One more view on the cycle

By Malini Hariharan

The debate on the next petrochemical upcycle is heating up. After confident forecasts of a “supercycle” the blog is increasingly hearing more cautious assessments

Take the recent report from Credit Suisse which stresses that while conditions for a period of bumper margins are favourable there are still many uncertainties.

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Pic source: avalonwine.com

On the plus side the analysts highlight that global ethylene capacity growth will slow down to a compounded annual growth rate (CAGR) 2.5% during 2012-15 – the slowest pace in 20 years.

While there is still time for companies to build new capacities for this period the challenge of putting a together a project in such a short period is enormous.

But Credit Suisse expects some plants taken offline after the 2008 economic crisis to restart once margins recover.

Cheap gas in the US has given producers the incentive to resume operations while European capacity would normalize as demand conditions and business confidence improve.

Additionally, they expect a rise in Middle East production which has been constrained for the last couple of years by a cut in oil output and consequently a fall in availability of associated gas.

These developments would boost capacity growth to 3.7% over 2011-15.

But for a megacycle to materialise, world economic growth would have to exceed 4.5% on a sustained basis.

The industry, they point out, has seen three peaks in the last 22 years – 1988, 1995 and 2005-07. “1988 was a super peak, with margins 2x higher than the other two instances. Sustained global GDP of 3.5-3.7% CAGR over four-five years will get us to a 1995/2005 type of peak. A global demand rise of 4.5%+ CAGR will get us to the 1988-type peak”.

The bank’s economists predict global GDP growth of 4.7% in 2010 and 4.4% in 2011. But growth thereafter is still a question.

Another uncertainty relates to demand multiplier. “Over the last 22 years, demand multipliers – ethylene demand growth to global GDP growth – have averaged 1.3x. However the multipliers in this decade (2000-07) have averaged only 0.9x. The question is what are we going to get going forward. Will multipliers rise as demand growth shifts to emerging markets as some have suggested? Or will it be otherwise?” they asked.

This takes us to China and whether the country’s domestic demand will be sufficient to take care of any drop in exports. And here the analysts predict that the demand multiplier in the country is likely to weaken rather than accelerate.

“Using China’s exports of plastic-related products, we estimate that in 2009-10, China’s exports of product accounted for 45% of total ethylene/propylene demand, or 11% of total world demand. Going forward, as export growth slows, and shifts away from the more manufacturing driven products into higher value added things, the demand for petrochemicals from this segment of China’s GDP is likely to slow.”

The chances of a megacycle are the highest in the last ten years but it would be good to remember that there are also plenty of uncertainties.

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