Executive Summary: ISG Provider Lens™ Agribusiness and Chemicals Services and Solutions - U.S.2025
31 Mar 2025
by Varsha Sengar, Mohd Aves Malik
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The U.S. chemicals industry is driven by AI, but faces challenges related to cost and talent acquisition
The chemicals industry drives the U.S. economy by generating high-paying jobs, fueling R&D investments and supplying essential chemicals for daily life. Trade is crucial to the industry’s competitiveness. As the second - largest manufacturing export sector in the U.S., the chemicals industry recorded a trade surplus exceeding $30 billion in 2023, with exports supporting nearly 200,000 jobs.
Since the onset of the COVID-19 pandemic in 2020, the industry has navigated volatile market conditions. The initial impact included weak demand, reduced production and low revenues in 2020. A strong recovery was witnessed in
2021 and 2022, driven by rising demand and supply chain concerns that led to increased inventory levels. However, by late 2022, supply chain pressures eased, key end markets began destocking, and demand for chemicals weakened. By the end of 2023, industry revenues had declined 8 percent year over year, operating margins hit their lowest levels since the Great Recession (2007-2009) and returns on capital reverted to prepandemic levels.
The American Chemistry Council (ACC) forecasts global chemical production growth of 3.4 percent in 2024 and 3.5 percent in 2025, following a modest 0.3 percent increase in 2023. While production is expected to recover and
margins to stabilize, the industry continues to face ongoing challenges and uncertainties. Following are the key trends observed in the U.S. chemicals industry:
Cost reduction plans
In response to high operating costs and low operating rates driven by weak demand, high inventories and chemical overcapacity, many companies launched cost-reduction initiatives in 2023 and 2024. These efforts focused on enhancing efficiency in plant and back-office operations, streamlining processes, aligning expenditures with broader economic conditions, and implementing workforce reductions and plant closures.
According to the ACC survey, over 18 percent of respondents cited operational efficiency as a key driver of their capital investments in 2023. Additionally, 26 percent of respondents indicated that replacing existing plant and equipment was a primary motivation, suggesting that some companies leveraged the period of low operating rates to conduct maintenance and upgrades. While many of these cost-saving measures began in 2023, many companies have announced plans to extend their implementation through 2025 or 2026.
AI and generative AI (GenAI) emerged as prominent technologies
GenAI is revolutionizing research and development in the chemical industry, particularly in materials discovery, process optimization, and formulation improvements. Previously, computational materials science was largely theoretical, with limited real-world applications. However, advancements in GenAI, machine learning, and cost-effective computing have dramatically accelerated innovation. Over the past five years, computational tools have identified millions of alloys, crystals, and molecules-many with promising commercial applications-without the need for traditional benchtop experimentation.
GenAI is unlocking new commercial opportunities by enhancing lead generation, identifying untapped markets, and enabling cross-selling strategies. For instance, a leading chemical company leveraged AI-driven insights to uncover new applications for its products and expand its customer base. This initiative resulted in a two to three times larger sales pipeline than before, with an expected revenue increase of 10 to 20 percent.
GenAI-powered technologies are also optimizing chemical production processes. Companies implementing advanced analytics, IoT sensors and predictive maintenance solutions have achieved 5 to 10 percent efficiency gains. These improvements help reduce downtime, optimize resource utilization and enhance operational excellence, ensuring a resilient and cost-effective production environment.
Shifting investment priorities
The U.S. chemicals industry is shifting toward high-tech sectors and clean energy, driven by strong growth in the semiconductor, metal and plastic industries. In 2024, semiconductors emerged as the fastest-growing market, fueled
by rising demand for automotive electronics and AI-driven data centers. The CHIPS and Science Act further encouraged investments in specialty gases and chemicals. The industry is also playing a vital role in the energy transition by supplying materials for battery storage, clean hydrogen and industrial coatings. This effort is supported by the Inflation Reduction Act, which has spurred new manufacturing investments. While high interest rates have temporarily slowed construction, a potential rebound in 2025 and increasing global EV sales - requiring 85 percent more chemistry than traditional vehicles - are set to drive future demand. As these trends unfold, the chemicals
industry is positioning itself as a key enabler of technological and sustainable advancements, ensuring long-term growth and competitiveness.
Tariff war impact on the chemicals industry
The U.S. chemicals industry faces rising costs, supply chain disruptions and potential retaliatory actions due to new tariffs on imports from Canada, Mexico and China. Despite a national surplus of polyethylene (PE) in the U.S., states like Texas and those in the Northeast and Midwest rely on significant PE imports from Canada, along with key feedstocks such as monoethylene glycol (MEG) and purified terephthalic acid (PTA) for polyester production. The fertilizers industry is particularly vulnerable, as Canada is the world’s largest potash supplier and alternative sources are limited. If companies shift to other suppliers to avoid tariffs, they could face delays and supply chain bottlenecks, as Canada, Mexico and China are the largest trading partners of the U.S. While Canada has announced 25 percent tariffs on $30 billion worth of U.S. goods, chemicals and plastics are currently exempt from these tariffs. However, further tariffs may be imposed following a subsequent review period. These trade restrictions could significantly impact costs and operations across the U.S. chemicals sector.
Aging workforce and talent gap
The aging workforce presents a significant challenge for the U.S. chemicals industry, which employs some of the oldest personnel across all sectors. As of 2023, the industry’s median workforce age was 44.7 years, higher than the
national average of 42.3 years, with 25 percent of employees eligible for retirement within the next five years. This demographic shift could lead to widespread labor shortages and a loss of institutional knowledge. While the pandemic
accelerated retirements, 32 percent of retirees aged 62-71 have rejoined the workforce, offering an opportunity to retain experienced talent. To address workforce gaps, chemicals companies must attract younger generations by fostering a technology-driven work environment. Millennials and Gen Z prioritize digital transformation, making investments in ERP, CRM, HRMS and IT systems essential for recruitment. Beyond R&D, modernizing finance and operations systems will enhance efficiency and innovation, ensuring the industry remains competitive and appealing to a new generation of skilled workers.
Rise in M&A activity
The U.S. chemicals M&A market showed signs of recovery in the second half of 2024, driven by decreasing interest rates, moderating inflation and easing destocking trends. This momentum is expected to continue into early 2025, as
economic and political uncertainties stabilize. Key factors fueling M&A activity include reshoring efforts, economic incentives, access to low-cost feedstock and global supply chain realignment. The outcome of the U.S. elections could significantly impact the industry, with potential regulatory changes affecting the energy, food and pharmaceutical sectors, which are closely linked to the chemicals industry. Private equity firms looking to deploy dry powder and return capital to shareholders could further enhance deal-making in the industry. Sustainability and ESG considerations will also shape investment strategies as companies optimize operations to meet evolving market demands.
Intersection of sustainability and operational efficiency
Sustainability and operational performance are increasingly intertwined in the U.S. chemicals industry, driving innovation despite economic challenges. In 2023, revenues declined by 8 percent, yet capital expenditures and R&D investments grew by 6 percent and 2 percent, respectively, as companies focused on efficiency, clean energy and circular solutions. Product innovation efforts include feedstock substitution and bio-based dropin chemicals, such as bioethylene, which integrate seamlessly into existing production lines. Process innovation, enabled by AI-driven analytics and digital automation, enhances efficiency and reduces waste. Ecosystem innovation fosters collaboration among industry players, startups and research institutions, promoting circular economy practices such as advanced recycling. Looking ahead to 2025, companies will continue leveraging CapEx for process innovation and R&D for product advancements, ensuring competitiveness while meeting evolving sustainability regulations and consumer demands.
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