Energy costs skyrocket hitting European chemical companies hard! First quarter financial results may come under pressure collectively.

European chemical companies severely affected by the Middle East war are expected to announce weak first-quarter performance. This will highlight how profound the impact of this Middle East war on an industry, widely considered to be one of the most vulnerable. Against the backdrop of continued tension in the Middle East, the key global energy transport channel of the Hormuz Strait has actually been blocked, and damage to energy infrastructure in the Gulf region has driven energy prices significantly higher. Although most of the EU's oil and gas imports do not rely on the Gulf region, the sharp rise in global energy prices has put tremendous pressure on European chemical companies. The chemical industry is known as an energy-intensive industry for a reason. From basic chemicals to fine chemical products, almost every production process relies on energy sources such as oil and natural gas. Crude oil is not only an important energy source but also the direct source of basic chemical raw materials such as ethylene, propylene, and benzene; natural gas is both a fuel and a raw material for products such as ammonia and methanol. When the prices of these basic energy sources rise significantly, the cost pressure of the entire chemical industry chain will be passed on layer by layer, ultimately reflecting in product prices. The soaring energy prices caused by the Middle East war have further worsened the already weakened situation of the European chemical industry. The industry has long suffered from weak demand, high energy costs, supply chain disruptions, and overall economic sluggishness. The German Chemical Industry Association (VCI) stated: "Compared to other industries, the chemical industry is particularly affected by the sharp increase in energy and raw material costs, as this industry mainly relies on oil and natural gas as raw materials." The association added that feedback from companies is mixed at present. On one hand, concerns about supply shortages are driving demand in some specific areas to rise. On the other hand, higher prices are inhibiting purchasing activities in other sectors. To offset the rising costs, chemical companies including Brenntag, Wacker Chemie, Lanxess, BASF, Evonik, EMS Chemie, and Sika have raised prices, with some companies raising prices multiple times for different products. The CFO of BASF stated at a Morgan Stanley chemical industry conference in March that he expects price increases in the second quarter of this year to be sufficient to offset cost inflation. Meanwhile, the CFO of Brenntag stated that customers have accepted the price hikes so far. However, analysts warn that any improvement may be fragile, as they expect that simply relying on price increases may not lead to a substantial recovery in profitability in the short term. Anna Wolf, an industry expert at the German Institute for Economic Research (DIW), stated that price volatility and rising uncertainty may further weaken demand, "given the overall weak demand and low business confidence, the recent price increase is unexpectedly large." Martin Gornig, a research director at the DIW, stated that while the rise in energy costs is a global issue, the higher energy bills, combined with the already sluggish economic recovery, have a greater impact on demand in Germany and other European countries. The German securities research firm MWB-Research stated in a recent report that Asian competitors maintain an advantage with their structural cost advantages, which help them offset the effects of weak demand. Wolf also stated, "Higher prices further weaken the competitive position of European producers relative to Chinese suppliers." Although the two-week ceasefire between the US and Iran has slightly eased short-term pressure on the energy market, cost levels remain structurally high, and volatility is still high. Sebastian Bray, an analyst at Berenberg Bank, stated that in a scenario of ongoing ceasefire assuming an improvement in raw material supply and a decrease in oil prices it is reasonable for chemical product prices to fall to some extent. The VCI bluntly stated, "Even if the crisis is temporarily resolved, energy prices are unlikely to return to normal quickly." This means that European chemical companies will continue to face pressure from high energy costs in the coming period. Furthermore, broader price pressures, including those of chemical products, will put the European Central Bank in a dilemma on its policy path. On one hand, the inflation rebound driven by energy costs may prompt the European Central Bank to raise interest rates. Several ECB policymakers have warned about high energy prices and have not ruled out the possibility of a rate hike in April. Market pricing indicates that the probability of a rate hike by the ECB in April has risen from about 20% at the end of last week to 50%. However, on the other hand, the transmission of rising energy costs throughout the economy will exacerbate downside growth risks, and rate hikes may hinder the already fragile economic recovery in the eurozone. Some ECB officials are cautious about taking action in April, believing that, as the April meeting lacks the latest official quarterly forecast data, they may need to wait until June for more comprehensive economic indicators before making a decision.