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A Personal View of the New Petrochemicals World

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By John Richardson on 23-May-2024

What follows is, as always on the blog, a personal view of how I see the petrochemicals world developing. There are no right answers, and the debate is the thing. That’s how we move forward together.

The shift to a bipolar world is accelerating

I see us heading towards a bipolar world – the friends of China and Russia versus the rest. Even if Trump were to win in November, the US divisions with China would remain – even though the pressures on Russia might ease.

The Economist reported on 17 May that Anthony Blinken, the US Secretary of State, had concluded that “Russia would struggle to sustain its assault on Ukraine without China’s support.” This was through supplies of machine tools, micro-electronics and other “dual use” technologies.

This is the biggest shake-up in the geopolitical order since the fall of the Berlin Wall.

I believe we’ve been heading towards a bipolar world since the Mike Pence speech in October 2018 which marked the end of the old Washington consensus. The consensus was that by integrating China into the global trading system “fairer trading practices” – and perhaps even democracy – would follow.

“The Chinese Communist Party has used an arsenal of policies inconsistent with free and fair trade, including tariffs, quotas, currency manipulation, forced technology transfer, intellectual property theft, and industrial subsidies that are handed out like candy to foreign investment,” said Pence in his speech.

Reshoring and sustainability

One of the few things that Republicans and Democrats agree on is this new approach to China, even though their tactics differ. And, as mentioned earlier, the divisions between China have widened since the Ukraine invasion.

We are seeing a major wave of reshoring in the West driven by geopolitical concerns over an overreliance on China for rare earth metals, solar panels, electric batteries and EVS etc (this would continue in the US under Trump).

Reshoring – through the US Inflation Reduction Act (IRA), the EU Green Deal and Future Made in Australia – is also about sustainability: reducing carbon emissions and unrecycled plastic waste while also creating lots of new local jobs. The latter will obviously not happen if the West remains too reliant on Chinese imports of green products. 

“Governments around the world adopted over 1,500 policies to promote specific industries in both 2021 and 2022 compared with almost none in the early 2010s,” reported The Economiston 9 May.    

“Local for local” supply chains involve chemicals as chemicals are of course the building blocks for all the manufacturing and service supply chains.

After the EU elections in June, we could therefore see new proposals from the Commission to protect the region’s chemicals industry. There is no point in say putting heavy duties on China’s solar panel exports if ethylene vinyl acetate (used to make solar panels) is still being shipped to Europe at very competitive prices.

The recent launch of the Antwerp Declaration by the European chemicals and other industries is a further sign of the more local-for-local world we are moving towards.

Last week’s decision by the US to impose tariffs on Chinese US EVs and electric batteries etc. is a further indication of the direction of travel.

Trade tensions with China are building elsewhere – for example in Brazil where the country’s chemicals industry is lobbying for an increase in chemicals and polymers import tariffs to 20%, in some cases even higher, from 12.6%.

This clashes with China’s increasing focus on “mercantilism”

Since the collapse of China’s property bubble in September 2021 (the Evergrande turning point), China has focused on boosting is exports in an effort to maintain GDP growth at 4-5% per year.

But, as described above, its exports could face more trade barriers because of tariffs and reshoring.

“Only 37% of China’s national income is spent by Chinese households on goods and services. That level is lower than anywhere else in the world—except for a few small tax havens and commodity hyper-exporters when prices are high,” wrote Matthew Klein in his The Overshoot blog on 22 April.

“For Chinese nonfinancial corporations, employee compensation is only worth about 44% of gross value added, whereas the equivalent measure of the labour share in the US, Europe, and Japan is ~60%,” he added.

There is said to be a debate taking place in the Chinese government over whether more focus should be put on boosting domestic consumption through raising wages (this would, however, undermine export competitiveness) – and through building better pension and healthcare systems.

Pension and healthcare systems are weak during a period of rapid population ageing, which is driving-up savings rates.

China is holding its next plenum meeting in July (this was supposed to take place late last year but was delayed without explanation).

The central committee of the Chinese Communist Party typically holds seven plenums between party congresses, which are held once every five years. Plenums set medium-tern economic direction.

We could see announcements during the plenum of more measures to stimulate domestic demand. But reforming social welfare and introducing other measures such as reforming the Hukou residency system would likely take years – assuming the political will is there to make the reforms happen.

