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Coronavirus and the way forward: Forecasting micro surges in petrochemicals demand

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By John Richardson on 11-May-2020

By John Richardson

THE MONTH of May is normally a low season for toluene di-isocyanate (TDI) demand in Europe because of reduced consumption of goods such as sofas and beds filled with flexible foams made from TDI. Perhaps not this year. There are reports from our market editors of long queues outside some furniture stores in Europe.

Is this because of the release of pent-up demand as some countries come out of lockdown and people spend money as a relief from the boredom of being trapped at home? Or are the long queues instead the result of shoppers having to stay between 1.5 and two metres apart?

Polyethylene terephthalate (PET) bottle grade resins serve as another example of uncertainty and disruption in normal patterns of consumption.

There has been a surge in demand for bottle and film grade PET because of panic buying of drinks and food during lockdowns. But now as some Asian and European countries ease lockdown restrictions, there are indications of a decline in demand as people stop stocking up on food.

In Europe, hardly anyone will be heading to the beaches of Greece, Spain and Portugal for their summer holidays when they usually consume lots more drinking water and carbonated drinks, packaged in PET bottles.

In the Middle East and Asia, how strong will the uptick in polymers demand be ahead of the Eid ul-Fitr holiday, which marks the end of Ramadan on 23 May 2020? Normally, there’s stronger packaging demand ahead of the celebration when families and friends get together.

There are minuses and pluses here. Last week Saudi Arabia banned gatherings of more than five people and is using military police to enforce the restriction.  But the UAE has relaxed some social distancing measures.

The Malaysian lockdown was due to end on 12 May, which of course is in time for the Eid holiday. But because of public and business concerns, the government has extended the lockdown until 9 June, which includes restrictions on international and domestic travel. But limited interstate travel will be allowed for families separated ahead of Eid.

All the old patterns of seasonality have been thrown up in the air, creating a whole new set of challenges for petrochemicals companies as they try to plan feedstock purchases, operating rates, sales targets and profit and loss estimates for their investors.

BASF CEO Martin Brudermuller suggests that planning in this environment is virtually impossible. His company will not give any financial guidance during the rest of 2020. Of the approximately 300 companies in the S&P 500 stock index that regularly provide earnings forecasts, 114 have not provided one for future profits, said the New York Times.

Virtually impossible does not mean impossible. There is a way through using “trends forecasting” to enable decisions on production and sales planning which could make all the difference over 6-12 months.

Micro Demand Management

Let us return to my example of TDI and flexible foams demand in Europe. An early look at sales data from stores for May versus April could help European TDI producers decide on feedstock purchases, operating rates and sales targets, along with assessing levels of inventory up and down the polyurethane value chain.

Or you could and perhaps should go further. Why not study the queues and work out how long and dense the queues  in order to get an early steer on furniture sales? Why not survey customer buying intentions as they queue up? Sophisticated big-data techniques may play a role here. If you wait for the May sales data, you risk missing the boat.

Gone are the old days of relying on simple multiples over GDP growth to estimate petrochemicals demand along with the usual seasonal demand patterns.

Think also of China where the official government data may not be telling us the real story of the extent of its post-virus recovery. Healthy scepticism is always essential when considering official data from China.

This is even more the case now than in the past. In the past, the one direction for demand was up so the only debate was how much was the real rate of increase. Now demand could be up, down or sideways. We won’t know unless we dig deeper.

I could be wrong, of course. But in this incredibility uncertain environment I believe you cannot afford to gamble your production and sales targets entirely on the official numbers.

You also, in my opinion, cannot only rely on top-down national-level data for Chinese demand that do not evaluate variations in demand province by province. As discussed last week, the pace of virus recovery will be different in each province and China comprises four different economic regions.

The above chart on the left shows my estimates for polypropylene (PP) demand by the big mainland provinces in China. Last week I looked at polyethylene.

Over the next few weeks, I will give you my forecasts for the other major polymers. I must stress that these are just preliminary efforts and will require more data crunching involving intra-province and overseas polymer sales if these sales can be assessed at all. But I at least hope that the charts will get an important going at your companies.

In this chart my best-case outcome for 2020 is a 1% fall in total PP demand over last year to 28.9m tonnes or a 5% decline to 27.5m tonnes. This leads to two different outcomes for per capita consumption by province and from there different results for demand per tonne across the provinces.

“Can I afford the extra costs of data gathering and processing when I am under a lot of pressure to optimise costs?” you might ask. I would argue this is an extra cost you simply must spend in order to avoid reduce losses over the next 6-12 months.

Every decision has to be micro and short term – e.g. “Do I buy an extra 50 tonnes of feedstock this week or do I wait?”

You cannot afford to miss out on the micro surges because they will help compensate for the overall deep slumps in consumption. Cashing in on these micro surges will repair some of the holes in your balance sheet and result in your shares performing better than your competitors.

Here is an example of a micro surge that has already happened: Chinese domestic tourism picked up during the recent national holiday. If you had good people on the ground who had anticipated the recovery, you could have responded by setting new sales targets weeks ahead.

Equally important, though, is to be aware that this pick up in tourism does not signal a return to the Old Normal. Over the whole year, spending on tourism on China is likely to be substantially down over 2020. In other words, do not get carried away by any anticipated rebound to the degree where you push your operating rates too hard.

Another aspect will be greater flexibility on operating rates. This may require some technical investments. Plants must have the ability to run at lower rates than usual and the capacity to quickly ramp up when micro demand patterns are spotted ahead of time.

And, of course, if you do not have enough good people in the ground who can detect these micro shifts, you need to find them.

Here is a free advert: Make use of our ICIS market editors in order to spot micro demand surges before it is too late. We have hundreds of editors making the telephone, Zoom and Microsoft Team calls up and down all the petrochemical value chains. This puts them in a strong position to identify small shifts in demand that do not follow the usual seasonal trends. Stay close to our editors.