Chemical Production Faces Contraction Amid War Pressures

Global chemical production is facing a potential contraction of 1.7% in 2026 if the US-Iran conflict and the closure of the Strait of Hormuz persist. According to a report from trade credit insurer Atradius, the disruption to this critical waterway severely impacts the supply of oil and gas feedstocks, for which the industry has limited alternatives. This volatility is particularly significant for the sector because the Gulf region accounts for nearly half of global ethylene glycol exports and 40% of methanol, essential components for plastics and industrial chemicals.

The ongoing conflict between the US and Iran has significantly strained the global chemical sector, with Atradius senior underwriter Olaf Gierlich Steffens warning that the risk balance has shifted toward a downside scenario. While the base case predicts a modest 0.6% growth in 2026, a prolonged closure of the Strait of Hormuz could trigger a 1.7% contraction. The closure is particularly damaging because the Gulf region is a primary source of ethylene glycol and methanol, which are vital feedstocks for the production of plastics and various industrial chemicals.

Regional impacts vary, with Asia expected to remain the most resilient due to structural factors such as coal-based production and strong domestic demand in China and India. In contrast, the US chemical sector is projected to experience a decrease in 2026, driven largely by a contraction in the soaps, polish, and detergent subsector. This specific segment is struggling with high input cost pressures from petrochemical derivatives and a premature exposure to consumer demand slowdowns compared to broader industrial chemicals.

Beyond geopolitical conflict, the industry is grappling with trade fragmentation and tariff-related uncertainty. Germany and Japan are facing headwinds due to their high export dependency on automotive and industrial goods, while Chinese exports are being diverted into European markets, increasing competitive pressure. Despite these challenges, the report suggests a recovery phase in 2027, supported by stabilizing energy markets and a rebound in industrial investment, particularly in the US, which is expected to benefit from its energy cost advantages.