Britain’s chemical industry is facing a deepening manufacturing crisis, with production forecast to fall by 2.4% in 2026 as soaring energy costs, weakening demand and mounting investment pressures leave UK producers lagging far behind major global competitors.

The UK is forecast to be the weakest-performing chemical producer among the major economies, with output expected to contract by a further 7.1% in the fourth quarter of 2026, according to the latest Chemical Industries Association (CIA) business survey.

The outlook contrasts sharply with forecast growth of 2.9% in India and 1.9% in China. Chemical production in the EU is expected to decline by just 0.6%, while US output is forecast to remain broadly flat.

The survey, covering the third quarter of 2026, reveals an industry under mounting pressure, with almost half of businesses cutting production or operating activity and more than half reporting that difficult market conditions have hit planned investment.

CIA chief executive Steve Elliott warned that the UK could not afford to take its chemical manufacturing base for granted, as the industry faces the prospect of further capacity losses and declining competitiveness.

Energy costs squeeze factories

Energy costs remain the industry's biggest threat, cited by 52% of businesses as their single greatest challenge. Weakening demand followed at 21%, while 12% identified raw material costs.

The financial strain is intensifying. More than three-quarters of respondents (76%) said energy costs had worsened during the quarter, while 46% reported energy cost increases exceeding 10%. A further 30% experienced raw material cost rises of more than 10%.

The squeeze is feeding directly into business performance. Almost one-quarter of companies (24%) reported profit margin declines exceeding 10%, while 21% experienced comparable reductions in production and capacity utilisation.

The figures underline the growing difficulty of running energy-intensive manufacturing operations in the UK while competing with producers in international markets.

Sales, exports and production lose ground

Business activity weakened sharply in the third quarter, with fewer companies reporting growth across sales, exports and production.

The proportion reporting increased total sales plunged from 46% in the previous quarter to 20%. Businesses reporting higher exports fell from 41% to 14%, while the share reporting increased production more than halved, from 32% to 15%.

Meanwhile, 39% of companies reported falling total sales and 29% experienced a decline in new orders.

The downturn is already forcing manufacturers to scale back operations. Around 45% of businesses reduced production or operating activity during the quarter, including 19% that cut operating rates, 14% that reported temporary shutdowns and 5% that reported permanent production capacity closures.

The latest figures raise fresh concerns about the erosion of Britain's industrial capacity, the resilience of domestic supply chains and the future of skilled manufacturing jobs.

Investment plans hit by deteriorating conditions

The pressure is extending beyond day-to-day operations, threatening the industry's ability to invest, expand and compete.

More than half of respondents (57%) said difficult market conditions had negatively affected planned investment during the third quarter.

Weakening demand was the leading factor behind delayed or cancelled projects, cited by 41% of businesses. Energy costs accounted for 18%, while regulatory pressures were blamed by 12%.

The immediate outlook remains subdued. Most businesses expect activity to remain broadly unchanged in the fourth quarter, including domestic sales (63%), exports (61%) and production (56%).

Investment prospects are similarly muted, with 78% anticipating no change in business investment. One-third of respondents expect profit margins to fall further.

There are some signs of cautious optimism over the longer term. Around half of businesses expect total sales (50%), production (48%) and capacity utilisation (49%) to increase over the next 12 months. However, employment and investment expectations remain weak, with 63% and 62% respectively anticipating no change.

A blow to a strategically vital industry

The deteriorating outlook threatens a sector central to Britain's wider manufacturing economy.

Chemicals were the UK's second-largest export commodity group in 2025, with exports valued at £66.3 billion. However, imports exceeded exports, reversing the broadly balanced trade position recorded in 2024.

Chemicals and pharmaceuticals combined were also the UK's second-largest contributors to business research and development expenditure, narrowly behind software development.

The sector supplies essential materials and technologies to industries spanning healthcare, pharmaceuticals, automotive manufacturing, construction, agriculture, electronics and clean energy. Its decline therefore risks consequences far beyond chemical factories, affecting the competitiveness of businesses and supply chains across the economy.

The industry employs roughly 135,000 people, while nearly half a million jobs depend on the sector, according to the CIA. Chemical workers typically earn around 25% more than workers in other manufacturing industries and almost 40% more than the average worker.

Industry calls for urgent government action

The survey puts pressure on the Government to tackle the costs and conditions undermining the UK's industrial competitiveness.

Businesses identified lower industrial energy costs as the most important measure for improving the chemical industry's position, followed by reductions in the overall business tax burden and employment costs, including employer National Insurance contributions.

Elliott said: “The UK cannot take its chemical manufacturing base for granted. With production under pressure, investment plans being disrupted and permanent capacity closures continuing to be reported, improving the conditions for competitive industrial production is becoming an increasingly urgent economic and strategic priority.

He added: "This sobering survey confirms that Government interventions such as the Critical Chemicals Resilience Fund, energy cost relief under BICS and the review of our trade defence measures cannot come quickly enough. However, these are sticking plaster solutions which will still leave the UK uncompetitive in terms of making chemicals - whether they are commodities or specialities. 

"If reindustrialisation and growth in every post code are to mean anything to a recognised key foundation industry, then we must adopt a much more ambitious growth and manufacturing-friendly culture and action plan right across Government. We still have world class research, world class companies and world class talent in our chemical sector, so let’s create the environment for all of that to flourish."

The warning highlights the gap between short-term support measures and the industry's demand for a more fundamental shift in policy to make Britain a competitive destination for manufacturing and investment.

With output declining, investment decisions under pressure and permanent capacity closures already being reported, the survey raises a stark question for policymakers: how much of the UK's chemical manufacturing base can be lost before rebuilding it becomes significantly harder?