EPCA '21: Petchems could suffer oversupply in 2022 after healthy demand, supply tightness - president

Author: Tom Brown

2021/10/06

LONDON (ICIS)--Healthy chemicals sector demand is expected to continue through much of 2021 but the situation is likely to change in 2022, with potentially oversupply and lower margins for some value chains, according to the president of the European Petrochemical Association (EPCA).

The bulk of European petrochemicals firms, particularly producers of more commoditised petrochemicals products, have posted strong margins through 2021 as easing of lockdown measures and vaccine rollouts have driven industrial growth to the highest levels seen in years.

Purchasing managers index (PMI) data showed the eurozone manufacturing sector rally to close to the mid-60 points, the highest level in decades, as customer orders continued to pour in and players moved to restock.

A reading above 50 indicates expansion, below suggests contraction.

The rush for product, amplified by the reordering of global trade in the pandemic era, as well as weather disruption and plant outages, drove profitability to near historic highs for some players in Europe.

Russia’s SIBUR posted second-quarter adjusted profit spike to Russian roubles (Rb) 66.83bn ($921m), compared with Rb44.91bn in the first quarter, while Poland’s PKN Orlen and Hungary’s MOL saw petrochemicals margins hit record highs.

Germany’s BASF swung to healthy profitability for the first half of the year, while Covestro is guiding for potentially its strongest earnings since the banner year of 2018.

The chemical sector’s position in global value chains, upstream of consumer end markets, resulted in it moving back into positive territory comparatively quickly after the initial phase of the pandemic, with Moody’s moving the sector back into a positive outlook in 2020 almost before any other industry.

The resurgence in manufacturing demand has piled pressure onto an already strained and disordered supply chain, with the pace of consumption reaching a point where difficulty obtaining supplies is starting to throttle the pace of growth.

Market tightness is likely to buoy chemicals demand and pricing for least another few months, according to Hartwig Michels, president of EPCA and head of petrochemicals at BASF.

“Until the end of 2021, we still see healthy demand and supply limitations which are driven by ongoing low inventories, a sequence of unplanned outages in the industry worldwide and the global crisis in container availability,” he said.

Margins will likely decrease as markets normalise, leading to likely market oversupply by early next year.

“We expect towards the end of the first half of 2022 an oversupplied market going along with lower margins overall. New start-ups in the US and particularly in Asia will contribute to this situation,” Michels said.

“On the demand side, we foresee the continuation of global recovery in 2022 with lower industry growth compared to 2021."

Michels was named as the EPCA’s new president in October 2020, replacing long-standing president Marc Schuller of Arkema.

He heads up the organisation during a period of continuing volatility, exemplified by the fact that the organisation’s key annual event, the most significant event in the European industry’s calendar, remains virtual for the second year.

This is amid uncertainty about the state of the pandemic, and the shifting regulatory landscape across Europe in response to peaks and troughs in daily infection levels.

Chemicals sector executives have become accustomed to dealing with large-scale system shocks to the global economy over the last few decades, but what makes the coronavirus pandemic especially diffficult to navigate is the pace and scale of the changes, according to Michels.

“Industries and economies have constantly been facing economic shifts in the last decades. But what is so unique about the current situation is the speed at which the shift will be occurring,” he said.

Aside from the direct disruption of a barely controlled global pandemic, the public reconstruction stimulus response, especially in Europe, has been focused on resource efficiency and the green agenda, driving a wider paradigm shift in the way the sector operates.

“The trend for more sustainable economies and societies is spreading globally, perhaps with regional differences, but the overall impact is significant,” Michels said.

“Considering this, I do believe that we will adapt more permanently to these shifts.”

Despite improving vaccination levels, at least among advanced economies, shipping prices continue to be high and logistics remains extremely volatile. With the precise logic of global supply chains slipping out of order during the pandemic and containers often in the wrong place, shipping costs have skyrocketed.

Surges in coronavirus infections across the globe are continuing to have an impact, with recent port closures in southern China in response to an uptick of infections in the region continuing to ripple through the system.

Links are stretched so tight that one-off events such as the US Gulf polar storms in February or the blockage of the Suez Canal continued to impact logistics months after the resolution of those issues.

COVID-19 is continuing to evolve and a true end to the global impact of the pandemic unlikely while vaccination levels remain low in much of the world.

But companies and economies have built up resilience to the volatility of the pandemic era, according to Michels.

“Despite low vaccination levels in many developing countries and recent regional flare-ups in infections it seems that economies all over the world have developed a certain resilience towards its influence,” he said.

Policymakers, executives and economic observers such as the World Bank have long warned of a retrenchment away from global trade towards more regional blocs, on the back of political uncertainty, protectionism and trade disruption.

The supply disruptions may lead to players keeping larger raw materials stocks as a matter of course and diversifying the range of suppliers by region, but the chemicals sector remains a global industry, according to Michels.

“Clearly, the pandemic has demonstrated the vulnerability of supply chains and the risks of dependency on one region or even a single supplier,” he said. “A trend towards diversification over more suppliers and regions and probably also higher inventories might be a longer-term consequence.”

“The long-term trend towards regionalisation of production is also driven by the need to produce near to end customers, particularly in China, which strives for more self-sufficiency. This long-term trend is independent from the pandemic,” he added.

The sector is adapting to the pandemic while facing, in Michels’ words, “the largest shift in doing business since the industrial revolution”, aggressively cutting emissions while adapting to a circular economy that stands to be the most substantial reinvention of petrochemicals production since the invention of the cracker.

“It is no longer sufficient to lower our emissions by continuous optimisation of our processes,” he said. “Now, climate change is our top priority and can only be achieved if we additionally develop and implement ground-breaking innovations.”

Many of the technologies necessary to mitigate emissions to meet the Paris Agreement goal of keeping climate change to 1.5-2 degree Celsius by 2050 are in the pre-commercial stages at present.

But research, innovation and pilot plants are necessary now to hit those targets in future.

The level of investment this will require places the onus on the sector to advocate for itself to policymakers, to make clear the extent of the challenge.

“The full electrification of our [BASF’s] largest steam cracker in Antwerp, which provides roughly 1m tonnes ethylene annually, would require about 8-9% of the total power consumption in Belgium today,” Michels said.

“This requires the national authorities to invest massively in the electricity infrastructure needed to deliver these amounts of renewable energy to industrial sites. And our industry needs to clearly articulate its needs towards national governments,” he added.

The fact remains that the investments to turn the sector into a fully green, sustainable entity is likely to result in higher prices, Michels said.

“Although the implementation of new technologies will significantly reduce the carbon footprint of our products, one thing should be clear: these measures will cost our industry huge amounts of money and these costs will need to be passed along the value chains,” he added.

($1 = Rb72.58)

Front page picture: Petrochemicals facilities in Bulgaria
Source: Artur Widak/NurPhoto/Shutterstock

Interview by Tom Brown