See below an Executive Summary of what I see as the new petrochemicals landscape. In future blog posts, I will provide detailed analysis of the individual themes below – and will then provide a summary in a final post.
I BELIEVE WE are heading for the biggest period of change in the global petrochemicals industry since the 1990s.
This was when globalisation took off with the formation of the World Trade Organisation (WTO), when China’s economic boom began, when the global population was more youthful and before climate change became a major threat to growth.
And in the 1990s, the petrochemicals industry wasn’t under the same pressures as today to decarbonise, to recycle plastic waste and to work with brand owners to reduce polymers consumption through re-use and redesign.
Some petrochemical markets look set to become more regional due to the growing recycling pressures and because of the geopolitically motivated push to re-shore manufacturing supply chains. We seem to be in an era of deglobalisation.
Demographics reshape consumption
The loss of petrochemicals demand growth in China versus earlier expectations is another element in the volatile mix. This explains today’s vast oversupply in all the major petrochemical value chains.
One of the reasons why China’s consumption growth will fall well short of earlier expectations is its rapidly ageing population. The other reason is debt – see the later section on debt and demand growth.
Ageing populations are a global petrochemicals demand problem.
The UN Population Division estimates that between 2025 and 2030, the growth of the perennials age group – 55 plus – will be bigger than the Wealth Creators (24-54) and the Under 25s.
The perennials already own most of what they need and many of them will be living on pensions, reducing their capacity to spend.
For the developing world outside China which has youthful populations, the rise in the number of perennials challenges the idea that relocation of export-focused manufacturing from China (because of China’s rising labour costs) is a route to strong growth.
So does the push against consumerism in the West, especially among the younger generations as “less is more” prioritises experiences over things.
Climate change is a further threat to the theory that the developing world ex-China can replace lost Chinese petrochemicals demand versus earlier expectations. Consider, for example, that some 70% of the Indian workforce works outdoors.
The impact of increased extreme temperatures, floods, droughts and food shortages are not part of standard models for estimating petrochemicals demand growth.
Further, ICIS data show that even very strong petrochemicals demand growth in the developing world outside China over the next 20 years cannot fully replace lost growth in China versus earlier expectations.
Debt-fuelled petrochemicals demand growth
China’s population was already ageing by the time it launched the world’s biggest-ever economic stimulus package in 2009. This further turbo-charged petrochemicals consumption growth in a country that was already dominating global demand.
The chart below shows per capita consumption for nine of the big synthetic resins in the world’s three mega regions – China, the developing world ex-China and the developed world between 1992 and 2022.
Economic liberalisation introduced following Deng Xiaoping’s 1992 Southern Tour provided the first big boost to Chinese growth followed by the country’s admission to the WTO in 2001. Membership of the WTO removed the tariffs and quotas that had restricted Chinese exports to the West, enabling it to take maximum advantage of what was then a youthful population.
But just look at how at how China’s per capita growth (the green line) took off from 2009 onwards.
China’s domestic growth since 2009 has been based on its real estate bubble, with prices peaking at 45 times disposable income. Real estate is now 29% of GDP, the highest in global economic history, whilst China’s debt has reached 295% of GDP.
But Pew data show that only 23m Chinese earn more than $50/day (India has just 2m).
Beijing needs to reverse course and focus on supporting domestic consumptions – including improvements in social security and pensions – now that the real-estate bubble has burst and as the economic drag of an ageing population increases. But this transition may not occur because of economic and political factors.
And globally, debt is a concern because of the big build-up in lending following the Global Financial Crisis and during the pandemic.
“Total debt stood at 238% of global gross domestic product last year, 9 percentage points higher than in 2019. In US dollar terms, debt amounted to $235tr, or $200bn above its level in 2021,” wrote the IMF in this 13 September blog post.
“Within 20 years the US federal debt will have climbed from its current level of 100% of GDP to its 200% limit,” wrote the 23 October issue of the Australian Financial Review, based on the work of the fiscal modelling team at the University of Pennsylvania.
“The debt burden will then have become unsustainable, with no way of avoiding an actual default or, alternatively, an implicit default in the form of a very long period of debilitating high inflation that reduces the debt in real terms,” the newspaper added.
The major questions are over when and whether global debt becomes a crisis given the demand challenges highlighted above. Today’s high bond yields and inflation rates might indicate that we have already reached crisis point.
The petrochemical export winners and losers
We must also consider shifting petrochemical feedstock advantages and the roles that the cost of carbon and carbon abatement efforts will play in reshaping traditional cost curves.
