Home Blogs Asian Chemical Connections Why HDPE and other petchem operating rates could remain at record lows until 2030

Why HDPE and other petchem operating rates could remain at record lows until 2030

By John Richardson on 04-Dec-2023

By John Richardson

UNTIL I FULLY understood the potential supply and cost-per-tonne implications of converting a lot more oil into petrochemicals, what’s happening to demand and the extent of China’s future self-sufficiency, I used to present charts such as the one above to clients with the proviso: “The good news is that this chart will almost certainly be wrong”.

In the above example I would say that there was no realistic chance that global high-density (HDPE) operating rates would average 76% between 2023 and 2030 compared with 88% in 2000-2022.

“No way so not to worry,” would be my message because project cancellations and strong demand growth would quickly bring markets back into balance.

Now I am not so sure for the demand reasons I summarised in my 26 November blog post, which has links to earlier posts and research going back to as early as 2011.

Briefly here, we must consider the end of the China property bubble, its ageing population, ageing populations elsewhere, sustainability and the effects of climate change, particularly on the developing world outside China.

My 15 November post explained why China could become almost completely self-sufficient in all three grades of PE, in polypropylene (PP), in paraxylene (PX) and in ethylene glycols (EG) by 2030. I cannot see a scenario where this doesn’t happen, barring a major and unforeseen shortage of engineering and construction resources.

There are rumours of many crude-oil-to-chemicals (COTC) investments in the Middle East excluding Iran that have yet to be officially announced, as I again discussed in the 26 November post. China’s push to balanced positions in the above products is expected to receive big support from COTC projects.

Plus, there’s a big wave of new ethane crackers being planned in the Middle East and North America.

This business could end up being largely dominated by oil and gas majors integrated downstream into petrochemicals. 

Even in a world of persistently very low operating rates, the Supermajors may continue to build new plants and run existing plants hard. This could perpetuate low overall industry operating rates.

This is because the Supermajors would have excellent cost-per-tonne economics due to the scale of the new COTC and ethane-based plants which are being planned.

These investments could also carry “lower carbon premiums”, further improving their economics, through carbon capture and storage. They may be able to compete very effectively in the EU if the EU applies its carbon border adjustment mechanism to organic chemicals and polymers by 2030.

And here’s a crucial thing: a tonne of petrochemicals could be valued very differently than today, upending how markets function.

Even if margins are low at the super-efficient new COTC plants, high operating rates may still be common because the alternative is being forced to leave oil in the ground for good. This would be because of the impact on oil demand of electrification of transport, biofuels and increasing fuel efficiency.

I suggested in my 7 November post that there could be a fundamental shift in the thinking on permanent plant closures.

Every one job lost upstream “equals 12 downstream”

During previous downturns, the scale of petrochemical shutdowns was less than had been expected because of political interventions to support jobs and the need to keep upstream refineries running for local fuel security reasons.

There was also the fear that even the most inefficient petrochemical players would lose out if they exited the business because of the way recoveries have worked in the past. Sudden upswings in margins led all producers to make as much money in, say, three months as they lost in three years. These rapid recoveries are called “fly-ups”.

But I argued in the 7 November post that these new demand realities could change equations.

So could the pressure to close refinery capacity in Europe because of electrification of transport and biofuels – and because the giant COTC projects promise to exert further pressure on older, less efficient refineries in every region: The COTC plants are expected to make a lot of low-sulphur diesel and Group III base oils along with petrochemicals.

You must build all the above arguments into a scenario where we see a major wave of permanent plant closures.

But other outcomes are equally possible. These include petrochemical plants in the most under pressure regions and countries – Europe, Singapore, South Korea, Taiwan, Thailand and Japan – limping along at very low historic operating rates.

“After years of accelerating growth, Europe’s electric car sales appear to be entering a go-slow zone as drivers wait for better, cheaper models that are two to three years down the road,” wrote Reuters in this 13 November article.

High interest rates were deterring buyers, major auto manufacturers told Reuters.

