The chemicals sector faces soft demand, pricing pressure and an uncertain global trade landscape.
Key takeaways
While some segments are stabilizing, demand remains uneven across many industrial end markets.
Many organizations are reevaluating supplier networks to build resilience.
The chemical sector remains challenged by soft demand, pricing pressure and an uncertain global trade environment. For middle market companies, success as these challenges continue will depend on disciplined cost management, strategic and opportunistic capital deployment, customer and product mix optimization, and the agility to adapt to evolving supply chain dynamics.
Middle market chemical companies should resist the temptation to pursue volume growth at the expense of profitability.
Brian Deming, Industrials Senior Analyst, RSM US
Protecting and expanding margins
In an uneven growth environment, margin discipline becomes more important than volume growth. The chemicals sector is expected to see modest growth through the remainder of 2026 and into 2027. Federal Reserve data shows that U.S. chemical manufacturing output has improved from 2023 lows, but growth has been gradual and remains below the pace associated with broad industry expansion.
While certain segments are beginning to stabilize, demand remains uneven across many industrial end markets and continues to be constrained by elevated borrowing costs, affordability pressures and persistent global overcapacity.
As a result, middle market chemical companies should resist the temptation to pursue volume growth at the expense of profitability. Rather, leadership teams might consider strategic actions such as:
- Rationalizing product portfolios and customer relationships to focus commercial resources on products, formulations and end markets that generate the strongest margins
- Evaluating pricing pass-through mechanisms and contract structures to better recover rising raw material, energy and logistics costs
- Tightening inventory management, receivables collection and procurement practices to preserve cash and improve working capital efficiency
Chemical companies that prioritize balancing profitable growth with preserving financial flexibility will be better positioned when demand conditions ultimately strengthen.
Strengthening supply chains
Geopolitical disruption continues to reshape supply chains, creating risk and opportunity. The Middle East conflict, trade policy uncertainties and tariffs are putting pressure on input costs and sustaining volatility in areas affecting chemical manufacturers.
U.S. real gross domestic product growth decelerated to 1.5% in Q2 2026 from 2.1% in Q1, reflecting the broader economic impact of geopolitical instability and rising input costs. From a tariff perspective, the average effective tariff rate was near 7% in July 2026, increasing costs across many imported raw materials, intermediates, and industrial inputs, and affecting the decisions of owners and operators of chemical companies.
For middle market chemical companies in particular, the challenge extends beyond higher costs. Geopolitical uncertainty is influencing sourcing strategies, inventory levels, capital spending decisions and customer purchasing behavior. As a result, many organizations are reevaluating supplier networks.
Such efforts might include:
- Increasing domestic or regional sourcing where feasible
- Seeking greater visibility into their supply chains to reduce disruption risk
- Evaluating exposure to single-source suppliers, tariff-sensitive inputs and geopolitically vulnerable regions
- Developing alternative sourcing strategies for critical raw materials and intermediates
Companies that diversify suppliers, improve supply chain visibility and strengthen contingency planning will be better positioned to manage volatility and respond to changing market conditions.
TAX TREND: Supply chain changes can create tax exposure
As chemical companies adjust sourcing strategies to navigate geopolitical uncertainty and build resilience, operational decisions often have tax implications. They commonly include indirect taxes, transfer pricing and reporting requirements. Bringing tax teams into supply chain discussions earlier can help leaders better understand the costs, risks and opportunities associated with a changing operating model.
Dig deeper: Supply chain management: Protect profits with total cost awareness
Follow the investment
Despite modest industry growth, attractive opportunities for chemical companies remain in end markets tied to AI infrastructure, data centers, semiconductors, power infrastructure, advanced manufacturing, agriculture and higher-value specialty applications. These are areas where growth and margins are expected to outpace the broader chemicals sector in the near and long term.
For example, semiconductor fabrication relies on specialty chemicals, industrial gases, photoresists and high-purity solvents throughout the manufacturing process. Likewise, data center construction requires coatings, adhesives, sealants and water treatment chemicals in the construction process. Once operational, data centers remain chemical-intensive facilities, supporting ongoing demand for cooling fluids, water treatment solutions, maintenance chemicals and other specialty products essential to reliable operations.
Overall, a significant portion of new industrial spending, whether driven by private corporations, domestic expansion or global firms entering the U.S. market, is flowing into a narrow set of future-focused end markets. Chemical companies that serve the AI and data center ecosystem have the opportunity to capitalize on demand growth.
CONSULTING INSIGHT: Supply chain visibility can support faster decisions
As chemical companies reevaluate sourcing strategies, supplier networks and inventory levels, many are finding that limited visibility across the supply chain can make it harder to respond to disruptions and cost pressures. Improving access to timely operational data can help leaders identify vulnerabilities, assess the impact of potential disruptions and make more informed decisions about sourcing, inventory and production planning.
Learn more: Supply chain advisory services
Strategic execution will be a differentiator
The chemicals sector is unlikely to experience a broad-based recovery in the near term, but opportunities remain for companies willing to adapt and focus on strategic execution rather than market momentum. Chemical companies that protect margins, build resilience and align investments with long-term growth trends will be best positioned to outperform through this year and beyond.
RSM contributors
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