Home Blogs Asian Chemical Connections Global ethylene capacity growth would need to be 90% lower than the ICIS base case for healthy 2024-2030 operating rates

Global ethylene capacity growth would need to be 90% lower than the ICIS base case for healthy 2024-2030 operating rates

Business, China, Economics, Environment, Europe, European petrochemicals, Malaysia, Middle East, Naphtha & other feedstocks, Oil & Gas, Olefins, Polyolefins, Singapore, South Korea, Sustainability, Taiwan, Thailand
By John Richardson on 15-Jan-2024

By John Richardson

NOW THAT the New Year is in full swing, I feel it is essential that we get to grips with the reality that this is not just a very extended petrochemicals destocking cycle. The chances of a recovery in 2024 are minimal, in my view.

During my meetings at EPCA in Vienna last October, the phrase “extended destocking cycle” kept cropping us. Many of my contacts asked if ICIS had seen any signs of destocking bottoming out, which would have been a sign that the end of the downcycle or trough was not too far away.

But as I said in my 10 January blog post: “I believe we should stop talking about what’s happening today as a trough as this is not a trough. We are instead seeing a secular shift in markets, the biggest since the early 1990s.”

The chart below is further data that confirm the secular shift. I challenge anyone to provide alternative petrochemicals data that contradict this conclusion. All the ICIS data points I can find seem to indicate the change in direction of travel.

Global ethylene operating rates were at an annual average of 88% in 1990-2023 versus the ICIS forecast of 79% in 2024-2030.

More significantly, capacity exceeding demand was at an annual average of 17m tonnes in 1990-2023. This is forecast to rise to 53m tonnes in 2024-2030, which would be an increase of 222% based on the exact numbers.

An argument I heard during EPCA and one that is still being put forward – including by a senior corporate planner the other week – is that we shouldn’t be misled by this apparently grim picture.

Beneath the picture presented by charts such as the one above was the essential context that we’d been through sudden surges of capacity like this before, the planner told me.

 “We have seen big surges in capacity like this before and demand quickly absorbed the capacity. This time will be no different,” he said.

Consider the chart below.

In 2010, global ethylene capacity increased by 9%, the highest annual increase of any year between 1990 and 2023 (the 1990-2023 average was 4%). And yet in 2011, global operating rates were at 86%, the same as in 2010. 

In 2024-2030, we again see a 4% annual average increase in ethylene capacity. And yet we see 2024-2030 operating rates, as mentioned earlier at 79%. In other words, the forecast growth in capacity is nothing unusual.

As operating rates are percentages of demand over capacity, the smoking gun responsible for our bearish forecasts for 2024-2030 must be demand.

1990-2023 global ethylene demand growth averaged 4% including minus 4% in 2008 (the Global Financial Crisis). Growth then increased to an all-time of 11% in 2010, as China rescued the global petrochemicals business through the world’s biggest-ever economic stimulus package.

This explains why, despite a 9% increase in ethylene capacity in 2010, global operating rates were still at a healthy 86% in 2011.

Global demand growth fell to zero in 2022 followed by a recovery to 2% in 2023. But did this happen given events in China? Could growth have been lower last year?

We forecast annual demand average growth of 3% in 2024-2030. But I see significant downside risks to this outlook for reasons detailed in the next chart. I thus see the risk of an even worse outcome than our forecast of an annual average of 53m tonnes in 2024-2030.

The next chart shows global polyethylene (PE) per capita consumption growth in 1992-2023. PE is, of course, the main ethylene derivative.

China’s 1990-2023 annual average per capita PE consumption growth was 10%. This compared with 4% in the Developing World ex-China and 1% in the Developed World. This led to China’s share of global PE demand in tonnes increasing from about 2% to above 30%

We see China’s per capita consumption growth falling to 3% in 2024-2030. But because of the three historic benefits highlighted in the boxes in the above chart being largely played out, growth could be lower. This would obviously translate into fewer new tonnes of demand than is expected.

Developed World growth in 2024-20303 is seen at 1% (consider the threat to this forecast from sustainability) and the Developing World ex-China at 3% (evaluate the economic impact of the climate crisis).

But for argument’s sake, let’s assume our demand growth forecasts are right. What would it take to get global operating rates back to the 1990-2023 very healthy average of 88% in 2024-2030?

The blue line in the above chart involves annual average capacity growing at just 800,000 tonnes/year in each of the years between 2024 and 2030. This is versus our base case assumption of 7m tonnes/year of capacity growth during each of the years. Capacity growth would thus have to be 90% lower.

Given new plants with excellent economies of scale and feedstock advantage that are due to start-up in the Middle East, North America and China, this reduction in capacity growth would surely mean capacity closures elsewhere. These would likely be in Europe, Singapore, South Korea and Taiwan and other disadvantaged countries and regions.

China faces what I believe is a long-term deflation challenge, which would make its plant construction costs lower than elsewhere.

China’s new plants, as mentioned above, will also have excellent economies of scale.  Feedstock advantage will come from access to cheap crude oil and new crude-oil-to-chemicals technologies because of China’s closer geopolitical and economic relationships with the Middle East.

Here’s a thing as well: Even if the economics of each new China steam cracker project doesn’t look good on paper, enough crackers could still be built achieve just about complete ethylene and derivatives self-sufficiency by 2030.

This would be because China may want to get to almost complete petrochemicals self-sufficiency in general, not just in ethylene and its derivatives, by 2030 for supply security and economic value-addition reasons.

Saudi Aramco has said that it wants to convert as much as 4m bbl/day of liquids into base chemicals by 2030.

Do the maths and this could involve a large amount of unannounced ethylene and other petrochemical building block (propylene, benzene, toluene, mixed xylenes and butadiene) and derivatives projects. Like China, Saudi Arabia has a non-standard economic reason to want to convert more oil into petrochemicals: Protecting oil production.

In North America, ethane remains a disposal problem because of pipeline limits on ethane content in methane. The US shale patch is enjoying a new boom.

In other words, if we see the announcements of more new projects in Saudi Arabia, China and perhaps in North America in 2024-2030, Europe, Singapore, South Korea and Taiwan etc. may have to bear even more of the burden of ethylene capacity shutdowns than our base-case capacity numbers suggest. That’s if we are going to get back to healthy operating rates.

Conclusion: Companies need to be more proactive

The story is similar in the other petrochemical building blocks and their derivatives. ICIS data point to levels of oversupply that tell us something much more than just an extended destocking cycle is taking place.

In all the other petrochemicals, we can also do the same exercise of challenging demand and capacity-growth assumptions.

All doom and gloom for Europe, Singapore, South Korea and Taiwan etc.? No, not at all if more proactive approaches to managing strategies are adopted. For the details, contact me at john.richardson@icis.com.