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Supermajors versus Deglobalisation scenarios: The impact on petrochemicals and recycling

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By John Richardson on 07-Dec-2023

By John Richardson

THERE ARE TWO scenarios or roads down which the petrochemicals industry could travel over the next ten years, with arrival either at Supermajors or Deglobalisation.

Under Supermajors, the industry would be dominated by a small number of global oil and gas companies, with maybe a few smaller oil and gas to petrochemicals “national champions” in reasonable positions.

The Supermajors outcome could result in a major wave of closures in Europe, Southeast Asia and Northeast Asia of plants that are small and inefficient with high decarbonisation costs.

Or we could see petrochemicals businesses in these regions largely limping on at low operating rates and with very poor profitability,

Businesses may be kept operating through government intervention for reasons including protecting employment and ensuring upstream refineries continue to run in order to guarantee local fuel supplies.

Under Deglobalisation, markets would become much more regional as local players thrived rather than lost money. This would be thanks to new trade barriers and other support from governments.

In the case of plastics recycling, I worry that under the Supermajors outcome, competitively priced virgin polymer imports could place further strain on recyclers. Recyclers are already struggling with recent falls in virgin prices.

Critical to either outcome is also the battle over carbon emissions assessments, with the force and articulacy of opinions perhaps as important the objective (if there is such a thing) science.

It is in the gift of legislators in Europe and elsewhere, including my home country Australia, to decide what happens next.

These are obviously two extreme scenarios. Many other less extreme outcomes are possible between Supermajors and Deglobalisation.

Somewhere along this spectrum seems most likely to me. I believe some governments will respond effectively to protect local industries while others won’t.

But nobody really knows what’s going to happen next, which makes scenario planning essential.

Scenarios will need to be frequently re-examined to assess what has become the more likely outcome, factoring in, for example, the pace of crude-oil-to-chemicals (COTC) investments in Saudi Arabia and any new trade barriers.

Petrochemical companies, buyers, traders, distributors, tank terminal operators, engineering and procurement contractors and financial companies etc. will be affected in different ways as the New Petrochemical Landscape develops.

Wherever we end up on the spectrum between these two scenarios, I am convinced that the following two outcomes are inevitable.

Firstly, China will be much more self-sufficient by 2030 in polyethylene (PE), polypropylene (PP), paraxylene (PX) and ethylene glycols (EG) than is commonly assumed. I believe that barring major engineering and construction shortages, China will become pretty much balanced in all these products.

Secondly. because of changes to China’s economy – and because of the global impact of ageing populations, sustainability and climate change – we have entered a period of significantly lower petrochemicals demand growth.

Risks to recycling from the Supermajors outcome

Let’s start with Australia as an example of a country where the Supermajors scenario poses challenges to recycling.

The Australian Packaging Covenant Organisation (APCO) is the non-profit body tasked by the government and companies to develop a circular plastics economy in Australia. Its targets for 2025 are:

  • 100% reusable, recyclable or compostable packaging.
  • 70% of plastic packaging being recycled or composted. 
  • 50% of average recycled content included in packaging (revised from 30% in 2020).
  • The phase out of problematic and unnecessary single-use plastics packaging. 

In July 2022, Australia banned exports of unsorted plastic waste, potentially creating a lot more local feedstock.

Here’s problem, though: Australia’s materials recycling facilities or “MRFs” (these are the companies that separate and prepare recycled feedstock) are said to be having to pay recyclers to take sorted waste away.

A year ago, the MRFs were earning money from the recyclers, which was before the collapse in virgin resin prices.

The virgin versus recycling price challenge could get a lot worse in Australia and elsewhere because the new COTC plants will probably have unbeatable cost-per-tonne economics.

A motive behind building COTC plants is also to maintain oil production as demand for crude declines due to electrification of transport, biofuels and fuel efficiency.

So, what might be the future value of a tonne of polymers?  Could it be the alternative value – obviously zero – of permanently leaving barrels of oil in the ground?

In other words, we could end up in a very extended virgin polymers pricing trough that places further financial pressure on Australia’s MRFs and recyclers.

And might the local brand owners delay their APCO-aligned targets because recycling feedstock supply declines, and because the alternative of buying virgin resin is so much cheaper?

Companies up and down the recycling value chain Australia want to do the right thing. But untempered market forces are untempered market forces.

Australia only has one polypropylene (PP producer), Viva Energy, which operates a 132,000 tonne/year plant. The plant’s propylene supply is downstream of Viva’s fluid catalytic cracker, part of its refinery.

Australia also has only one polyethylene (PE) producer, Qenos. The company produces 115,000 tonnes/year of high-density PE (HDPE), 85,000 tonnes/year of low-density PE (LDPE) and 130.000 tonnes/year of linear-low density PE (LLDPE) via ethylene from ethane crackers.

