pulling back from a few clean energy projects. They did say it was somewhat due to the cost increase of technology and equipment from tariffs, but mostly it was of course due to the new CEO and the board change. And then they added a wrinkle of the uncertainty, unclear guidance surrounding the US tax credits under the new Trump administration.

So Vincent, is there anything unique about this quarter for M&A?

Vincent Valk:

Well, to the extent that there's something unique for M&A, probably the same thing that's unique to a lot of other things, which is the centrality of tariffs and policy.

And I think a lot of this actually goes back to the comment Daniel referenced earlier, that it's almost like you would rather just know what the tariff is and then you can plan around it, as opposed to this kind of uncertainty where there's a tariff and then there's a pause, and different countries may have different rates. And a lot of that really has stymied the M&A market.

I was reporting our M&A cover story about a month ago, and this was a really big theme. And there was definitely a sense that this tariff uncertainty was holding things back, because just a lot of executives are hesitant to make big bets on anything right now. Maybe not entirely due to the tariffs, but that's probably the biggest part of it.

And I mean, the only things I'll add here are just you briefly referenced CapEx, I think that ties into this too. Already mentioned that Dow is pausing its path to zero cracker in Alberta. They're forecasting a $1 billion cut in 2025 CapEx. LyondellBasell and Eastman Chemical also are forecasting cuts in capital investment.

And one thing that I would be keeping an eye on as the year progresses is seeing as business investment itself is a big part of economic growth and a big part of demand, and seeing as, I think if you look at some of the companies, especially within specialty chemicals that sell into industrial end markets, for example, the coatings producers, their industrial coatings businesses generally have not been performing so well. I think that probably can be tied back to this kind of pullback in capital investment in business investment.

And I would say that that does not bode well for the outlook for the rest of the year, because investing in plants, in facilities, whether that's by a chemical maker or anyone else, that generates a lot of demand. So to the extent that companies are pulling back, that this does run the risk of creating a bit of a, I hesitate to say vicious cycle because maybe that sounds overwrought, but could create a cycle that is not great, put it that way.

Jameson Croteau:

Sure, yeah. Yeah. I have our final question here, and I'll again throw it around the horn, but what does the outlook look like for the back half of 2025? What are companies saying? How do things shake up for the rest of the year? Vincent, we'll start again with you.

Vincent Valk:

I think we've touched on kind of the main points, the growth forecast is highly uncertain and pretty muted. I think if you look at the GDP growth forecasts for S&P Global, and Jameson, you referenced this earlier in the podcast, they've been cut.

The forecasts are still a little bit better for North America than for Europe. But the latest update from S&P Global cut the GDP growth forecast for the US to 1.3% from 1.9%. And we'll see what happens with that going forward.

Demand growth really just does look pretty muted at best. And obviously there's a ton of uncertainty, so we're sort of in this holding pattern. Curious to see what Ian and Daniel have to say about that.

Ian Young:

Well, you're absolutely right about the importance of these GDP growth forecast cuts. Chemical demand traditionally matches or exceeds GDP growth, although I'm hearing that the correlation is loosening a bit as emerging economies start to mature, like India and China, but I think it's still a fairly good guide.

Yeah, clearly, I mean, for example, China's GDP growth forecast was cut by S&P Market Intelligence from 4.2% to 3.8%. That's going to mean slower demand for chemicals. There was a similar cut in Europe, although obviously the GDP growth rates in Europe are much lower than in China. But all of this does translate into lower and slower chemical demand, and this is something that faces all of the companies operating in the industry.

In terms of specifics, it's really hard to call. I mean, we really do need some certainty on tariffs, going back to tariffs. The final outcome on any US-China trade talks will be crucial. And a lot of companies have said that until we have got clarity from these tariffs discussions, it's really hard to say. But with the overall economic climate softening, then clearly there are going to be negative impacts for the chemical industry.

Daniel Pelosi:

Yeah, the risk of belabouring the point a little bit, I think the uncertainty really is the dominating theme in the outlook, both from the set of results and the broader market view at this stage.

I think the US trade position really is critical here. Any kind of degree on direction and established position from that end will be critical for the industry and really will dictate things moving forward.

I think some interesting dynamics recently within the ground on the European side of things, where my coverage lies, we are beginning to hear greater talk of imports coming into the market. The discussion surrounding competitive Asian and specifically Chinese availability is becoming more and more of a discussion within the day-to-day spot markets.

And I think any further clarity on this kind of tariff discussion will only add more interest in dynamics to that discussion between different market participants.

From a demand perspective, I think the outlook, generally speaking, remains reasonably bleak. Generally looking to the peak seasons that we would see roughly around this time of year in the second quarter, things haven't quite materialized as strongly as one would expect within, say, construction or automotive industries. But I do think there are points of resilience, maybe see a situation which I'm hearing from some sources reasonably often, in that the broader supply demand fundamentals haven't got worse from last year. And this is also sort of reflected in the sales volumes that were reported during last few periods.

So I think certainly some areas of positivity and some reasons for slight optimism, even within this sort of very uncertain and volatile landscape.

Jameson Croteau:

Fantastic. Thanks for the great insight, guys. And obviously there's so much to talk about with the impact of these tariffs, and I'm sure we'll be having another extended conversation in roughly 50 days once those delays are reassessed. Vincent, Daniel, Ian, thanks for joining me. This has been Jameson Croteau, and thank you for tuning in to the Chemical Week podcast.