By Ozan Ergenay and Bartosz Dabrowski
July 20 (Reuters) - European chemical companies are expected to report second-quarter results reflecting temporary support from Middle East conflict-related supply disruptions, though investors are increasingly focused on whether the uplift can counter weak demand and mounting competition from Asian producers.
Tighter supply conditions linked to the Middle East conflict have supported pricing and provided some breathing room to Europe's chemicals sector, but weak
demand, global overcapacity and growing competition from Asia continue to weigh on the industry's long-term outlook.
Investors will also be watching whether companies report sustained volume improvements or merely temporary pricing gains, as well as their outlooks for the second half of the year.
Some chemical companies, such as Brenntag, BASF and Evonik, have recently raised their full-year profit guidance, suggesting parts of the industry are benefiting from stronger pricing and resilient demand despite broader concerns about excess capacity and weak volumes.
Results from Lanxess, Clariant and Wacker Chemie will be closely scrutinised for signs that recent pricing support is translating into stronger earnings.
Analysts said investors' focus has shifted in recent weeks from the margin benefits of supply shortages to concerns over underlying demand weakness in the European chemicals sector.
MIDDLE EAST CONFLICT-DRIVEN UPLIFT SET TO FADE
For years, European chemical companies have struggled with high energy costs, weak demand and intense price competition from Asian peers. The conflict in the Middle East offered short-term support to the region's chemicals sector, as supply disruptions raised costs for Asian rivals and prompted customers to prioritise reliability over price.
The boost has so far been insufficient to offset weak demand and subdued investment across the industry.
Germany's chemical industry body VCI warned that the recent uplift seen by parts of the sector from Middle East disruptions could prove temporary.
"The risks for the second quarter have increased because of the special economic boom caused by the war in the Middle East," it said, referring to customer stockpiling and precautionary purchases following supply concerns.
The association said demand could soften again once supply chains adjust and pre-purchasing activity fades, potentially exposing what it described as an underlying structural weakness in the market.
"Then an increased supply structure will meet a still extremely weak demand," it added, warning that the sector could face renewed price pressure and weaker order volumes.
Even before the latest Middle East tensions, European producers were warning that Asian competitors were regaining ground as energy markets stabilised and regional supply chains adapted.
Analysts and strategists said periodic disruptions to traffic through the Strait of Hormuz and surging energy prices could keep commodity chemicals prices elevated, though they doubted prices would return to the peaks seen at the start of the U.S.-Iran war.
"The latest impact is likely to be less pronounced than the first time," Berenberg analyst Sebastian Bray told Reuters.
"And I suspect that some Southeast Asian chemical producers have become a little more adept at feedstock production now," he added.
(Reporting by Anastasiia Kozlova, Bartosz Dabrowski, Dimitri Rhodes and Ozan Ergenay in Gdansk, editing by Matt Scuffham)
