Beginning 2025, the chemical industry expected a gradual recovery, with global chemical production projected to grow 3.5%. Instead, the sector has entered a prolonged downcycle, with forecasts now at just 1.9% for 2025 and 2% for 2026. 

“Instead of stability, 2025 ushered in uncertainty and volatility,” driven by three key factors: weakened economic growth, geopolitical and trade tensions, and shifting policy landscapes, as per a report by Deloitte. 

Global GDP forecasts have fallen to 3.0% in 2025 and 3.1% in 2026, with US growth slowing to 1.8% and 1.4%, respectively. Geopolitical tensions in Europe and the Middle East, coupled with ongoing trade disputes, are reshaping supply chains, delaying investment, and reducing trade volumes. US chemical imports are projected to hit their lowest since 2020, while exports are at their lowest since 2021. 

Policy changes are further complicating the landscape. “In Europe, policymakers have scaled back elements of their sustainability agenda through an omnibus package. Meanwhile, in the United States, several key regulations are being altered or rescinded, reducing some regulatory requirements while also changing the economics of some planned projects.” 

Heading into 2026, the chemical industry is nearing the bottom of a capital cycle. Despite surviving pandemic shocks and inflation, the sector now faces overcapacity, soft demand, and persistent global uncertainty. US production volumes are expected to contract 0.2% in 2026, following two years of weak growth. Demand will likely remain uneven across key end markets, while overcapacity in basic chemicals continues to pressure operating rates and profit margins. 

To navigate these challenges, chemical companies are aligning strategies around five key trends: 

1. Profit prioritization: Preserving cash and restructuring portfolios. 

2. Supply chain resilience: Navigating tariff shifts, trade tensions, and investment uncertainty. 

3. End-market demand: Weathering cyclical declines with some bright spots. 

4. Innovation: Leveraging R&D and digital models to maintain competitive advantage. 

5. AI adoption: Scaling intelligent applications to boost efficiency and transform operations.

Profit Prioritization: Preserving Cash & Restructuring Portfolios 

After averaging 5.8% net profit margins between 2000 and 2020, profits dropped sharply in 2023 and remained low through the first half of 2025. In response, companies have deployed cost cuts, restructurings, closures, and divestments. “To continue navigating these challenges in 2026, companies are expected to intensify their focus on cash generation and portfolio rebalancing in a more strategic and data-driven manner.” 

Preserving cash ensures liquidity, operational continuity, and investor confidence. Free cash flow (FCF) rose slightly in 2024 but declined in the first half of 2025. Operational expenditures remained flat, SG&A fell 2.3% amid cost-cutting, and capital expenditures dropped 8.4% year-on-year in 2024, with further declines expected in 2025. “Continued efforts to improve operational efficiency, capex, and net working capital could lead to higher FCF in 2026.” 

Companies are also transforming portfolios, rationalizing underperforming assets, and prioritizing high-cash-flow businesses. Overcapacity is growing in basic chemicals, with new ethylene and polyethylene plants set to start in the US and Qatar.  

Meanwhile, Europe and parts of Asia face cost disadvantages, prompting plant closures and divestments. Specialty chemicals, however, continue to offer higher margins. “Several companies have announced intentions to shift their portfolios from basic petrochemicals to specialty chemicals or expand into adjacent specialty chemicals to capture higher margins.” 

Mergers and acquisitions remain subdued, with only 243 deals in the first half of 2025—the lowest since pre-COVID. Portfolio reevaluations could, however, drive a wave of consolidation after 2026. 

Supply Chain Resilience: Navigating Tariffs 

The chemical industry continues to adjust to tariffs, trade tensions, and investment uncertainty. “In April 2025, the Global Economic Policy Uncertainty Index reached a record high, following the April 2 reciprocal tariffs announcement, leaving companies uncertain about supply chain impacts.”

US chemical imports fell 8% year-on-year in Q2 2025, with those from China dropping nearly 30%. Companies are rerouting product flows, adjusting transfer pricing, and pursuing duty-drawback credits. Some importers front-loaded orders early in the year, spiking inventories.  

Regional regulations, such as Europe’s Corporate Sustainability Reporting Directive and Carbon Border Adjustment Mechanism, will continue shaping chemical portfolios. Geopolitical tensions, climate disruptions, and energy volatility also remain major considerations. 

End-Market Demand 

Demand in key end markets—construction, automotive, and consumer goods—is expected to remain soft. Consumer spending is projected to grow just 1.4% in 2026, down from 2.1% in 2025, while US housing starts are expected to rise by only 0.3%. Automotive sales are projected to remain flat, with EV incentives expiring in September 2025, reducing chemical demand for EV components. 

However, semiconductors offer a rare bright spot. Fueled by AI-driven data center growth, the global semiconductor market is projected to reach US$760 billion in 2026, with AI chips making up almost half the market by 2028. Chemicals account for 9%–14% of device materials, prompting multimillion-dollar greenfield investments in ultra-pure gases and solvents in the US and Europe. 

Innovation: Driving Competitive Advantage 

Despite the downturn, chemical companies continue innovating. “Innovation is vital during such periods to drive growth, build resilience, and gain a competitive edge.” Companies are redesigning operating models, developing specialized products, improving processes, and leveraging data-driven insights in sales and marketing. 

AI Adoption: Transforming Operations 

AI adoption is accelerating. “Already, 51% of US manufacturers use AI in daily operations, and 80% say it’s essential to grow or maintain their business by 2030.” Early implementations in operations and R&D have delivered measurable gains.  

For instance, nearly 500 AI models improved safety compliance, reduced energy consumption, and optimized ethylene distribution at a diversified chemicals producer. AI is also speeding R&D by predicting material properties, reducing cycle times, and accelerating commercialization of new products. 

The Road Ahead 

2026 is expected to remain challenging, with overcapacity in polyethylene, polypropylene, and other olefins and aromatics likely to persist. Without renewed market certainty, end-market demand will stay subdued. Companies are expected to focus on cash flow, portfolio restructuring, and growth through innovation, while making decisions based on data rather than short-term noise. 

Sustainability is poised to drive the next upcycle, with chemical demand expected to double over the next 30 years. “The industry could require an estimated US$1 trillion in capital by 2080 to meet sustainability needs.”  

Investment in low-carbon solutions—carbon capture, clean hydrogen, and electrification—will remain essential, while regional regulations and market needs will shape priorities. Companies aligning portfolios and innovation strategies with these shifts will be better positioned for the future. 

To sum up, as 2026 unfolds, the chemical industry faces uncertainty, overcapacity, and global volatility, but strategic cash management, portfolio transformation, supply chain resilience, innovation, and AI adoption may allow companies to emerge stronger when the next growth cycle begins.