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The “National Champions” in the New Petrochemicals Landscape

Business, China, Company Strategy, Economics, Environment, Europe, European petrochemicals, India, Indonesia, Malaysia, Middle East, Naphtha & other feedstocks, Oil & Gas, Olefins, Polyolefins, Singapore, South Korea, Taiwan, Thailand, US
By John Richardson on 20-Nov-2023

By John Richardson

Introduction – a reminder of the new fundamentals, including some new interpretations.

THE PETROCHEMICALS world seems to be changing for good because of the potential emergence of a new breed of Supermajors who will be lower carbon, will in some cases be bringing new plants on-stream on a scale never seen before – and because of very good cost-per-tonne economics.

Here is a list of some of the new cracker projects.

On reducing carbon, competitive carbon capture and storage costs in the Middle East – and perhaps in the US and Canada – could these give exporters an advantage under the EU’s carbon border adjustment mechanism (CBAM). The EU may apply its CBAM to organic chemicals and polymers by 2030.

Europe is the world’s second biggest PE and third biggest polypropylene (PP) net import market.

This new carbon cost curve could place a lot of pressure on older, smaller and less carbon efficient European plants, while making it harder for other exporters to Europe to compete.

And because of the growth of crude-oil-to-chemicals (CTOC) processes, we may be moving into a world where the value of oil has a greater influence over petrochemicals production.

Sure, Saudi Aramco will have very strong cost-per-tonne advantages on a standalone petrochemicals basis as it develops its new CTOC plants.

But the motive is to also ensure that Saudi Arabia is not forced to leave oil in the ground because of the damage to gasoline demand caused by electrification of transport.

Because of the large scale of the COTC investments taking place in Saudi Arabia and overseas, mainly in China, we seem to be moving towards a petrochemicals industry more influenced both by oil and by refining.

How will these influences reshape the value attached to each tonne of petrochemicals production?

Then there is demand. I don’t see any circumstances under which China’s petrochemicals demand growth can be more than an average 1-3% per year over the next decade, perhaps lower, because of demographics and debt.

This compares with estimates as recently as three years ago that China’ long-term growth would be 6-8% per year.

Developing world ex-China demand growth may also fall short of expectations because of climate change. Developed world demand could undershoot consensus forecasts due to sustainability pressures and ageing populations.

The “national champions” in Southeast Asia

In an Executive Summary at the beginning of this series, I suggested that the Winners in the New Petrochemicals Landscape would include “national champions”. Focusing on Southeast Asia (SEA), see below the Winners that could fall into this category.

The above companies are well-diversified, important for local economic growth (thus important for governments) and have in some cases access to advantaged feedstocks.

The Vietnamese government recently said that Saudi Aramco is reconsidering investing in Vietnam, having previously put plans for the country on hold. But ICIS news didn’t confirm this with Aramco.

Aramco has already invested in Malaysia, as it is a joint-venture partner with Petronas in the Pengerang Refining and Petrochemical complex.

As Aramco prioritises compensating for declining gasoline demand through COTC, its overseas partners stand to benefit.

Short-term tactics for the SEA producers

But we have never seen oversupply like this before. In HDPE, as this is the subject of today’s post, the ICIS Supply & Demand Database estimates that:

  • Global average annual HDPE capacity exceeding demand was 4m tonnes in 2000-2019 with the average operating rate at 88%. Annual average capacity exceeding demand is forecast by ICIS to be 12m tonnes in 2020-2030 with the operating rate at 79%.
  • Under our 2024-2030 demand growth assumptions, global HDPE capacity would have to be an average of 1.3m tonnes/year per annum lower than our base case predictions to result in a return to an operating rate of 88%.

We might see a wave of permanent plant closures and project cancellations as supply and demand rebalance. The pressure on less competitive producers to shut down could also be exerted by the emergence of the Supermajors.

But the more that things change, the more they stay the same. As with every downturn, sales and marketing managers can do little to influence C-level decisions. But they can edge their companies forward tonne-by-tonne through a forensic focus on the best possible returns.

Before I make some suggestions based on the above chart, let me explain the ICIS Cost Curves.

The green shaded area shows ICIS estimates of production costs for each HDPE plant in South and SEA (I’ll focus on what the New Petrochemicals Landscape means for India and the rest of South Asia in a later post).

This chart is for the week ending 10 November 2023.

ICIS assessments of production costs mainly comprise variable costs. We also include fixed costs, but not including depreciation and interest costs as these vary too much between different complexes.

Hover over the shaded area on our dashboard and you will see the names of each company, their production costs and capacities.

As you move from left to right, production costs increase. So does the regional’s cumulative capacity in millions of tonnes (the bottom axis).

We then hit the point where we reach our estimate of HDPE demand in South and SEA in 2023 – 6.837m tonnes.

The chart shows just capacities and not operating rates.

Costs of production are based on either purchased naphtha or purchased ethylene and not the benefits of integration with refineries. However, we assume transfer pricing for feedstock costs for integrated complexes rather than market prices.

