Commentary: Boom time ahead?

27 September 2013 10:27  [Source: ICB]

The chemical industry could be in for a multi-year cyclical peak from 2016, buoyed by project delays and cancellations, increased outages in the US and asset closures in Europe as its aging facilites become uncompetitive, according to bullish analysis from analysts Alembic Global Advisors.



Industry could see high capacity utilisation rates

The group believes the consensus view on ethylene capacity additions from 2013-2017 may overestimate supply growth by as much as 19.4m tonnes. Reduced operating rates in Iran, plus delays and cancellations reduce its forecast for the Middle East. Meanwhile delays to additions in North America hit its forecast. It also believes Asia and Latin American consensus figures are overstated. Alembic’s view of “consensus” is for an extra 50m tonnes of capacity to be added, a 34% increase on 2012. Alembic’s consensus view seems high – the ICIS Consulting estimate is less than half this figure.

On the demand side, Alembic uses International Monetary Fund global GDP forecasts and factors in a 1.2X multiplier which it says may prove too conservative. This gives average demand growth of 4.9% between 2013-2017, in line with historical trends. The analysts look back at the last 47 years to show ethylene demand growth has been flat to negative in only five years, all following oil price shocks, and all followed by sharp rebounds in demand growth. Global capacity utilisation will move steadily upwards to 90.8% in 2016 and could continue to peak for several years, sustained by a big increase in plant outages in North America as companies run their aging plants hard to maximise returns from cheap ethane feedstocks. Alembic also factors in plant closures in Europe, where around 90% of the facilities are over 30 years old.

This scenario would be great news for US-exposed chemicals in particular, with companies such as Dow, LyondellBasell and Westlake seeing their share prices doubling. Before we all rush out to buy stocks, it is worth remembering that not all economists share the IMF’s bullish forecasts for global growth. Some suggest that population demographics will play a huge role in determining future growth, as aging populations in mature and emerging economies such as China stifle and alter historical demand patters. International eChem’s Paul Hodges points out that US 2012 ethylene production was still 7% below the 2004 peak level. He says that without major new sources of demand, it is hard to see the driver for a 2016 peak in operating rates and profitability.

By: Will Beacham
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