“Dealers in Germany and Italy as well as research by four global data analysis firms say there is more behind the slower uptake than economic uncertainty, with the consumers unconvinced that electric vehicles [EVs] meet their safety, range and price needs,” the wire service added.

“Range anxiety” – the concern that EVs would run out of power, leaving drivers stranded, was a significant concern affecting EV sales everywhere, wrote Forbes in this 30 August article.

“Confusion of EV networks, charging locations and parking rules are fuelling consumer reticence and slowing deployment. Today’s status quo of fragmented networks with incompatible payment platforms is untenable. Easy charging that ‘Just works’ will be essential for mass EV adoption,” Forbes continued.

Slower than anticipated EV adoption could mean that the most inefficient refineries may continue to operate for a good while longer.

And, anyway, EVs are mainly only a threat to gasoline demand.  Refineries may continue to operate in order to supply diesel and jet fuel.

There is also the supply security issue for refineries in an ever-more uncertain geopolitical world. Governments could intervene to support refineries because of the risks of interruptions in fuel supplies from overseas.

We most also think about jobs. 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.

Even if petrochemical plants on a standalone basis continue to lose money, we might see strong government intervention to support employment.

The huge scale of shutdowns required to restore profitability

And refineries can sometimes only continue to operate if associated petrochemical plants continue to run. Where else would, say, a small inland European refiner sell its naphtha if the local cracker were to close?

We must also remember that in countries such as South Korea and Thailand, petrochemical companies are important for broader economic growth.

The chaebol in South Korea are giant industrial conglomerates of which petrochemicals are just a small part. It might be that the insurance company supports the petrochemicals company within a chaebol to keep a petrochemicals complex running.

We may thus see charts such as the one below continue for a long time.

The chart, from the ICIS Cost Curves service, shows that during the week ending 24 November most of the HDPE producers in Northeast Asia (NEA) were assessed to have total costs above the “current price”, which was $845/tonne CFR NEA.

Total costs mainly comprised integrated variable costs (minus co-product credits). Also included were fixed costs not including interest charges and depreciation as these vary too much between different plants.

Total costs are on the left-hand axis with the bottom axis representing cumulative capacity.

The black vertical line is our estimate of the region’s net demand (local production plus net imports) at 16.8m tonnes in 2023. The region comprises China, Taiwan, South Korea and Japan.

Another argument supporting why we could end up with low petrochemicals profitability and operating rates for a long time to come is the scale of the shutdowns required to bring markets back into balance.

Sticking to HDPE an example, and assuming China’s demand grows is at an annual average of 5% between 2023 and 2030 (which is our base case), global capacity would have to be an average 1.8m tonnes a year lower than we forecast for operating rates to return to their 2000-2022 average of 88%.

But I see a risk of China’s demand only growing by 1-3% between 2023 and 2030. Assuming the other regions grow as in under our base case – and assuming China’s HDPE demand increases in the middle of this range at 1.5% per year – this would necessitate capacity 2.4m tonnes a year lower than our base case to get back to 88%.

The scale of the shutdowns required under both these scenarios would be huge. So, one can argue that shutdowns won’t happen on this scale for the reasons detailed earlier on – and because producers might hang on in the hope of a sudden “fly up” in margins.

Further, our forecasts of HDPE capacity in 2023-2030 only include announced new capacities. As also mentioned earlier, there are rumours of a lot more new petrochemicals capacity in general being planned that has yet to be announced.

Conclusion:  Scenarios, scenarios and more scenarios

The two extreme outcomes of the new petrochemicals world by 2030 are Supermajors and Deglobalisation.

Under Supermajors, two sub scenarios are possible. One is an unprecedented wave of capacity shutdowns, discussed in my 7 November post, or the “limping along” outcome outlined today of less efficient producers continuing to operate, but at low rates and with low profitability.

Or we could end up with Deglobalisation where markets end up much more protected and much more regional with new trade barriers preventing the creation of the Supermajors.

The Deglobalisation outcome will be the subject of my next blog post.