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Sustainability Reshapes Petrochemicals Demand

Business, China, Company Strategy, Environment, Europe, Sustainability, Technology, US
By John Richardson on 28-Oct-2016


By John Richardson

IF you still view the petrochemicals world from only the perspective of feedstock advantage then the above chart, taken from the recent ICIS EPCA seminar, offers this very straightforward fantastic opportunity:

  • If our higher penetration scenario for electric cars in Europe is realised then there could be lots of stranded naphtha in the region’s refineries. Refineries, rather than deciding to shut down, might increasingly be dedicated to supplying naphtha and other feedstocks to petrochemicals plants at very competitive costs.

What applies to Europe could well apply to the rest of the world as electric vehicles take off.

Combine this with the likelihood that oil prices will be cheaper for longer than many people expect and you can paint a picture of very strong global naphtha-cracker margins for the next ten years and beyond.

But this of course overlooks the “why” behind the switch to electric cars and what I also believe is the decline of oil as an overall energy source.

Understanding the significance of the landmark COP21 agreement in Paris is absolutely critical here in getting to grips with the “why”. Eighty six countries responsible for more than half of greenhouse gas emissions have now agreed to reduce emissions in line with the decisions made in Paris last December.


Long-term shift in public and political opinion

As I keep reminding everyone – as this is so, so important – it doesn’t matter whether or not you believe that climate change is caused by humans.

What instead matters is that COP21 demonstrates that the general public, and so the politicians, accept consensus scientific opinion.  If you want further evidence of this change in perception take a look at last month’s quite stunning global agreement on limiting the use of hydrofluorocarbons (HFCs).

You might indeed find yourself sitting on lots of cheap naphtha. But this won’t matter a jot if the legislative environment is such that you cannot sell your petrochemicals – and/or the general public simply don’t want what you make.

Why has public opinion changed then? The answer partly lies in how demographics are reshaping consumer markets.

At the height of the Babyboomer-led Economic Supercycle, the world was an incredibly optimistic place because of the oversupply of young people. Young people tend to be more optimistic than older people.

What further fuelled this optimism was incredibly strong economic growth, leading to a big surge in individual wealth. The priority was therefore consumption, consumption and more consumption.

But now young people have less money, meaning that they will want to conserve and re-use rather than spend money on new consumer products.

Meanwhile, older people are also in a weaker financial position because they are living on retirement savings.

Equally, of course, climate science used to be less-developed. People in the West were less-aware of the harmful consequences of CO2 and HFC omissions and plastic rubbish. But now the science has moved forward.

This seismic shift in public opinion doesn’t just apply to the developed world. What is also crucial is the role of China in this enormous, multi-generational shift. An ageing population in China has led to rising income levels. Rising incomes are always followed by a greater focus on quality of life.

It is not just about global warming in China as quality of life comes to the fore. The much-more immediate issue is all the illnesses and deaths being caused by heavily-polluted air, water and soil.

As for the developing countries with youthful populations, their economic growth prospects are being undermined by the end of the Economic Supercycle. This will result in less of the “can do anything” optimism that dominated the West at the peak of the Babyboomer years.

The attitude of developing countries rich in young people is also being shaped by modern-day climate science. They accept the scientific consensus, as the COP21 and HFC agreements so clearly demonstrate.

And as many of these countries are equatorial, they are seeing at first hand the impact of more extreme weather.


Back to the subject of electric cars

These changes have of course vast and complex implications for the consumption of every single thing made from petrochemicals. There is thus no space here to go into all the details.

Here, though, are three conclusions on the rise of electric cars to help develop this crucial debate.

  1. People are less likely to own a car at all as car-sharing and autonomous-driving technologies take off for affordability reasons.
  2. And if they do opt to own a car, whether it is an electric car is powered by another fuel, they will keep that same car for far longer in order to save money.
  3. The end result could well be less demand for all the chemicals and polymers that go into today’s conventional autos industries – although new opportunities may arise – for instance, 3D printing of replacement auto parts.

Sure, making petrochemicals cheaply is still going to matter in the future – in fact more so because of this critically important issue of affordability. It will therefore remain important to continue to map the availability of competitively-priced feedstocks.

But if that’s all you do you in today’s New Normal you will be running the commercially unacceptable risk of ending up with a steam cracker-load of products that you cannot sell.