Just to stress again that this blog represents my personal views and not those if ICIS.
By John Richardson
YOU WILL NEED to constantly debate the details of the megatrends as they will very often change entirely. And whilst today’s four megatrends – sustainability, the pandemic, demographics and geopolitics – will remain unchanged, their relative importance will be in constant flux. Think here of how concerns over plastic rubbish, which obviously falls under sustainability, has temporarily receded because of greater hygiene needs resulting from the pandemic.
But to quote John McEnroe, ‘you cannot be serious’ in thinking that sustainability is going to disappear as a megatrend. As further evidence emerges of the damage we are causing to our environment, public and legislative pressure can only build. This is my personal view.
But it does not matter what I think. Even if you disagree that human activity is causing climate change, and that plastic waste in the ocean is not a big deal, the boat has already sailed. Global public opinion has permanently shifted in favour of carbon neutrality and cleaning-up beaches. The petrochemicals industry must respond to public opinion.
Nobody can surely dispute the fact that the pandemic is a megatrend. It will reshape how we work and how we travel for many years to come, perhaps permanently. The pandemic has proven wrong the already flawed notion that you can estimate petrochemicals demand growth through multiples over GDP growth forecasts. Markets have become so complex and volatile that new demand-growth models need to be built.
Demographics are economic destiny as I have been contending for the last nine years. All the data I have seen show that spending patterns change as we get older, and wow, we are really, really getting older.
“In 2020, there are an estimated 727m persons aged 65 years or over worldwide. This number is projected to more than double by 2050, reaching over 1.5bn persons. The share of older persons in the global population is expected to increase from 9.3% 2020 to 16% in 2050,” said the UN in its 2020 report on the ageing of the world’s population.
Think here of the impact on oil prices as the number of people aged over 65 expands. This age group already owns most of what it needs and is living on reduced means because of retirement. When you are not driving to work or taking the kids to school and football practice, you need a lot less gasoline and diesel.
Consider another demographic influence, the Millennials, and how this generation is reshaping the climate debate. Here we have one of the many instances where one megatrend influences the other, in this case the influence of demographics over sustainability.
Because the Millennials largely accept that human activity is wrecking the environment, they are less likely to own a car. They are more likely to object to plastic rubbish , according to surveys by fast-moving consumer goods companies. The rise of social media means you no longer need to own a car to stay in touch with your friends, and the Millennials are adept at using social media.
The ageing of China’s population, which threatens the country’s economic growth, is another example of how one megatrend is affecting another. Because China must escape its middle-income trap if it is to secure its continued economic prosperity, it is on a collision course with the US over access to high-value technologies. Demographics meet geopolitics.
Population ageing explains why China is pushing hard towards petrochemicals self-sufficiency as it tries to move up the manufacturing value chain. The push towards self-sufficiency is also driven by concerns over supply security because of its split with the US and doubts over who will win the new Cold War. Here again, demographics meet geopolitics.
What follows, under headings for each of the four megatrends, are more examples of the new complexity out there. This just scratches the surface of the complexity:
- Sustainability. The pushback against plastic waste is occurring as oil prices collapse. The rise of electric vehicles is a sign of the climate-change consensus. Petrochemical producers may find that the refinery where they buy their naphtha from is shutting down, as they also face pressure from brand owners to switch to mechanical and chemicals recycling. The environmental costs of producing carbon may soon upend petrochemicals cost curves. This could make markets more regional, as being charged for carbon emissions makes it too expensive to move petrochemicals and polymers around the world. The EU’s new Green Deal is aimed at creating new jobs in response to the pandemic. The pandemic and sustainability come together.
- The pandemic. Seasonal demand patterns have gone out of the window as has the normal relationships between GDP and petrochemicals demand. New tools to measure markets have become essential, such as monitoring micro-fluctuations in demand from the supermarket and home appliance shelves, upstream to the petrochemicals plant. Changes in travel patterns must be evaluated – for example, the impact of reduced overseas holidays versus more holidays at home. Other critical success factors for measuring demand include assessing the pace and severity of lockdowns, the success of vaccine development and distribution, as well as the scale and effectiveness of government policies.
- Demographics: Aside from ageing populations in the West and in China, youthful populations in the Middle East are combining with a lack of employment opportunities to threaten geopolitical stability. The long-term collapse in oil prices (the result of ageing populations, the influence of the Millennials and the rise in sustainability) is making it harder for Middle Eastern governments to fund new employment opportunities and maintain welfare budgets. As with the Middle East, Africa and India have the potential demographic dividend of youthful populations. But Africa and India will only be able to benefit from this dividend if they more effectively meet basic needs – food, potable water, sanitation, shelter, transportation and infrastructure. Here, geopolitics come into play. China may end up winning the new Great Game with the US by meeting basic needs in Africa through its Belt & Road Initiative. How will India meet its basic needs? Now, let us deal with geopolitics in more detail.
- Geopolitics. From the fall of the Berlin Wall in 1989 up until four years ago, there was no Superpower competition. During the benign 1989-2016 period, globalisation increased. Goods more easily flowed between countries and regions. This led to the rise of outsourcing with the shift of low-cost manufacturing to the developing world. Petrochemicals became more globally traded. All that counted in deciding where to build a petrochemicals plant were tax incentives and feedstock, technology and logistics advantages. But now, because of the split between the US and China, (The new Biden administration seems likely to take a similar approach to the outgoing White House), markets could become more regional again. The rise of Populist politics is another geopolitical threat. Populism in the US hasn’t gone away despite President Trump’s defeat. Populist governments in Hungary and Poland are blocking the passage of the EU Budget.
If you are a purchasing or sales manager for a petrochemical producer, you might think, “What on earth has this got to do with me?”. Think again. Micro-movements in demand and pricing are being driven by the pandemic. If you are a brand owner buying plastic packaging or resins to make packaging, you already know that sustainability is a huge issue. This is why you spend so much time redesigning packaging to make it more recyclable.
Purchasing and sales managers would have been caught out if they did not see the US-China trade war coming in 2018 (I did), which was of course the result of geopolitics.
Few people selling consumer goods in India will doubt that the nature of demand is shaped by the country’s youthful population. In China, elevator manufacturers look set to make good money because the government is retrofitting 3m apartments with elevators. This is the result of China’s ageing population.
Awareness of the importance of the megatrends needs to travel all the way up to the CEOs as it is obviously the CEOs that set strategies. If strategies do not reflect the four megatrends, companies will flounder. Wrong strategies cannot be fixed by any amount of tactical adjustments.