Energy shocks intensify profit margin risks for EU chemical companies, warns JPMorgan

Investing.com - In a report released on Wednesday, JPMorgan Chase warned that European chemical companies may need to raise sales prices by more than 5% over the next 12 months to offset soaring oil and natural gas costs, but this move will face difficulties due to severe industry overcapacity.

Since the end of December 2025, Brent crude oil prices have risen by about 35%, while European TTF natural gas prices have surged approximately 84% during the same period, mainly due to increased Middle Eastern supply disruptions, including restrictions in the Strait of Hormuz and the halt of Qatar’s liquefied natural gas production.

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JPMorgan estimates that, under the current energy prices and with only half of the incremental costs passed on to customers, the most affected companies’ Bloomberg 2027 adjusted EBITDA consensus could face a 15% to 25% downside risk, with earnings per share being hit even harder.

The bank states that Lanxess, BASF, Arkema, Evonik, and Wacker Chemie face the greatest adverse factors.

Lanxess has the highest risk exposure, with petroleum-based raw material costs accounting for 62.4% of its 2026 consensus EBITDA. Arkema needs the largest price increase of 5.7% to fully offset incremental petroleum-based costs, followed by Lanxess at 5.6% and BASF at 5.2%.

In terms of energy, Yara faces the largest unhedged burden, with EU natural gas costs representing 20% and 22% of EBITDA in 2026 and 2027, respectively. It would need to raise European prices by 11% in both years to balance costs and revenues.

This fertilizer producer has no hedging in place, leaving it fully exposed to risk. Lanxess and Wacker Chemie face secondary energy adverse factors after hedging, accounting for 12-15% and 7-12% of EBITDA, respectively.

These disruptions are particularly severe for the nitrogen fertilizer market. QatarEnergy accounts for about 10% of global urea shipping trade and has ceased chemical production, while Iran’s ammonia and urea production reportedly also halted. Egyptian spot urea prices recently increased by about 26% in a sale.

JPMorgan suggests this could benefit net sellers like Yara, depending on how long Middle Eastern disruptions last.

In the upstream petrochemical sector, due to rising naphtha costs, South Korean steam cracking units have reduced operating rates by 5-10%, while Asian ethylene prices have increased by about 16%.

JPMorgan states that broader and sustained production cuts could create a narrow window for pricing power to return, potentially helping BASF offset raw material inflation, though the firm considers this a low-probability scenario.

Novozymes and Air Liquide, with stronger pricing power, face the lowest direct energy adverse factors, though JPMorgan warns both could face indirect demand pressures.

Data provider Argus reports that EU natural gas storage levels are near their lowest seasonal levels since 2019, and pipeline suppliers Norway, Russia, and Algeria have limited capacity to increase supply in the short term.