While China's chemical industry remains in an expansion phase with new capacity still coming online, the global chemical sector has officially entered a challenging and protracted period of capacity rationalization. Unlike the temporary shutdowns and production cuts seen in past cycles, this restructuring is defined by large-scale permanent plant closures and physical dismantling of production units, signaling that overseas chemical companies have transitioned from cyclical downturns to structural difficulties. Europe, as the traditional chemical manufacturing hub, has become the focal point of this contraction, while Japan, South Korea, and the United States have also advanced capacity optimization and industrial reshuffling, marking a significant realignment of the global chemical industry landscape.

Europe's Capacity Contraction Takes Center Stage

As the birthplace of modern chemical manufacturing, Europe remains a major global chemical producer and a key player in the global chemical framework. Chemical products are a primary export for Europe, accounting for about 7% of the EU's manufacturing value added in 2024 and serving as a core contributor to the EU's trade surplus. However, in the current global structural capacity shakeout, Europe has emerged as the epicenter of production cutbacks. A combination of high regional energy costs, persistently weak end-market demand, and intensifying global competition has kept Europe's chemical industry growth well below the global average, pushing it into a historic and deep structural contraction.

According to a report released by the European Chemical Industry Council in early 2026, from 2022 to 2025, the European chemical industry permanently shut down a cumulative 37 million tons of capacity, roughly 9% of Europe's total chemical capacity. The pace of capacity exits has accelerated, with 17.2 million tons of chemical capacity retired in 2025 alone—a sixfold increase compared to 2022—demonstrating that the region's capacity rationalization process is now in full swing.

Looking at the segment breakdown, the traditional petrochemical sector, centered on steam crackers, has borne the brunt of the impact, with the highest share of capacity exits. Cumulative permanent shutdowns in this segment reached 17.8 million tons, representing 14% of Europe's current petrochemical capacity. Basic inorganic chemicals followed with 11.7 million tons of closed capacity, while polymers and specialty chemicals saw 5.4 million tons and 2 million tons of shutdowns, respectively. This reveals a structural pattern where bulk upstream categories are being retired at significantly higher rates than higher-value downstream segments.

Petrochemicals, once the EU's most important sales product, cover essential upstream materials like ethylene, propylene, and aromatics, and are typical energy-intensive industries. Under the current high-energy-cost environment, the global competitiveness of EU petrochemicals has weakened steadily, making them one of the hardest-hit categories in this capacity adjustment phase.

Geographically, capacity retirements are widespread across European nations. Germany, France, Italy, and the Netherlands—the core producing and selling regions of Europe's chemical industry—are also the areas with the most concentrated shutdowns. Germany has been hit hardest, with 8.8 million tons of capacity exited, accounting for 25% of total permanent closures. The Netherlands follows with 7.2 million tons (20%), and the UK has retired 4.5 million tons (12%).

Alongside capacity shutdowns, utilization rates at existing facilities have shown a clear downward trend. Since 2022, the EU chemical industry's capacity utilization has remained below the industry average of 81%, falling to around 74% by Q4 2025, with expectations of further declines. The EU chemical sector remains under sustained pressure.

New investment and capital expenditure in Europe's chemical industry have also plummeted. In 2025, new investment in the EU chemical sector totaled just 0.3 million tons, a sharp drop from the 2.7 million tons recorded in 2022, with capital expenditure down 81%. Persistent high costs and weak demand have significantly dampened producers' willingness to invest in Europe, with many opting to relocate capacity to lower-cost regions. The long-term competitiveness and overall resilience of Europe's chemical industry face unprecedented challenges, and the situation is expected to deteriorate further.

Japan and South Korea Accelerate Capacity Adjustments

Japan and South Korea are also accelerating capacity adjustments in their chemical industries, though unlike Europe's more reactive stance, their moves reflect proactive choices for industrial innovation. In recent years, Japan's chemical sector has seen its global influence wane, particularly in basic chemical products. Looking at the ethylene sector, Japan's chemical industry has grown slowly since the burst of the economic bubble. Since Mitsubishi Chemical's first ethylene unit was idled in 2014, Japan's ethylene industry has been mired in supply-demand imbalances. By 2025, Japan's ethylene capacity stood at about 6.2 million tons, with over half of the units operating for more than 50 years.

