Producers and consumers cannot afford to ignore the risks that this development creates for their business. Nor can investors afford to indulge in the wishful thinking that says central banks can quickly return growth to previous levels:
- On the supply-side, oil prices have tumbled, and yet inventories remain at record levels – suggesting further price weakness cannot be ruled out. This has had a major impact on the relative values of oil and gas-based feedstock. US shale gas cracker investments no longer have the secure long-term advantage assumed when they were conceived
- On the demand side, there is increasing evidence that today’s globally ageing populations mean a “demographic deficit” is replacing the “demographic dividend” created by the baby boomers when they were in their prime spending mode. The same trends are developing in many emerging economies, with China’s working-age population already in decline
As I note in a new analysis for ICIS Chemical Business, companies need to respond quickly by developing new, less product-oriented and more service-driven offerings.
These developments raise a fundamental question as to whether the petrochemical industry is undergoing a generational change, that challenges current supply-driven business models based on forecasts for GDP growth.
These concerns are highlighted by the impact of China’s New Normal policies. These have dramatically slowed economic growth, even if one takes the official numbers at face value. Its move towards a service-led economy is challenging previous certainties about its ability, along with that of other emerging markets, to underpin high levels of demand growth for major petrochemicals and polymers.
Additional levels of uncertainty are created by the impact of the major stimulus policies implemented by central banks post-2008. These appear to have created only a fragile recovery, and have left behind a legacy of debt which will inevitably depress future demand. China’s stock market downturn over the summer has also emphasised the fragility of many global financial markets.
Petrochemical companies and investors have come to a fork in the road.
It is no longer possible to believe in the concept of a quick “return to trend” following the financial crisis. Equally, there are clear signs of major secular change taking place in core end-user markets such as automotive and construction. Plus, there are major question marks on the outlook for emerging economies, with two of the previously all-conquering BRIC countries (Brazil and Russia) already in recession
Please click here to download a copy of the ICIS Chemical Business analysis.
WEEKLY MARKET ROUND-UP
My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:
Brent crude oil, down 54%
Naphtha Europe, down 52%. “Exports high on Asia refinery turnarounds”
Benzene Europe, down 62%. “Traders have also fixed exports to the US Gulf to help clear out some of the length in the European market.”
PTA China, down 43%. “Some end users came to the market to build stocks for the upcoming holiday”
HDPE US export, down 36%. “Prices for domestic exports remained stable during the week”
¥:$, down 18%
S&P 500 stock market index, down 1%