By John Richardson
YOU DON’T have to be an oil and gas producer to be successful in polyolefins. Anyone with integration upstream as far as refining is in a strong commercial position.
It is also good enough to be integrated from the steam cracker downwards; in fact, more than good enough given the strength of polyolefins margins over the last few years. And in some cases where good pipeline links exist, it is even possible to make decent money from buying-in olefins to make polyethylene (PE) and polypropylene (PP).
But this will change in as little as four years’ time as a result of the drop in oil demand resulting from the rise of electric vehicles, and the collapse in virgin polymers demand resulting from the plastics rubbish crisis. Collapse is no exaggeration, by the way.
There is a third reason for the transformation summarised in the above chart, and that’s China’s drive towards balanced to long positions in polyolefins and other petrochemicals.
If the world stays as it is, which it won’t, China will be responsible for 46% of total global PE net deficits from 2018 until 2025. In tonnes, this would amount to 92m tonnes of Chinese net imports during these years.
Imagine if China’s net deficits were half this level – a very realistic scenario given the scale of the country’s planned ethylene additions. This would leave everyone outside China competing for what would in effect be a smaller global market.
Oil and gas companies won’t stop producing polyolefins
The National Oil Companies (NOCs), most notably Saudi Aramco, have recently announced a major wave of new steam cracker and derivatives investments.
Returns from these investments should be strong because of the excellent cost positions of the NOCs. But building new steam crackers isn’t just about making money from petrochemicals. It is also about finding a guaranteed home for crude oil reserves as demand for gasoline and diesel falls on the rise of electric vehicles.
This means that even in the worst case scenario where polyolefins margins collapse on oversupply, the NOCs won’t stop producing polyolefins.
Natural gas-to-polyolefins producers are in a similar position. They are not going to stop making PE if PE margins crater, as pipeline and liquefaction specifications limit the amount of ethane that can be left in methane. Ethane has no other market other than steam cracking, and so it is a case of either flaring the ethane or adding some value downstream
A new definition of standalone
Right now, the term “standalone” carries with it connotations of a very weak competitive position. This refers to the small number of PE and PP producers that not only lack their own crackers, but are also unable to source monomers via domestic pipelines. They instead need to buy ethylene and propylene from overseas suppliers.
But in as little as four years, the term standalone could end up also being applied to cracker-to-polyolefins producers. Refining-to-polyolefins producers should avoid falling into this new standalone category, but they will be at a bigger disadvantage to the oil and gas players.
It doesn’t have to be like this. There is a way forward for polyolefins players without access to oil and gas. This involves focusing downstream on the recycling industry:
- Techno-commercial teams need to work with brand owners and retailers. These teams must produce innovative plastic packaging solutions that protect end-use applications from being legislated out of existence. This will allow polyolefins producers to lock in demand for their resins and license new packaging designs.
- Producers must also build entirely new manufacturing chains involving pyrolysis plants at landfill sites that break down plastic that cannot be recycled into fuels and naphtha. Feedstock is feedstock. Polyolefins players shouldn’t care where their feedstock comes from as long as it is advantaged.
- Technologies also need to be developed to monitor what happens to plastic resins once they leave polymer factory gates. Tomorrow’s winners will be those companies that can demonstrate to legislators, through perhaps Blockchain technologies, that the plastic pellets they make are being recycled.
In the innovation adoption lifecycle, the Innovators account for only 2.5% of participants in any market. Next come the 13.5% that comprise Early Adopters. This is followed by the rest – the Early Majority, the Late Majority and the Laggards.
If you want to guarantee success in the polyolefins industry of tomorrow, you have to be both an Innovator and an Early Adopter.
