The chemicals sector is in a difficult patch. Demand is weakening, competition is intensifying, and some key market fundamentals have shifted over the past couple of years.
But it's not all bleak. McKinsey's latest analysis[1] shows that these pressures are forcing companies to rethink their strategies in fundamental ways, and the ones acting decisively now are positioning themselves for long-term success.
So, what's changing, and where should chemicals businesses be focusing in 2026? We've identified four key trends.
1. Overcapacity is forcing hard choices on portfolios
The structural overcapacity problem isn't going away. Demand remains stunted across key value chains, and capacity additions still outpace consumption growth.
Deloitte forecasts[2] production volumes in the US will contract by 0.2% in 2026, with Europe facing similar headwinds, in part due to higher energy costs eroding competitiveness.
This is driving a wave of portfolio rationalisations. PwC reports[3] that M&A activity hit its lowest point since pre-COVID in the first half of 2025, with only 243 deals. But that's changing. A pipeline of divestitures and carve-outs is building for 2026.
For many businesses, the challenge is more complex than finding cost-cutting measures. To be successful, they need assets which can consistently outperform peers and generate returns above the cost of capital. Some are finding creative solutions through joint ventures, while others are making the difficult decision to exit.
2. Trade tensions are reshaping supply chains by region
The chemicals industry has always operated globally, but that's getting harder to manage. Trade policies are shifting, and companies are having to rework their approaches to sourcing, production and sales.
Take the US market. Chinese goods are now hit with an effective 40% tariff rate, which has changed the calculation completely. Supply chains are being reconfigured around regional bases rather than purely chasing the lowest global costs.
There's also a growing trend towards domestic sourcing in the US. After years of shipping delays and tariff impacts, many businesses are bringing chemical sourcing closer to home in a bid to regain control and reduce volatility.
Europe finds itself caught in the middle. US tariffs could send more Chinese exports towards European markets, undercutting local producers already dealing with high energy costs. European companies are looking at lower-cost joint ventures abroad to maintain customer relationships while managing their cost base.
3. AI is moving from pilot projects to competitive necessity
Meanwhile, artificial intelligence in the chemicals sector is no longer a nice-to-have. According to industry forecasts[4], the AI market in chemicals is projected to grow from $1.41 billion in 2025 to $12.71 billion by 2034.
The impact is real. McKinsey's research shows AI is doubling rates of molecule discovery and formulation optimisation in R&D. In commercial applications, generative AI is producing two- to three-times increases in sales pipelines through better lead generation.
On the operations side, AI is being deployed for predictive maintenance, energy optimisation and supply chain management. Companies leading the way are deploying hundreds or thousands of AI agents to automate workflows.
For companies that haven't started, AI-enabled performance is quickly becoming the baseline expectation, not a differentiator.
4. Radical cost discipline is replacing incremental gains
Incremental cost improvements may no longer be enough for chemicals manufacturers to survive and compete. Indeed, companies need zero-based approaches that challenge every assumption about their cost structure.
Europe's producers are particularly exposed. Energy costs remain stubbornly higher than competitors in the US and Middle East, and this is creating a structural disadvantage which is proving difficult to overcome through efficiency gains alone.
Interestingly, according to McKinsey, the best-performing companies are maintaining investments in R&D and commercial capabilities even during downturns. They are taking a through-cycle view rather than cutting everything when times get tough.
What this means for 2026
The chemicals sector is navigating real structural change. Companies are dealing with multiple pressures simultaneously: too much capacity, fragmenting trade routes, rapid digitalisation and relentless cost squeezes.
Chemicals firms can't afford to sit tight and wait for things to get better. The ones that will emerge stronger are making tough calls on their portfolios, building supply chains that can handle shocks, getting serious about AI, and taking a hard look at their cost base.
At EMG, we work with chemicals companies to communicate effectively through periods of transformation. Whether you're navigating portfolio changes, implementing new technologies or repositioning for changing markets, we understand the sector's challenges. Get in touch to discuss how we can support your communications strategy.
