INSIGHT: Petrochemical makers must rethink strategy in a world upturned by pandemic

Author: Pearl Bantillo

2020/09/29

SINGAPORE (ICIS)--Petrochemical producers must seriously rethink strategies to capture limited opportunities opening up as recovery gingerly takes hold in a world upturned by the coronavirus pandemic.

Pockets of opportunities exist as manifested by spikes in demand for plastics that go into face masks and other personal protective equipment, and the world’s heightened but justified pre-occupation with cleanliness to ward off  infection.

On a grand scale, however, the outlook is murky with economies unlikely to make a full recovery until 2022.

A careful study of each end-use application of petrochemicals and polymers must be undertaken to identify growth opportunities, ICIS senior Asia consultant John Richardson said.

“Some industry and service sectors will do better than others. Airlines, autos and commercial real estate (less time in the office and in hotels) are obvious losers,” he added.

Travel restrictions have largely remained in place more than six months since the novel coronavirus pandemic gripped the world, resulting in airlines seeking bailouts.

The automotive industry continues to perform poorly in most parts of the globe, although some heartening data of recovery are coming out of China, which emerged from pandemic-induced lockdowns much earlier compared with the rest of the world.

Working from home has become the norm despite recent lifting of lockdowns on fears on contracting the virus in an office setting. Lower occupancy rates of office buildings will probably persist for the rest of the year, at least.

“For every gain made from spending more time at home, there will be losses from not travelling to work and overseas for business and leisure,” ICIS’ Richardson said.

The trend imposed by the pandemic caused a spike in demand for petrochemicals used in packaging as popularity of online shopping and food deliveries and take-outs surged.

Nevertheless, massive job losses globally as small and medium enterprises shut and major companies struggle to generate profits, underscore the enormity of damage to world consumption which would take time to mend.

“It’s hard to be positive at all for the developing world because of the collapse of remittances, the strain on healthcare systems and the loss of incomes during lockdowns for very low-paid workers,” Richardson said.

“I suggest a traffic-light system for measuring demand by end-use application, sector and country – red for worse (cut back on production, reduce new investment), amber for the same as before the crisis and green for expansion,” he said.

“There will be lots of traffic-light changes – loads of volatility and uncertainty – with end-use sectors etc., changing from red to amber to green and back again. That’s why I think producers need to set up new demand management teams,” Richardson said.

MARKETS ADJUST TO NEW NORMAL
After more than a month-long spike from March, demand for petrochemicals that go into rubbing alcohol, hand sanitizers, plastic barriers and face masks - which became rare commodities at the start of the fight against the pandemic - have normalised as supply has largely caught up with increased consumption.

Isopropanol (IPA); methyl methacrylate (MMA), along with downstream polymethylmethacrylate (PMMA); and spun-bound and non-woven polypropylene (PP) grades were among those that witnessed a surge in demand in the early months of the global health crisis.

Panic-buying, which resulted in a strong build-up of stocks among end-users, has largely subsided, but demand support for these materials will remain with no end in sight to the pandemic as of yet.

For acrylonitrile butadiene styrene (ABS), demand has stayed robust to date on strong purchases of appliances - its main downstream – as a huge swath of the world population were forced to stay home.

ICIS analyst Jimmy Zhang said 2020 is also “regarded as a renewal cycle” for the household industry, citing peak sales growth a decade ago.

ABS demand is expected to remain robust for the rest of the year amid peak manufacturing season in China, with supply relatively snug.

CHINA CAPACITY BOOST
Against this backdrop, massive petrochemical capacity expansions in China are coming on stream toward the end of the year which could flood markets with supply since demand is nowhere near pre-pandemic levels.

Four integrated petrochemical complexes in the country were scheduled to come on stream in phases through to the fourth quarter.

“Some of the new capacity in China has been delayed one to three months than their companies’ schedules,” ICIS analyst Amy Yu said.

“But considering the resumption of construction in China was from April and some of the materials was transported from out of China, I believe most of these delays largely have been in the market expectation,” she said.

For the polyethylene (PE) market, the supply-demand imbalance will intensify once all the new capacities are launched, “possibly in the first half of 2021”, Yu said.

China’s manufacturing sector has managed to rebound to expansionary territory immediately after the slump in the first two months of 2020, while exports have also been showing signs of improvement.

These were “buoyed by factors such as lockdown-triggered changes in the patterns of global spending, China’s early emergence from severe restrictions, and government assistance”, said Ben May, director for macro research at Oxford Economics, in a recent note.

“While these circumstances helped to ensure a fast initial rebound in Chinese activity, some factors are likely to prove temporary, suggesting that China may face a more challenging environment in 2021,” May said.

IMPORT SLUMP POINTS TO WEAK DOMESTIC RECOVERY IN ASIA
Steep export contractions in most parts of Asia have started to ease with the lifting of pandemic-related restrictions on businesses and people movement, but not a convincing reason to be jumping for joy over the pace of recovery.

“Overseas economies … have started to pick up from a state of significant depression”, as Japan’s central bank put it, but it’s a long dark tunnel to full recovery.

Strict lockdowns have mostly been lifted allowing some semblance of normality in day-to-day lives, but coronavirus vaccines are still in the trial stage and confirmed cases and deaths continue to grow.

Global coronavirus deaths have now exceeded 1m, with the tally of confirmed cases currently at more than 33.5m, according to US-based Johns Hopkins University.

The demand destruction had been significant and recovery would take longer than initially expected. For global trade, an "L-shaped" recovery could not be ruled out, economists at the World Trade Organization (WTO) had stated in August.

A L-shaped recovery indicates a long period of stagnant growth after a steep decline.

In the second quarter of 2020, global merchandise trade volume shrank  by 14.3% as a direct result of pandemic-induced lockdowns, according to the WTO.

Trade volumes in Europe had the steepest contraction at 21% during the period, followed by North America's 20% decline, while those in Asia shrank by a smaller rate of 7%.

The overall rate of decline was sharper than the 10.2% fall registered during the global financial crisis between the third quarter of 2008 and first quarter of 2009, it said.

Imports of most countries are languishing, with double-digit contractions in the giant emerging economy of India, and the world's third-biggest economy - Japan - indicating continued weakness in their respective domestic activity.

While there is undoubtedly improvement in economic activity since the second-quarter slump, the degree of uncertainty is high on the future trajectory of economic performance with no cure yet for the deadly novel coronavirus.

Insight by Pearl Bantillo

Additional reporting by Yvonne Shi

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