The first of three things you should do during the rest of this downturn

By John Richardson

At first glance, the above chart appears highly alarming, as it suggests that by as late as 2035, global ethylene operating rates may still remain below their historic long-term average. By that year, the operating rate—after a few years of gradual increases—is forecast to reach just 81%, compared with the 1992-2024 average of 87%.

This, therefore, implies that the downturn, which began in early 2022 following the late 2021 Evergrande Turning Point, could last as long as 14 years.

However, this is very much a live chart—this is merely the beta version, your starting point for constant updates using ICIS data, as the industry adjusts capacity to restore operating rates to much healthier levels. Surely, this must happen well before 2035.

I arrived at this beta version through a very straightforward mathematical exercise. I progressively reduced capacity growth from our base case of an average 6.3 million tonnes per year until I reached 2.5 million tonnes per year.

At 2.5 million tonnes per year, when I divided our base case estimate of production by this revised capacity growth, average operating rates recovered to their historic long-term average of 87%—the orange line on the chart. This compares with the 79% average represented by the blue line, the ICIS forecast.

A Living and Breathing Chart

Every six months or so, I recommend requesting an update to this chart, as well as all the other charts for monomers and polymers. What applies to ethylene applies to every other product upstream and downstream as we endure the most extended and deepest period of oversupply in the history of our industry. It is essential to conduct the same analysis for all products – and across all countries and regions. Local markets won’t always behave entirely in line with the global trends.

Since the start of the year, I have spoken to around 20 clients, all of whom have asked the $64,000 question: When do you think the downturn will end? My instinct suggests that this downturn has another 2-3 years to run.

This is based on the scale of the capacity rationalisations and the number of project cancellations or delays required to rebalance the market. However, as I said, this is only my gut feeling. Closures, cancellations, and delays could occur in a rush, restoring market balance more quickly than I currently expect.

Meanwhile, as we wait for this process to unfold, I do not foresee any upsides from demand (which, on a global basis, is the same as production), given the depth of China’s economic slowdown. I do not believe there is anything that can be done in the medium term to reverse the decline in China’s domestic consumption. Furthermore, rising trade tensions clearly pose a threat to China’s ability to export its way to higher GDP growth.

As a reminder, what happens in China is more significant than developments in any other region due to the country’s dominant role in driving global petrochemicals and polymers demand.

At some point, the much more populous Developing World ex-China could become the primary driver of consumption growth by volume. However, percentages can be misleading without the context of actual tonnes of new demand.

ICIS data suggests that these tipping points—varying by product—will not occur until the 2030s. In other words, do not hold your breath. Moreover, as I will discuss in a later post, this potential demand boom is threatened by the economic, social, and political disruptions caused by climate change, including the forced migration of tens, if not hundreds, of millions of people as we approach the pivotal year of 2050.

Murky Outlook for Plant Closures, Project Delays, and Cancellations

Returning to the present, the medium-term outlook remains highly uncertain due to the many unknowns surrounding plant shutdowns, project delays, and cancellations. Here are just a few factors to consider:

• Why shut down, cancel, or delay when the upswing might arrive much sooner than in 2-3 years? I could, of course, be wrong.
• Environmental clean-up and pension costs complicate shutdown decisions. While money is being lost at an alarming rate, companies still need to allocate funds for these liabilities.
• Specifically in China—where much of the overcapacity is concentrated—the following factors merit attention (I will discuss these themes in greater detail in a later post):
  1. Some of China’s crackers and downstream plants are more than 20 years old, leading to speculation that a wave of rationalisations is likely among smaller, older, and less cost-efficient plants. However, simply assessing a plant’s age does not provide the full picture. Some older plants may have had furnaces and reactors replaced, effectively making them new.
  2. There are unconfirmed reports that China intends to close some of its coal-based capacity for cost and environmental reasons. If these reports are accurate, the next key questions are which plants will be affected and how many. Some of the newer coal-to-olefins plants may be less vulnerable than, say, the smaller and older carbide-based PVC plants.
  3. To what extent will the limited availability of new feedstocks from China’s refinery sector restrict the country’s petrochemicals capacity growth? China has capped its refinery capacity from 2028 onwards due to the rise of electric vehicles.
  4. Later this year, we should get a look at China’s next five-year plan. The 2026-2030 plan will set out carbon emissions reduction targets as China progresses towards Net Zero. How will this impact the approval process for petrochemicals projects?
• What role will regulations and government support play in sustaining the European and South Korean petrochemical industries? These regions may experience significant consolidation—or perhaps not.
• Pride and passion for the business may lead companies to postpone or entirely avoid making difficult decisions. How do we accurately assess the human factors involved?

Conclusion: The Other Two Things You Need to Do

In addition to regularly updating operating rate outlooks across all products, countries, and regions, I believe there are two other key steps you should take. I will explore these in greater detail in later posts:

1. Stay ahead of import tariff increases. As trade tensions escalate, those who act early—before their competitors—will be better positioned to capitalise on changes in arbitrage.
2. Do not dismiss the transformative power of AI. The potential cost and efficiency savings through Ask ICIS are immediate and significant.

Even during the remainder of this downturn, opportunities exist to both generate and save money. There are still many possibilities to explore. As I have outlined today, gaining a clear understanding of where we stand in this cycle—by reassessing the data every six months—will enable your company to position itself optimally for the eventual recovery.