Investing.com -- The European chemicals sector continues to navigate a challenging landscape as demand softness and cost pressures weigh on earnings.

According to analysts at J.P. Morgan, the sector is contending with sluggish industrial activity, ongoing macroeconomic uncertainties, and energy price volatility, which are collectively limiting the recovery prospects.

J.P. Morgan flags the persistent weakness in key end markets, particularly in construction and automotive industries, which remain under pressure due to higher interest rates and muted consumer spending.

The analysts note that chemical companies have struggled to pass on elevated costs to customers, leading to margin compression across the sector.

The brokerage indicates that weak pricing power and high inventory levels have exacerbated the difficulties, further squeezing profitability.

Production levels have also been constrained by elevated energy prices, especially in Germany, where reliance on natural gas has made operations more expensive.

The analysts point out that while natural gas prices have stabilized from the peaks seen during the energy crisis, they remain higher than pre-crisis levels.

This sustained cost pressure has dampened competitiveness for European chemical producers relative to their U.S. and Asian counterparts, which benefit from lower energy costs.

Earnings revisions for major chemical companies remain negative, with several firms issuing profit warnings in recent quarters. J.P. Morgan’s projections indicate that EBITDA across the sector are likely to decline by a mid-single-digit percentage in the near term.

Additionally, the report underscores the cautious outlook provided by industry executives, who are hesitant to forecast a strong rebound given the prevailing macroeconomic environment.

Despite the headwinds, there are some areas of relative resilience. Specialty chemicals, particularly those tied to pharmaceuticals and agriculture, have shown more stability.

These segments have benefited from steady demand and less exposure to cyclical downturns compared to commodity chemicals.

J.P. Morgan analysts suggest that companies with a strong footprint in these areas may fare better in the near term, even as broader market conditions remain weak.

The analysts flag that destocking trends appear to be easing, which could provide some relief in the coming quarters. However, any significant improvement in demand will likely be gradual.

The sector’s recovery is expected to be slow, contingent on improvements in industrial activity and a potential easing of interest rate pressures.

For investors, J.P. Morgan maintains a cautious stance on the sector, noting that while valuations have corrected, a clear catalyst for a sustained recovery is still lacking.

The focus remains on cost management and operational efficiencies as key levers for companies to navigate the current downturn.

The analysts stress that any near-term optimism should be tempered by the structural challenges that continue to weigh on the sector’s performance.