The emergence of Saudi Arabia’s crude-to-chemicals technologies, along with the country’s focus on ensuring that its capacities have a lower carbon footprint than competitors, has the potential to substantially redesign the global petrochemicals map.
While, as mentioned, some markets are likely to become more regional, reducing the need for imports, the deep-sea import and export flows that remain could be largely captured by the Middle East.
Saudi Arabia, the United Arab Emirates and Qatar may win bigger shares of export markets because of their strong feedstock cost positions – and because of their push to decarbonise their output in a world where the cost of carbon is going to increase. Europe’s carbon border adjustment mechanism (CBAM) legislation may provide significant support for their exports.
Perhaps the US will also be among the winners in long-distance export markets for the above same reasons. Perhaps not, though, if the US industry’s costs for carbon capture and storage place it at a disadvantage – and if the US finds itself on the wrong side of trade barriers.
China may also be among the export winners if its decarbonisation efforts combine with continued big increases in local capacity.
The table below details just some of the new, mega cracker complexes being planned globally, which claim to be lower in carbon output than conventional complexes.
The role of Beijing in supporting decarbonisation efforts will be a critical factor, as will the scale of government financial support for the petrochemicals industry in general.
China’s petrochemicals industry has never been run purely for profit. Understanding the scale of future government support for the industry – along with cost-per-tonne economics – will thus help us forecast the scale of China’s petrochemical exports.
What seems clearer is that some producers in Europe, Singapore, South Korea and Japan will be under pressure to consolidate. Capacity shutdowns are already said to be under discussion.
This is because of their feedstock cost disadvantages, the age and scale of assets, lower-than-expected China growth and the country’s increasing petrochemicals self-sufficiency. Another factor is the higher costs of carbon abatement relative to the Middle East and the US – and perhaps also China.
Another group may also emerge when the dust settles. This could be “national champions” – regional-only petrochemicals players without major deep-sea export positions that are supported by governments for local economic development reasons. The successful national champions will also need to have good economies of scale, upstream integration and technical and operational skills.
Another group of winners: “Local for local producers”
Plastic recycling offers another route to success for producers. This is provided they can manage a much more complex manufacturing value chain than in hydrocarbons.
Petrochemical producers need to work with waste collection and sorting companies, and they must cooperate more closely with brand owners and retailers on re-use and redesign.
They also need to manage the expectations and perceptions of all the other stakeholders in the circular economy – the NGOs, the academics and the general public.
Plus, of course, they need to ensure that governments provide the right regulatory framework in countries where policies, which should be long-term and consistent, are heavily shaped and re-shaped by short-term political factors.
But the opportunities are big, especially in markets where volumes of demand and growth prospects are low.
Take Australia as an example where polyethylene (PE) and polypropylene (PP) consumption is estimated by ICIS at 957,000 tonnes in 2023 with demand growth from 2023 until 2030 forecast to average 2% per annum.
In 2023, 52% of demand is forecast to be met by local production with this percentage expected to remain steady until 2030.
It is feasible that local production could reach 100% of local demand for single-use PE and PP end-use applications through mechanical and chemicals recycling.
Some producers argue that the viability of global recycling investments hinge on the willingness of brand owners and retailers to pay “green premiums” to cover investment costs.
But because supermarket margins are typically only 3-4%, neither the supermarkets nor their customers seem to have the capacity to pay premiums.
The way forward instead seems to be producers working with the brand owners, whose margin positions are a lot stronger, on sustainable packaging solutions that enable brand owners to win more market share.
Recycling markets are the “local for local” markets mentioned at the beginning because of bans on exports of plastic waste, such as the one introduced by Australia in 2020, and the 2019 Basel Convention on Plastic Waste. The convention heavily restricts exports of plastic waste.
Conclusion: A whole new level of complexity
What is not discussed here is how artificial intelligence (AI) could reshape the global economy and the petrochemicals industry. We need to add AI, and/or advanced machine learning, to the other older megatrends – demographics, debt, geopolitics and sustainability.
But the themes covered in this Executive Summary, hopefully, go some distance towards helping petrochemicals producers at least start to debate a new and much higher level of complexity.
The next step is obviously to revise strategies to fit with the needs of producers across the different regions.
This won’t be achieved through standard, spreadsheet modelling because the old models are broken. Nobody should, for example, depend anymore on multiples over GDP to estimate petrochemicals demand growth as all the variables connected with sustainability make this approach unviable.
How we get there is through highly interactive workshops during which we might be able to ask AI to go away and model all the new inputs before we return to discuss again – and very probably again and again.