In other words, these are very small producers in the global context. But they are very important for the Australian economy because of the downstream employment they generate.

Returning to theme of recycling, both Viva and Qenos have advanced or chemicals recycling projects.

These projects – along with existing and future investments in mechanical recycling – have the potential to create complete circularity in Australia for single-use PE and PP end-use applications. This is because of the small size of the local market.

As you can see from the chart below, the Australian polyolefins market is only some 1m tonnes a year with demand growth forecast by ICIS at just 1-2% per annum until 2030.

Australia can thus be home to some of the “niche” producers who I believe can win in the New Petrochemicals Landscape by focusing on recycling.

And the understanding of how to work complex recycling value chains can be a service that Australia eventually exports.

The Australian polyolefins market needs substantial imports to meet about 50% of local demand, as the above chart again illustrated.

The obvious danger, though, is that unless Canberra provides the right regulatory support for the local virgin producers, recyclers and MRFs, the market could be flooded by very competitively priced polymers.

Then the APCO targets might not be met. Plastic waste that can no longer be exported might end up mainly in landfill, adding no economic or environmental value to local resources.

The chart below, from a 2022 Plastics Europe study, shows that Australia is already a recycling laggard with just 12% of its post-consumer waste recycled, 1% used for energy recovery and the remaining 87% sent to landfill.

This is an easy solution given our vast amount of land. But it not the right solution for the economy and environment.

These same challenges could just as much apply to recyclers elsewhere.

Now let’s examine the carbon issue, using the EU as an example.

The carbon crisis for the EU’s petrochemicals industry

“The EU chemicals industry is likely to be hit by substantially higher carbon prices and a more ambitious wave of CO2-reduction reduction targets from the European Commission in the years ahead,” wrote my ICIS news colleague, Tom Brown in this 26 September article.

Tom was reporting on comments made by Marco Mensink, director general of industry body Cefic, at the opening of this year’s European Petrochemicals Association (EPCA) meeting in Vienna. I attended the event.

“Carbon prices have increased rapidly and far exceeded projections made a few years ago, but a lack of carbon credits in the current emissions trading system (ETS) directive beyond 2036 means that prices could spike even higher than expected,” Mensink also said.

“By 2039 if you still emit carbon, you’re going to pay through the nose, there is no other way,” he added.

Higher carbon pricing is likely to be exacerbated by European Commission 2040 targets, which are expected to be determined in early 2024.

The European Scientific Advisory Board on Climate Change has recommended that policymakers target 2040 greenhouse gas reductions of 90-95% compared to 1990 levels, from 2030 targets of minus-55%.

Policymakers were leaning towards an 85% reduction, according to Mensink, but that would also constitute a major shift for the chemicals sector.

“Brussels has to come out with the 2040 targets,” Mensink said. “The science panel says minus-95% and politicians say minus-85%. Minus-85% might as well be minus-100%,” said Mensink.

The potential for a substantial increase in carbon pricing beyond the mid-2030s raised the pressure on companies to make the right bets in their next investment cycle, Mensink added, particularly as higher costs would also impact consumers. This would exert pressure on politicians to support either industry or households.

Developing sectors such as electric vehicles, batteries and semiconductors were a priority for the European Commission. These were all value chains that the chemicals sector supplies to, but the chemicals industry had yet to benefit significantly from subsidies flowing to those industries, Mensink said.

“10% [of European chemicals companies] will die… 10% might get state aid, and the middle will suffer. The message is to be among the 10%,” Mensink said.

Carbon capture and storage costs in Europe are said to be around $200/tonne versus some $30/tonne in the Middle East.

So, given these higher costs and Mensick’s comments on the other carbon challenges, this an outcome: European imports of competitively priced petrochemicals increase from the Middle East and North America, which are accredited as lower carbon, forcing European plants to shut down.

But under Deglobalisation, legislations would be introduced on the basis that it was better from a carbon abatement and local employment perspective for local refineries and petrochemical plants to continue to operate.

In my 26 November post, I said that every one job lost through a refinery or petrochemical plant closure equalled six jobs lost downstream. “More like 12,” I was told by a contact on LinkedIn.

There is also the supply security issue for refineries and petrochemical plants in an ever-more uncertain geopolitical world. Why rely on imports when there is a higher risk of interruptions in supply?

Conclusion: No business as usual  

One of the big problems we face is mindsets. For example, during this year’s EPCA event, a lot of the discussions I had were with industry executives eager to know when markets would return to normal.

I don’t believe they can return to normal for the reasons detailed above. These are the biggest changes this industry has seen since the early 1990s, when globalisation began, when China’s demand started to boom and before sustainability became a defining challenge.

If we keep scrabbling around for signs of a return to normal, this will pull valuable attention away from the constant assessments necessary to understand where we are on the spectrum between Supermajors and Deglobalisation.