By John Richardson
THERE is a very common view out there that the ethylene cycle will tighten from next year until around 2019, when the big flood of new US capacity is expected to hit the market.
This is supported by the thinking that:
- The global economy will get stronger, rather than weaker, next year.
- There isn’t that much new capacity due on-stream between now and 2019.
- Add all this together and global ethylene operating rates will increase next year, and will continue to rise until 2019.
In a later post, we will look at the ethylene cycle after 2019.
But here are our 30 reasons why we think that this consensus view will prove to be very wrong:
- Global growth will decelerate, rather than accelerate, next year.
- The Eurozone, which in 2013 accounted for 20.34% of global GDP, is in the midst of a secular and very long term economic decline with no signs of an policy initiatives that will reverse that decline.
- China, which in 2013 accounted for 14.90% of the world’s economy, is undergoing its biggest programme of economic reforms for at least 20 years. Success is not guaranteed, and, during this process, there is every chance that the country’s “real growth” may, once again, dip into negative territory.
- The rest of the world cannot prosper when 35.24% of the world economy faces such major difficulties.
- And in the case of China, of course, 14.90% greatly understates the support it provided to the global economy during 2008-2013. Now that support has largely been removed because of its economic reforms.
- Yes, the decline in oil prices is good news for major importers such as China, India and Indonesia. But oil prices have fallen because of what the International Energy Agency recently says is a “remarkable decline” in demand.
- Oil prices were only kept stable and in the region of $100 a barrel because of temporary demand created by China’s massive stimulus programme, and the flood of low-cost money from other central banks.
- Throughout this period, however, until, in fact, as recently as July this year, oil prices were equivalent to around 5% of global GDP. At this level, they have always caused recessions in the past.
- Damage to the disposable incomes of the vast majority of people was masked by the “false calm” in oil markets created by all this central bank stimulus.
- Now that the false calm has ended, as stimulus is withdrawn, we cannot assume that this means we are in an era of constantly low oil prices.
- The suspension on the car has gone and so we will feel every bump in the road as real price discovery returns to oil markets. Prices might, thus, swing between $50 a barrel on demand fundamentals and $150 a barrel on geopolitics.
- Nobody really knows the future of oil prices, of course, but we must prepare for an extended period of great volatility in oil prices.
- And the higher that prices go, however temporarily, the greater the tax on global growth.
- We think it is important not to only look at the amount of absolute olefins capacity being added between now and 2019, but to also look at how all of the world’s olefins capacity will be run, especially in China.
- China will run its new coal-to-olefins (CTO) complexes very hard in order to protect jobs as its economy slows down.
- Domestic polyethylene (PE) production increased by China rose by 9.5% to 9.5m tonnes in January-September 2014 compared with the same period last year, according to ICIS estimates. This has, literally, astonished many people, given the strength of demand in China (see our above chart).
- Estimates of PE and polypropylene production in China in 2016 and beyond must, as a result, be revised upwards.
- Low cost commodity grade resin from these facilities will also be used to boost exports of cheap finished plastic goods – again as a means of protecting jobs.
- Thus, the more resin that people manage to export to China, the more it will ultimately come back to bite their local industries, in the form of a flood of low-cost plastic finished goods re-exports. This will, of course, damage local conversion industries – and so demand for domestically-made olefins derivatives.
- It has been long assumed that a fairly sizeable percentage of Europe olefins capacity will have to be shut down, but please don’t bet on this.
- Graham van’t Hoff, the CEO of Shell Chemicals, said at the European Petrochemical Association’s meeting earlier this month in Vienna: “European chemicals are a $558bn industry providing over 1 million direct and nearly 5 million indirect jobs,… based on a vast, differentiated product portfolio”.
- He talked about the need to build better chemicals clusters, through improving integration, feedstock flexibility and government partnerships
- Here is the thing, also, on Europe: PE exports to Asia from Europe have reportedly increased this year, as European naphtha crackers are said to have a cost advantage of some $100-200/tonne over their Asian competitors.
- This is said to be the result of greater discipline in managing inventories and better management of costs in general in Europe compared with Asia. The recent weakness of the Euro has also helped. Why shouldn’t this trend continue?
- There are some 20 PE plants alone in Asia, which are said to be highly uncompetitive.
- But why do you think they will run at low operating rates over the next five years, let alone shut down?
- Protecting jobs in Asia ex-China will also be a priority, and so, just as happened in 1998 during the Asian Financial Crisis, governments will get involved.
- The priority, in fact, everywhere will be government intervention to protect local jobs.
- A global increase in trade protectionism seems highly likely, therefore.
- A rise in protectionism is another reason to think that global “effective capacity” will be a lot higher in olefins and its major derivatives than many people have forecast.
We acknowledge, of course, that we have given very little space to the arguments about why the ethylene cycle will tighten up until 2019.
Obviously, those who back this argument have spent a lot of time thinking this through and can make a very convincing case.
And so we say to these people: Please come to the debating table and discuss. We will publish your views in detail, as this debate is crucial for the industry.