Crucially, also, the lines at the top of the green shaded area showed ICIS assessed prices within the region. Better returns might have been available in other regions.

ICIS assessed the price floor or current price at $990/tonne CFR south Asia/SEA during the week ending 10 November. We estimated that producers could achieve prices up to a ceiling of $1,081/tonne CFR south Asia/SEA.

Producers who charge above our price ceilings risk increased import competition.  

To the right of the cost curve, you can see that some producers were assessed as below breakeven.

Some 20% of capacity was below breakeven based on of the current or ceiling price, whereas just one HDPE plant was assessed as having production costs above the ceiling price. This underlines the value of setting pricing at the price ceiling.

The cost curve was based on HDPE injection grade, which is a pure commodity. Producers can thus use ICIS Cost Curves (which cover other products) to assess the value of shifting production to higher-value grades.

And as I’ve been arguing since this downturn began, a razor-like focus on comparative netbacks is essential. Every tonne you can export anywhere in the world the better. If the netbacks don’t work than obviously don’t sell.

Producers need to be more global and more flexible given the increased volatility in pricing between regions – and because of weak China demand growth and the country’s rising self-sufficiency.

China is the main export market for SEA HDPE producers. This means that they must scour the world for alternatives sufficient to make up for declining China sales.

The above chart shows average HDPE film grade price premiums in a selection of other countries over CFR China film grade prices from February 2014 until October this year. February 2014 was when all the individual price assessments had begun.

The big spike in premiums was the result of the pandemic-related disruption in container-freight markets that led to HDPE oversupply being trapped in northeast Asia. This drove-down China’s HDPE prices relative to the rest of the world.

And as SEA HDPE producers search the world for acceptable netbacks, they must maximise volumes by targeting the markets with the biggest import demand.

The chart below, from the ICIS Supply & Demand Database, shows the estimated relative size of the global HDPE net import markets in 2024. This is among the countries and regions that are forecast to import more than they export.

If you are interested in the data behind the slide, please contact me at john.richardson@icis.com.

These estimates will of course change based on the actual trade, which is also available on the ICIS Supply & Demand Database.

SEA: Competitive advantage over the long term

As the Supermajors emerge – and as China moves to what could be complete HDPE self-sufficiency by 2030 – the producers in SEA need to think long and hard about their competitive positions.

Widening the focus to the other types of polyolefins, Singapore has a very small HDPE industry, but its linear-low density (LLDPE) and polypropylene (PP) capacities are big.

Because of China’s shift to self-sufficiency, because of Singapore’s very small domestic market – and because its feedstock advantages are weakening versus the emerging Supermajors – the island nation needs to redefine its polyolefins future.

Thailand has big polyolefins export exposure to China and a large overall export exposure but has a big domestic market. In this new competitive environment, questions even need to be asked about the cost position of Thailand’s ethane cracking.

Malaysia’s Petronas is predominantly an oil and gas company (PTT is predominantly a gas company in Thailand, so what follows also applies to PTT).

Oil and gas give the Petronas chemicals businesses a solid bedrock of support. But Malaysia’s petrochemicals cost position on the new cost curve could shift to the right.

Indonesia, for now at least, is a major net import market with very few petrochemical assets. It will be interesting to see whether local expansions are justified if they are not led by one of the Supermajors.

Vietnam, as mentioned, may attract Aramco, one of the Supermajors. As an oil producer, Vietnam also has the upstream support for its petrochemical operations.

But because of free trade deals with the rest of ASEAN, China and South Korea, Vietnam is heavily exposed to the record levels of global oversupply. This is because Vietnam is another big net import market.

Now let us put SEA in the global context. The chart below shows the collective percentage size of its net import countries – Indonesia, Vietnam, the Philippines, Myanmar and Cambodia.

SEA’s HDPE net import countries are forecast to represent the second-biggest prize in 2023-2030 at 24% of the total behind China in first place at 37%.

But here’s the thing: If China moves much closer to self-sufficiency than we expect, SEA’s relative importance to exporters would increase.

One must question the ability of SEA’s net exporters (Singapore, Malaysia and Thailand) to compete in a market where Middle East and North America (US and Canada) cost advantages are set to increase.

One could also argue that in a market share battle, scale matters with SEA forecast to see a share of just 8% of global net exports in 2023-2030.

Or maybe because SEA’s net export volumes are relatively small, there is an opportunity for the region to switch to smaller-volume and higher-value grades.

Conclusion: There is no turning back

There is no turning back. The petrochemicals industry is undergoing its biggest period of change since the 1990s, when globalisation and China’s demand took off – and before the sustainability pressures began.

I am, as a result, retiring my series of blog posts on the New Petrochemicals Landscape as every post from now on needs to be about the implications of these changes. In other words, the landscape has become the blog.

Perhaps I should change the title of blog to Asian Chemicals Connections (The New Landscape).

If you need support in navigating this new landscape, contact me at john.richardson@icis.com.