By John Richardson
THE BIGGEST UNKNOWN out there remains whether petrochemicals and polymers demand will be stronger, the same or weaker post-pandemic than during the pandemic in the developed markets plus China. We seem to be getting no closer to any answers.
This matters from a hard-hearted dollars and cents perspective because the developed markets plus China account for more than 70% of demand for all the petrochemicals and polymers. In the developing world outside China, events will be more linear. The pandemic has weakened demand across all products and end-use markets. Recovery from the coronavirus will thus lead to a broad-based rebound.
But in the developed world plus China what follows is just an appetiser of all the uncertainties we confront.
Demand for takeaway food containers has greatly boosted polymers consumption. In China, the US, Europe, Singapore, South Korea and Taiwan a whole new economic ecosystem of restaurants working together to cook takeaway food from shared kitchens – and new food delivery companies – has sprung up.
Read this article from The Economist which talks about a group of restaurants in Washington DC that has established a shared takeaway food business. Some restaurants are making as much or more money than before the pandemic.
Demand for takeaway food seems unlikely to decline for a long time, if it all, because people will remain cautious about dining out for a long while. Or am I wrong?
The three key issues: government spending, government spending and government spending
Neither will, surely, packaging demand for hygiene products out of the precautionary principle. We will be using face masks made from polypropylene (PP) non-woven grades and bottles of hand sanitiser made from high-density polyethylene (HDPE) blow moulding grades in much bigger volumes for a long, long time.
“When we can all fly again, airlines will insist on mask-wearing and will have bottles of hand sanitiser in every seat pocket,” one of my contacts said. Hear, hear.
Coffee shop customers are reportedly insisting on disposable rather than re-usable cups because of concerns about infection. This is another micro demand trend that could linger for a long time. Or it may be a trend that disappears.
This trend has been good news for polystyrene (PS) demand as cup lids are made from PS. The cups themselves are made from paper and coating grades of PE.
And I cannot stress this enough as this is so, so important: we are living in an era of government-driven economies on a greater scale than even during the Great Depression and immediately after the Second World War.
“We have to be experts in government policy and its implications on consumer spending. This kind of analysis is longer something we can outsource ,” added another of my contacts. I again could not agree more.
On government stimulus, new demand teams set up by petrochemicals companies must evaluate:
- The extent to which government stimulus is spent rather than saved. This excellent article, again from The Economist, details some of the complexities.
- The impact of government infrastructure spending. Think of the potential $2-3tr US infrastructure spending bill. The bill could be great news for all the petrochemicals and polymers that go into construction – eg HDPE, PP and polyvinyl chloride pipes.
- Regional disparities in government spending and the effects on demand. The EU appears to be a long way behind the US in terms of total stimulus and the speed with which the stimulus is being released. This could, of course, result in different patterns of petrochemicals demand growth across regions.
There are many, many more complexities. Other complexities include the effect of the cycle out of demand for some of the things we have needed at the height of the pandemic – such as more laptops and office furniture – back into all the petrochemicals consumption associated with travel and working from the office.
Will this cycle be positive, neutral or negative for overall demand? This is vital to understand if we are going to forecast China in particular, as Chinese petrochemicals demand is largely driven by exports of finished goods – and its petrochemicals demand boomed last year because of soaring exports.
Quite frankly, nobody has a clue about any of the above because existing demand models don’t work. We need entirely new models.
But, of course, these models will take a long while to build, presuming that they can be built at all to any significant effect because of all the complexities out there. We don’t just have to contend with the pandemic but also how the three other megatrends are reshaping consumption: sustainability, geopolitics and demographics.
Meanwhile, though, we can continue to apply the scenario-based approach that has helped our industry for many years.
Three scenarios for US PE demand
Let me use PE in the US as an example of the value of our data as building blocks for your scenario work. As always, my data crunching is basic as it is for demonstration purposes only. For serious scenario work, you need to hire our consulting team.
I have used the three demand-growth scenarios for all the three grades of PE. The scenarios are as follows – along with the assumptions behind the scenarios:
- Scenario 1 – 2021-2025 annual demand growth averages 5%. a major infrastructure spending bill passes Congress, boosting HDPE pipe demand. Pandemic-related demand remains strong.
- Scenario 2 – demand growth averages 2%. A moderate-sized spending bill passes Congress. Pandemic-related demand declines in some end-use markets.
- Scenario 3 – demand growth averages 1%. No spending bill gets through Congress and/or pandemic-related demand sees a sharp decline as growth returns to pre-pandemic levels.
The end result is the chart at the beginning of this blog post. While of course my numbers will surely be wrong, the range of potential outcomes is the essential point here.