Over the past three decades, Japan's ethylene output has trended downward, with the decline accelerating in the last five years. In 2024, ethylene production fell below 5 million tons. Following Middle East tensions in March 2026, Japan's ethylene operating rates dropped to under 70%, hitting a historic low of 66.6% in June. In response, Japanese petrochemical companies have initiated structural reforms, with major players like Mitsui Chemicals, Idemitsu Kosan, Maruzen Petrochemical, and ENEOS announcing plans to suspend some ethylene production units between FY2026 and FY2027, which will also impact downstream derivative capacity.

South Korea's petrochemical industry has seen its earnings fundamentals deteriorate sharply in recent years, with the sector posting losses for two consecutive years. In H1 2025, the average cost-to-sales ratio for major Korean petrochemical firms climbed to 98.6%, with some companies unable to cover production costs with their sales profits. The losses accelerated further into Q4 2025. According to ICIS, preliminary combined operating losses for major Korean petrochemical companies in 2025 reached KRW 1.5 trillion, a significant expansion from the KRW 1.1 trillion loss in 2024, heightening industry survival pressures.

To reverse the industry's decline under chronic cost disadvantages, the Korean government introduced a petrochemical industry self-rescue plan, setting three key targets for major producers: cutting surplus and aging capacity, shifting toward high-value-added products, and systematically improving balance sheet structures and financial health while minimizing impacts on regional employment and local economies. Under a 2025 business restructuring agreement among Korean chemical giants, the country will reduce naphtha cracking capacity by 2.7 to 3.7 million tons per year, about 25% of current capacity.

In February 2026, a restructuring plan for Lotte Chemical and HD Hyundai Chemical at the Daesan Industrial Complex was approved. Under the plan, Lotte Chemical will spin off its Daesan plant in South Chungcheong Province and merge it with HD Hyundai Chemical to form a new entity, while shutting down Lotte's 1.1 million-ton-per-year naphtha cracker at the Daesan complex. Redundant or loss-making facilities will also be suspended to optimize capacity layout and cut operating costs. YNCC's restructuring plan, submitted on March 6, 2026, confirms the closure of two ethylene crackers with a combined annual capacity of 1.39 million tons by the end of 2026, reducing capacity by over 60%. South Korea aims to ease long-term oversupply pressures and lift the industry's earnings center through permanent closures of redundant or loss-making capacity, integration of production units within complexes, improved efficiency, and adjusted product portfolios.

Key Drivers Behind the Capacity Contraction

The core reasons behind the plant closures in Europe, Japan, and South Korea center on three main factors: high production costs, persistently weak demand, and declining global competitiveness. Additionally, industry chain transformation is also contributing to global chemical capacity exits.

High Production Costs as the Primary Driver

Production costs are the most critical factor driving overseas plant shutdowns. The chemical industry is energy-intensive. Compared to the Middle East and the US, which leverage feedstock advantages, and China, which relies on large-scale integrated refining, most European, Japanese, and Korean chemical companies are smaller in scale and heavily dependent on imported feedstocks, placing their production costs at the higher end globally. Geopolitical conflicts have further inflated costs in these regions. Since the Russia-Ukraine conflict, European energy costs have risen sharply, with electricity prices in Europe surpassing those of other major economies. According to the International Energy Agency, average EU electricity prices in 2025 were more than double those in the US and nearly 50% higher than in China. This is especially true in key chemical-producing countries like Germany, France, the Netherlands, and Italy, where electricity generation is highly dependent on natural gas, making power prices vulnerable to gas price fluctuations. European gas prices spiked after the Russia-Ukraine conflict and, despite some pullback, rose again following Middle East tensions in March, further pushing up energy costs.

Beyond energy, Europe's environmental regulations add another burden. Europe enforces some of the strictest environmental policies globally, and the chemical industry is a core part of the high-carbon industrial sector. Carbon tariffs and marginal CO2 abatement costs impose significant financial pressure on European chemical firms. Additionally, Europe's requirements for waste treatment far exceed those of other countries—estimated to be 8 to 15 times more expensive than in China—further driving up production costs.

