Risks rise for petrochemical producers as trade tensions mount


Chemicals are the best leading indicator for the global economy.

They are telling a very worrying story about the impact of China’s move to massively increase its manufacturing capacity, as the chart confirms:

  • It shows NE Asian margins for polyethylene (PE), the world’s largest polymer, based on 2014 = $100/t
  • Margins have collapsed from $202/t in 2016 to -$25/t in 2022; $3/t in 2023; and -$27/t so far this year

US PRODUCERS HAVE SEEN OPERATING RATES FALL AS CAPACITY EXPANDED

Producers clearly face some painful decisions in coming years:

  • The initial problem was that N America massively expanded output during the shale-revolution
  • Unfortunately, and predictably, their sales have since failed to reach the anticipated level
  • And so operating rates fell sharply over the period to just 80% last year, as the chart shows

We warned here in March 2014 that this was likely:

US ethylene producers need to work out where all the new ethylene production is going to be sold before embarking on the planned frenzy of cracker construction”.

But as one CEO told us after reading the analysis, “You may well be right, but every time I mention shale on an earnings call, the stock goes up $5”.

In turn, of course, this highlights the underlying issue:

  • The US Federal Reserve’s focus on boosting asset prices to try and create economic growth meant investors were uninterested in the detail of investment decisions
  • They wanted a simple story along the lines that shale gas provided: “US ethylene producers were about to undergo a manufacturing renaissance based on a massive increase in exports
  • After all, everyone “knew” that China would always be growing at double digit rates, and would “always” require increasing volumes of imports

MIDDLE EAST PRODUCERS HAVE EXPANDED TO COMPENSATE FOR SLOWING OIL SALES IN CHINA

More recently, Middle East producers have added to the over-capacity. The issue is that China has been the main growth market for their oil exports. And now China’s demand is likely to reduce as Electric Vehicles (EV) replace gasoline and diesel.

Transport is 60% of oil demand. And EVs are already 35% of the auto market, as the chart shows. They are likely to be 50% by 2026 – and 100% by 2030.

And unfortunately, oil producers don’t really understand chemicals:

  • They think in terms of millions of barrels of oil per day
  • But chemical markets are much smaller – even PE is only 90 million tonnes/year
  • And other products are usually much smaller

So they are adding massively to the over-capacity problem.

COMPANIES VASTLY OVER-ESTIMATE THE SIZE OF AFRICA’S ECONOMY

The key issue is that no market is large enough to replace China.  Some producers have argued that Africa might be able to absorb the surplus:

  • It does have 1bn people, but sadly they are too poor to generate anything like the required volume
  • Its GDP per head is just $2080 versus an average $62000 for the wealthy G7 countries, as the IMF chart confirms

RETHINKING, REPOSITIONING AND RESTRUCTURING ARE NOW ESSENTIAL FOR THE INDUSTRY

Future Winners in this New Normal world will be those companies that realise that today’s  key question is no longer, “Do we have low-cost supply?”

It is instead “Do we have a customer who is willing and able to buy from us”.

As the Antwerp Declaration confirms, there is an urgent need to combine the green agenda with forward-looking industrial strategy.

Governments have to lead the way (as is already happening in the USA) in promoting the move to Net Zero products and services, and in developing advanced chemical recycling technologies.

There is no doubting the challenges ahead. But every challenge is also an opportunity for those who are prepared to think ‘out of the box’ about the way forward. They will be the major winners of the future.

Please click here for the full analysis.