We are living in increasingly turbulent times. Oil and gas prices have rocketed and then tumbled. Contagion is spreading in the banking sector as depositors worry about whether their money is safe. And geopolitical turmoil continues with the war in Ukraine entering its second year.
As noted last week, we are also now in the the endgame for the Federal Reserve’s $8tn stimulus programme. As the Wall Street Journal warned earlier this month:
“You can’t run the most reckless monetary and fiscal experiment in history without the bill eventually coming due. The first invoice arrived as inflation. The second has come as a financial panic, with economic damage that may not end with Silicon Valley Bank.”
Unfortunately, the N American chemicals industry is in the eye of the storm. It invested $200bn in new shale gas-based capacity at the peak of the central bank “experiment”. And sadly, there is now massive global over-capacity in polyethylene (PE), the focus of the expansions.
Today’s 26Mt of surplus capacity means that global Operating Rates are expected to be just 79% in 2023. They averaged 86% between 2000-2022. And the problems don’t just impact PE. ICIS data shows global over-supply in the 6 major building block chemicals will reach 218 million tonnes this year.
There is therefore an urgent need for new thinking. The growing financial crisis confirms the mistakes made by the central banks. As the head of the European Central Bank (ECB) confessed last August:
“There are things that the models don’t capture. Sometimes the unexpected happens. So we have to pay attention to traditional indicators while also monitoring empirical data and what we expect to happen in terms of geopolitics, energy price developments and demographics.”
Essentially, this means we have reached the endgame for today’s business models. Management teams need to start thinking ‘out of the box’ and develop new business models and strategies for the New Normal world.
The question facing them is simple. How can producers avoid major plant closures, given the pressures already in evidence?
Luckily, there is an answer, which is to expand as rapidly as possible into the domestic market for recycled plastic. The key enabler for this move is the existing US rail network. It currently delivers polymers from Texas and Louisiana to customers around the country. At the moment, this is just a one-way trade. But there could be a major opportunity to use these otherwise empty railcars on the return journey to bring back waste polymer for recycling.
Houston, after all, is already making great progress under the Cyclyx umbrella in building the necessary framework for this on a local basis. ExxonMobil and LyondellBasell are currently building a 150kt Circularity Center to supply their advanced recycling projects and mechanical recycling markets. This is meant to be just the first of many. And there seems every reason to believe that the concept could be expanded to bring back waste plastics from current customer sites around the USA.
End-users should be delighted to co-operate, given their commitment to recycle. Their involvement could also make the recycling process much more efficient, by making it easier to identify the type of polymer being returned. The project should also benefit from favourable logistic costs as the waste plastic will often be carried at cheaper, backhaul rates. Of course, this development will need funding, not just to develop the new infrastructure require, but also to repurpose current cracker production facilities. Hopefully, though, the Inflation Reduction Act could provide major support.
This PE example confirms the future could be very bright. Companies need to think ‘out of the box’, and develop new business models aligned with future needs. This new thinking could create major new opportunities for the US industry in today’s New Normal world. It could position it to become a Winner for decades to come.
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