Chemical Spreads to Normalize by End of 2026, Morgan Stanley Says

Morgan Stanley has revised its outlook for the chemical sector, now projecting that upstream chemical spreads will normalize by the end of 2026, a significant acceleration from its previous forecast of mid-to-late 2027. The investment bank announced the updated timeline during a Global Chemicals Webcast on Tuesday, noting that consensus views have shifted toward an earlier normalization.

Revised Outlook and Market Risks

Morgan Stanley analysts anticipate spreads will narrow, particularly given the risk of moderating demand in the second half of 2026. This environment will likely lead chemical companies to issue conservative guidance for the third and fourth quarters, a strategy that could help them in negotiating better price settlements for July.

Despite the shifting consensus, the firm pointed to potential headwinds, including the recent conflict in Iran which could impact critical shipping flows through the Strait of Hormuz. This geopolitical tension adds a layer of uncertainty to the global supply chain.

Regional Dynamics in Asia

Demand in Asia remains a key concern, with downstream companies hesitant to restock inventories despite them being at likely low levels. According to Kaylee Xu, Morgan Stanley’s China Chemicals Analyst, China’s chemical exports declined month-over-month in June but were still higher on a year-over-year basis.

Key regional data points include:

• Chemical plant utilization rates have been stable since April.
• Ethylene cracker operating rates are holding at approximately 78-79%.
• Product spreads for April and May were above January-February levels due to falling feedstock prices.

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Sector Catalysts and Stock Picks

Morgan Stanley also highlighted potential catalysts, noting that El Niño weather conditions could have a neutral to positive effect on crop inputs. The firm upgraded its rating on two companies, citing specific growth drivers.

Air Liquide

The bank upgraded Air Liquide to Overweight, viewing it as an attractive investment within the sector. Analysts project the company's Electronics segment will grow at approximately 9% from fiscal 2026 to 2028, outpacing the consensus estimate of 7%, supported by a backlog growing six times faster than its nearest competitors.

Shenzhen Capchem

Morgan Stanley also added Shenzhen Capchem to its Overweight list. The firm expects the company, which supplies chemicals to semiconductor facilities, to see its electronic chemicals business grow to 24% of total sales and 40% of gross profit by 2028, up from 15% and 30% respectively in 2025.