Japan and South Korea also face high production costs. Both countries are heavily reliant on imported raw materials, with crude oil import dependence above 90%. Japan sources about 80% of its naphtha and 95% of its crude oil from the Middle East, while South Korea transports over 70% of its crude oil through the Strait of Hormuz, making production costs sensitive to crude price movements. Energy costs are another factor: crude oil and natural gas are key energy sources for both nations, and both import nearly 100% of their natural gas. Since the Russia-Ukraine conflict, Northeast Asian gas prices have stayed elevated, keeping industrial electricity prices in Japan and South Korea among the highest globally. In Q1 2026, Japan's average industrial electricity price was $0.23/kWh—2.6 times China's rate—while South Korea's 2026 industrial rate stood at $0.15/kWh, 1.5 times China's. These high production costs place enduring pressure on the Japanese and Korean chemical industries.

Persistently Weak Demand

The global demand slump in chemicals continues to weigh heavily. Key end-use sectors include real estate, packaging, automotive, and home appliances, with real estate being the largest consumer at 35% of global chemical demand. With severe inflation in Europe, Japan, and South Korea, consumers are cutting discretionary spending, retail trade is structurally downgrading, and downstream industries show weak restocking appetite. New orders continue to soften, and export demand has also declined. According to the European Chemical Industry Council, the business confidence index remains in negative territory, with markets cautious about sustained demand improvement.

Declining Global Competitiveness

Looking at global chemical industry growth from 2004 to 2024, China has been the core driver of global industry expansion and the fastest-growing economy in chemical sales. European Chemical Industry Council data shows that over those two decades, global chemical sales rose from EUR 1.4 trillion to EUR 5.0 trillion, a compound annual growth rate of 6.6%. China's sales grew at a compound rate of 15%, far outpacing global averages and the other five major chemical-producing regions, making China the engine supporting global industry growth.

In terms of market share, China accounted for only about 10% of global chemical sales in 2004, while the EU-27 held 27%—nearly three times China's share—and the US held 22%. Over the following two decades of rapid Chinese expansion, its sales growth far exceeded other regions, and by 2024, China's share of global chemical sales had climbed to 46%, capturing nearly half the market, with further gains expected. In stark contrast, the EU-27's global share fell to 13% in 2024, marking the steepest decline among major chemical-producing regions, while the US share dropped to 12%.

In export markets, China has also been the fastest-growing chemical exporter globally. In 2004, China's share of global chemical exports was just 5%. Around 2022, China's export share surpassed both the EU and the US for the first time, and by 2024, it had risen to 18%. European, US, Japanese, and Korean positions in chemical export markets are being progressively displaced by China, and the shift of the industry's center of gravity toward China is now well established.

Industry Chain Transformation

As the global chemical market landscape shifts, European, Japanese, and Korean companies are seeing their traditional advantages erode, forcing them to gradually divest low-value-added, commoditized products. Many are pivoting their focus toward specialty chemical areas with high entry barriers and added value, such as electronic chemicals, bio-based materials, and high-end additives.

Future Outlook

According to S&P Global forecasts, global ethylene production in 2026 will decline by about 22 million tons, a 12% reduction from 2025 levels. This is partly due to Middle East blockade impacts that have reduced global naphtha and crude supply, forcing lower ethylene output, and partly due to global ethylene capacity rationalization reducing total capacity. Boston Consulting Group analysis indicates that over 30 million tons of inefficient ethylene capacity worldwide is slated for closure, with over 4.5 million tons already permanently retired.

The pace of plant closures in Europe, Japan, and South Korea is accelerating, with nearly 19 million tons of ethylene capacity expected to shut down. Europe plans to retire an additional 11 million tons of aging cracker capacity by end-2027—units that have been loss-making since 2022, operating at utilization rates persistently below 75%, and primarily running on single naphtha feedstock. South Korea, with current ethylene capacity of around 12.8 million tons, is projected to cut nearly 7.5 million tons—the most aggressive reduction among regions, representing a 45% decline—along with reductions in downstream ethylene derivative capacity. Japan has announced plans to close approximately 1.89 million tons of ethylene capacity, a reduction of over 25%, with closures concentrated between end-2026 and 2027. Further retirements of aging, smaller-scale units are expected, potentially bringing Japan's total ethylene capacity reduction to around 4.5 million tons.

Looking ahead, the chemical industry will continue to reshape its landscape through elimination of inefficient capacity, reassertion of regional cost advantages, and industry chain transformation. Basic chemical capacity in Europe, Japan, and South Korea will keep declining, and global chemical trade flows will undergo long-term adjustments.