Business sentiment within Germany's chemical industry improved sharply in August, according to the Ifo institute, but underlying measures of activity and competitiveness show the sector remains far from a sustained recovery.
The Ifo business climate index for the chemical sector climbed to -2.4 points in August, up from a seasonally adjusted -26.3 in July, the Munich-based economic research institute said. The sub-index gauging current conditions rose to 11.6 points from -14.6 the previous month - the first positive reading for current conditions since July 2022.
Despite the brighter sentiment readings, Ifo industry expert Anna Wolf cautioned that the industry's fundamentals still look weak. German chemical production remains about 20% below 2021 levels, Wolf said, underscoring that the improvement in sentiment has not yet translated into a return to previous output levels.
Part of the recent uplift in exports has been linked to disruptions among suppliers in Asia and the Middle East. Those interruptions have redirected demand toward German chemical producers and supported pricing, but Wolf warned this effect is likely temporary. "As soon as Asian supply chains normalize, the substitution effect disappears," she said.
The improvement in the business climate has been mirrored in corporate financial outlooks: BASF, Evonik and Brenntag have each raised full-year profit forecasts after supply disruptions outside Europe helped lift pricing and demand for their products.
However, other indicators point to a fragile recovery. Order books and sentiment indicators have improved, but capacity utilisation shows little sign of firming. Capacity utilisation for the sector has averaged 73.2% so far in the third quarter, well under the roughly 80.4% long-term average and below the thresholds typically needed for plants to operate economically.
Ifo's analysis suggests that stronger external demand is being satisfied largely from existing inventories rather than increased domestic production, given the low utilisation rates. That dynamic means firms may be selling more without reactivating idle production capacity.
Even with an expectation that output will rise, chemical companies are still planning job reductions, reflecting excess labour capacity tied to weak utilisation rates. Wolf highlighted a set of unresolved structural challenges weighing on competitiveness, including high gas prices, concerns over supply security, and rising CO2 costs. She said there is no policy measure likely to materially improve competitiveness within the current cycle.
In sum, while headline sentiment measures have moved into positive territory, the Ifo's data and industry commentary point to a rebound that remains contingent on temporary global supply dynamics and has yet to restore production, utilisation, or labor markets to pre-downturn norms.