Petrochemicals Supercycle On The Way – Morgan Stanley

Watch out for the charging bulls…


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By John Richardson

A FEW senior industry executives told the blog as long as a year ago that a petrochemicals supercycle was on the way as a result of lack of new supply post-2011 and booming emerging markets demand growth.

The babble of optimism has built-up steadily over the past few months.

Because profitability has remained robust for such an unexpectedly long period, this seems to have undermined the credibility of those who have been predicting a disaster that has yet to happen.

So a new consensus seems to be forming – that we are indeed heading for a supercycle in a few years.

But the herd can be wrong, as the collapse in financial markets so amply demonstrated in September 2008. It could all still end in tears.

A new Morgan Stanley report adds big analytical weight, though, to those confident that we are heading the sunny uplands.

Here follows the executive summary from the report, which argues for:

An inflection point in the global plastics market, driven by China and India: After a recent period of slower growth and a decoupling from global GDP growth, we now expect the strongest period of ethylene demand growth in the past 20 years. We forecast that in the next five years, incremental annual consumption in China and India alone will equal the total current consumption in the US, until recently the world’s largest ethylene consumer, and still responsible for 15% of the market.


Our global supply/demand model suggests ethylene utilization rates will tighten. We forecast strong demand growth, averaging 5.6% in 2009-14, and also expect the supply outlook to improve. The credit crunch has halted infrastructure investment by industry titans, and the Middle East appears to be exhausting feedstock quotas. Thus, global capacity should grow at just 2.3% in 2011-14. Utilization rates are set to tighten from 85% today to 92% in 2014, resulting in improving margins and returns globally.


Implications: In the US, with its advantaged natural gas-based feedstock, cash margins in the next cycle should be 2.4x the average of the past 20 years. Dow and LyondellBasell should be the main beneficiaries. Asian utilization rates are set to tighten the most from current low levels. In Asia/Middle East, we prefer companies with exposure to gas-based feedstocks such as PTT Chemicals and SABIC. Europe should remain structurally weak due to low demand, high feedstock costs, and proximity to potential Middle East imports.

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