Petrochemicals in peril: oversupply crisis and energy transition threaten industry survival

The petrochemical industry stands at a critical juncture as it experiences one of its most challenging periods in recent history. The market is burdened by persistent oversupply and underwhelming demand growth.  The imbalance between supply and demand has weighed heavily on profitability and pushed many producers into states of emergency. This is resulting in multiple plant closures as industry participants fight to secure future viability in an increasingly competitive and evolving sector.  At the same time, the industry is simultaneously navigating the broader influence of energy transition that demands high levels of investments in decarbonisation, circularity, and other sustainability led channels.  

A large part of the current problem is associated with an extended period of capacity expansions —predominantly in China.  This has exerted significant downward pressure on industry margins and fundamentally altered the competitive landscape.  If your operations rely on a gas-based platform, you remain in a comfortable position; if you run a large-scale, modern, integrated refinery, your asset is secure. However, those with older, non-integrated facilities face a high risk of closure.  Consequently, chemical producers in Europe and parts of Asia—mostly constituting the highest cost quartile—have been impacted most severely and have already implemented a barrage of plant closures. 

Read on as we examine the current market landscape, industry cyclicality and outlook, and tangible strategic options for petrochemical players.

Oversupply, low margins and plant closures 

China’s aggressive capacity expansion and desire to move away from energy import dependency have contributed significantly to the structural oversupply in commodity petrochemicals and polymers. This has led to persistently low operating rates across most value chains.  China no-longer absorbs global production surpluses and is even emerging as an exporter in some products.  

Global ethylene capacity has expanded by more than 40 million tons between 2020 and 2025, with around 70% of this new capacity built in China. During the same period, demand grew by approximately 27 million tons. However, this only partially explains the oversupply, as a similar pattern occurred from 2015 to 2020, when net capacity additions exceeded consumption growth by about 11 million tons. As a result, the average global ethylene plant utilisation rate currently stands at roughly 80 percent. 

Polyethylene cash margins, on an integrated basis, have largely been negative since mid-2022. However, as the sector is largely integrated, negative polymer margins have been offset by positive ethylene cash margins up until the second half of 2024. However, ethylene margins for higher-cost producers have remained largely in negative territory over the past year. This situation has triggered multiple plant closures, both temporary and permanent. Significant steam cracker shutdowns in Asia include Lotte Titan in Malaysia, Lon Song Petrochemicals in Vietnam (resumed in August 2025), and JG Summit in the Philippines. 

In South Korea, the government has intervened to facilitate industry restructuring which is expected to result in approximately 25% cut in domestic petrochemicals capacity. This looks like the end of an era for South Korea as a large volume exporter of commodity chemicals and polymers. 

Meanwhile, producers in China are also feeling pain, both Sinopec and PetroChina, have taken actions to close older production facilities to pave the for the new generation of large-scale refinery-integrated steam cracker complexes. 

In Europe, most players—including Dow, Exxon, LyondellBasell, SABIC, TotalEnergies and Versalis—have been actively reducing or seeking to reduce their footprints in the region. INEOS has also taken steps to close some of its refining and chemical assets in Europe and voiced concerns about the unsustainable state of the European petrochemical industry.  Europe is challenged by structurally high energy costs and escalating costs associated with reducing carbon emissions resulting from EU climate policies. 

Naphtha-based crackers in Europe and Asia face significant variable cost disadvantages compared to gas-based producers in the Middle East and the US. This inherent cost gap weakens their competitiveness, rendering operations unsustainable amid increasing pressure from intensified competition in key export markets. Moreover, geopolitical tensions have contributed to greater feedstock price volatility, along with recent changes to US trade policies on selective imports, amplify market uncertainties and raise the likelihood of additional capacity closures.  

Industry cyclicality and outlook 

The petrochemical sector is inherently cyclical, with multiple downturns occurring periodically over past decades, driven predominantly by overinvestment in new capacity.  However, additional factors have evolved in recent times that make investments easier—such as improved access to technology and capital—therefore reducing entry barriers. Coupled with much larger plant sizes and new refineries with an increased focus on chemicals production, these dynamics are contributing to a prolonged industry downturn, being experienced now. 

The current capacity build-up is forecast to slow post 2026 at which point the industry is forecast to pivot to a demand led recovery.  However, the recovery period is expected to be prolonged and will hinge on a stronger economic outlook – something that is not visible today.   The timeline for the industry to achieve “satisfactory” profitability levels is likely to extend into the early 2030s.  With this backdrop, further capacity rationalisation, is expected over the next 12-18 months.      

Asia represents more than half of the global petrochemical demand and remains the epicentre of future petrochemical consumption growth.  A demand-led recovery will depend on Asian market growth, driven by its favourable demographics, increasing living standards and continuation of urbanization. Despite this, Asian markets have their own challenges, including rising consumer debt levels, political instability and the prospects of further US tariffs impacting exports of finished goods.  These factors pose a threat and have the potential to derail prospects for a sustained recovery across chemical markets.  

Long-term industry outlook amid energy transition trends 

The petrochemical industry's future will be shaped not only by traditional supply-and-demand dynamics but also by how effectively it incorporates sustainability, renewables, and innovation into its strategic fabric. Chemical companies will need to re-shape traditional portfolios to meet these challenges. Traditional commodity focused business models will not be viable without either a leading cost position or the ability to differentiate product and service offerings.    

At present, decarbonisation appears to be losing momentum as the rate of investment, seen previously, is decelerating.   Nevertheless, decarbonisation policies are still expected to have a long-term influence on petrochemicals sector in terms of; feedstocks employed, process technologies selected, and consumer consumption trends.  However, the rate of change, will vary greatly between regions resulting in a mixed bag of activities and timelines.  Key drivers influencing the rate of energy transition adoption and influence include:  

• Regulatory and Policy Pressure: Governments worldwide, including most Asian nations, are implementing net-zero targets and carbon pricing, pressuring petrochemical producers to decarbonise operations. 

• Feedstock Shift: Transitioning away from conventional fossil feedstocks toward bio-based feedstocks, green hydrogen, and recycled materials. 

• Consumer and Investor Expectations: Heightened demand for environmentally responsible products and transparency in supply chains. 

Tangible strategic options for petrochemical players 

The imperative for petrochemical companies is clear: divest high-cost, carbon-intensive assets and refocus capital towards future-proof, high-growth potential segments.  However, successfully implementing this strategy is complex and fraught with risk.  Associated business strategies and actions to consider should include: 

• Exiting or reducing exposure to uncompetitive capacity reliant on high greenhouse gas emissions, particularly aging or non-integrated assets 

• Streamlining operations and improving integration across the wider energy and refinery value chain to improve cost efficiency and operational flexibility 

• Acquisition of assets to improve business performance and or increase presence in higher value segments that also capitalise on existing operational synergies. 

Overcapacity and depressed profitability, combined with increasing capital demand for energy transition and regulatory requirements, necessitates bold strategy, innovation, and partnership.  Overall, these strategies promote portfolio optimisation balancing financial performance with environmental responsibility, while navigating execution complexities and market risks inherent in carbon-intensive asset divestment and acquisition decisions. 

This new paradigm offers opportunities for resilient, forward-thinking players willing to embrace change and shape the future of global petrochemicals. 

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