AFPM '19: Industry mulls economy worries, sustainability, oil-to-chems

Author: Al Greenwood


SAN ANTONIO (ICIS)--The chemical industry is starting one of its biggest conferences at a time of continued worries about economic growth, public backlash again plastic waste and increased interest in turning larger amounts of oil into chemicals.

It's a lot to contemplate during the International Petrochemical Conference (IPC), which starts on Sunday.

At this point in the year, companies expected that the industry would be showing signs of recovering from the slowdown in demand that took place in the fourth quarter.

That slowdown has several causes. Rising interest rates made automobiles and housing more expensive to finance, causing sales to fall. Growth in Europe started to slow.

China attempted to rein in debt, which tightened lending and slowed growth. The tariffs resulting from its trade dispute with the US aggravated the downturn.

Concerns about global demand led to a sharp decline in oil prices. During such steep drops, petrochemical buyers typically delay purchases and rely on their inventories to meet their needs, in a phenomenon called destocking. This caused demand for petrochemicals to fall.

Companies acknowledged all of this during their Q4 earnings calls and said the factors were in place for chemical demand to recover – a sentiment repeated by an economist at a recent conference.

European monetary policy remains loose, which should stimulate demand. China has changed course on its campaign to reverse interest rates and has introduced a multi-pronged stimulus programme that lowered bank-reserve requirements and taxes.

The Federal Reserve has halted its campaign to raise interest rates in the US.

Few economists expect a recession this year, although the chances increase substantially in 2020 and even more so in 2021.

Despite this relative optimism for 2019, signs point to more trouble.

US-listed shares of chemical companies fell sharply on Friday, and they have lagged behind the recovery in the overall stock market this year. The slowdown could be worse than expected.

The yields on 3-month and 10-year US Treasurys inverted for the first time since 2007. Inverted yield curves often preclude a recession by several months.

Among chemical companies, US-based Huntsman expects Q1 adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) to be 10% lower versus Q4 2018 on weaker construction and auto markets in the US, as well as “softer demand patterns” in most large European economies.

US-based Eastman Chemical on 15 March announced a “modest and targeted reduction” in its workforce” and a delay in salary increases for most employees on a weakening outlook, specifically in China and Europe.

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In addition to a shaky recovery, the industry will also face growing public backlash against plastic waste.

Plastics consumption has increased sharply in emerging economies, which often lack the capacity to collect waste. Plastic packaging end up in mountains of waste or in rivers that feed oceans.

Graphic photographs of plastic waste have created backlash against plastics around the world, leading to regulations that restrict or ban plastic straws, bags and other items that are used one time before being discarded.

Trade groups and other non-governmental organisations are setting goals to adopt increasing amounts of recycled material in plastics.

Chemical companies have a legitimate concern that regulations and sentiment could reduce or even wipe out demand for many applications.

Worries about bisphenol A (BPA) leaking into food and beverages led to companies to find replacements. Phthalate-based plasticizers were replaced in toys. In the US, methyl tertiary butyl ether (MTBE) was replaced by other octane-boosters in gasoline.

Chemical companies and trade group have spent much of the past year talking about sustainability, their industry's role in achieving it, and what they can do to reduce waste.

The American Chemistry Council (ACC) has its own goal, calling for all plastic packaging to be reused, recycled or recovered by 2040.

Plastic producers have teamed up with converters, consumer group and waste-management firms to create the Alliance to End Plastic Waste (AEPW).

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Just as downstream plastic markets are changing because of sustainability, the chemical industry could see shifts in upstream production as well.

Oil companies are considering whether they should convert a larger share of their crude into petrochemicals.

Refineries already produce petrochemicals. Catalytic reforming units convert naphtha into benzene, toluene and xylenes (BTX). These aromatics can be blended into gasoline, sold as solvents or used to make other petrochemicals.

Fluid catalytic cracking (FCC) units convert gasoil into gasoline and refinery-grade propylene (RGP).

These older technologies could be revamped to produce even larger amounts of petrochemicals.

Companies are considering units that could convert other refining streams into petrochemicals. Saudi Aramco is even developing new technology that could convert a larger portion of a barrel of oil into chemicals.

Petrochemicals are attractive to refiners because demand is growing at faster rates than fuel.

If policy-makers become more aggressive about restricting greenhouse-gas emissions, then growth in fuel demand could be even slower.

New technology could make electric vehicles more affordable than gasoline-fueled automobiles, regardless of any government incentives or subsidies.

Petrochemicals could provide oil companies with a hedge in the event that fuel demand falls below expectations.

It is unclear whether it will be an adequate hedge. Petrochemical markets are orders of magnitude smaller than fuel markets.

Demand for ethylene and propylene derivatives is growing faster than chemicals derived from oil-based feedstock such as aromatics. Companies are producing these olefins with gas feedstock via ethane crackers and propane dehydrogenation (PDH) units.

The backlash against plastic waste could extend to greenhouse gas emissions and the oil industry. This would also make refineries a less attractive hedge.

Oil-to-chemicals technology, sustainability and slowing growth could take the chemical industry down an uncertain path. Where it could end up could become clearer during the conference.

Hosted by the American Fuel & Petrochemical Manufacturers (AFPM), the IPC takes place on 24-26 March in San Antonio, Texas.

Additional reporting by Joseph Chang