Middle East chemicals in a de-globalised world

The biggest challenge facing Saudi Arabia and its national oil company Saudi Aramco is summarised by the International Energy Agency’s (IEA) forecasts for global crude demand growth in a June 2023 report.

“Based on current government policies and market trends, the IEA expects global oil demand to rise by 6% between 2022-28 to reach 105.7m bbl/day,” wrote the IEA.

“Despite this, annual demand growth is expected to fall from 2.4m bbl/day this year to just 0.4m bbl/day in 2028, putting a demand peak in sight,” the agency added.

This helps explain why Aramco is pursuing changes in refinery technology that aim to raise chemicals feedstock output from refineries from the current maximum of some 40% to 70-80%.

This is through crude-oil-to-chemicals (COTC) technologies which should not be confused with well-established adaptions of refineries to maximise chemicals feedstock output. COTC technologies represent a major step change to, as mentioned, chemicals feedstock output from refineries potentially reaching as high as 80%.

The IEA’s bearish outlook for oil-consumption growth is based on the rise of electric vehicles, biofuels and increased fuel efficiency.

The risk is that unless Aramco can turn more oil into chemicals, oil may be left in the ground for good.

Aramco has a target of converting up to 4m barrels a day of liquids into chemicals by 2030 including both crude and natural-gas liquids.

A million barrels a day of this capacity is said to be already onstream. The upper end of the target is to convert a further 1.5m barrels a day of liquids into chemicals in the Kingdom and 1.5m barrels a day into chemicals in other countries by 2030, according to sources.

If all these ambitions were entirely fulfilled this would amount to an additional 28m tonnes/year of global ethylene capacity beyond what we have listed in the ICIS Supply & Demand Database, adding a further 11% to global supply. This is based on conversion factors supplied by ICIS contacts.

But the more de-globalised world that I believe we are heading towards could limit Aramco’s ability to expand capacity in Saudi Arabia (lack of sufficient export markets), but not in China as this is a local self-sufficiency play (see my concluding points below).

Perhaps other heavily export-focused projects elsewhere in the Middle East will be similarly challenged – assuming I am right in my assumption that we are moving towards a more regionalised petrochemicals world.

Conclusions for petrochemicals

Based on the assumptions above, here are some conclusions or scenarios for petrochemicals.

  • The US chemicals industry (with benefits trickling down to Canada) continues to thrive thanks to the IRA, tariffs and feedstock advantages. Local demand growth could surprise on the upside as local investments, especially in greener chemicals production, continue. Dow Chemical is for example pressing-ahead with its two-phase plans for developing its site at Fort Saskatchewan in Canada, involving lower-carbon capacity additions. It is also talking about building a lower-carbon cracker in the US Gulf later-on which would be “scrap and build” – shutting down an older higher-carbon cracker complex.
  • Europe sees a new industrial master plan. It won’t be perfect, there will be lots of trial and error and the problems will remain of coordinating government policies across the 27 EU members, enforcing EU-level policies that are only directives rather than regulations and the complexity of policies (the EU Green Deal is some 40,000 pages long). But Europe moves towards unified electricity, plastic-waste and bio-feedstock markets that the Antwerp Declaration called for. Some capacities are rationalised. A combination of these shutdowns, more protection and more EU-wide coordinated support for green incentives return the industry to good profitability. Crucially as renewable electricity capacity increases, European energy and thus electricity costs decline.
  • China’s chemicals demand grows at 1-3% per year, down from long-term historic growth rates of around 10% or more. This places major pressure on the big petrochemical exporters to China – South Korea, Singapore, Taiwan, the Middle East and on the US in these products – PE, PVC and MEG.
  • Weaker-than-forecast Chinese demand growth combines with increased Chinese self-sufficiency. This reduces the size of import markets.
  • As regards self-sufficiency, China pushes its operating rates higher in order to minimise imports in response to supply-chain insecurities resulting from geopolitical tensions.
  • But China’s petrochemicals exports struggle because of the increase in trade measures. China is a well-established major exporter in PVC, PTA, polyester fibres and PET bottle and fibre grades. More recently it became a major exporter in PP. Trade measures against China provide opportunities for other exporters.
  • As petrochemicals markets become more regional, some of the big new export-focused petrochemicals projects come into question.