Depressed demand for durable goods hitting petrochemicals hard – SABIC exec

SAU PAULO (ICIS)–High inflation continues making consumers weary of big-ticket, durable-goods purchases and that is slowing down the recovery in the petrochemicals industry, according to an executive at SABIC.

Brian Powers, head for the Americas at the Saudi petrochemicals major SABIC, said Q1 “has not been a great quarter” for petrochemicals across the board, a slowdown continuing from the second half of 2022.

The executive added that the re-opening of China may also take longer than many within the industry hoped, who see it as the key to unleash healthy demand for petrochemicals again.

Powers said SABIC is mulling options to invest in a facility in the US driven by carbon capture and storage (CCS) technology or driven by “carbon neutrality, incorporating the CO2” into the value chain, although he did not elaborate.

Powers has been SABIC’s head for the Americas since May 2022; according to the company’s annual report, he leads a division which in 2022 posted sales of $5.2bn or 10% of the Saudi major’s $52.92bn revenue.

Since January 2022, SABIC and US energy and petrochemicals major ExxonMobil operate a 50:50 joint venture in Texas, named Gulf Coast Growth Ventures (GCGV).

The facility includes a 1.8m tonne/year ethane cracker, a 1.3m tonne/year polyethylene (PE) plant, and a 1.3m tonne/year ethylene glycols plant.

In Brazil, SABIC operates a production facility in Campinas, Sao Paulo state, producing engineering plastics, polycarbonate (PC), and acrylonitrile butadiene styrene (ABS) resins; the company also sells to the agricultural nutrients sector.

In Argentina, it operates a smaller compounding facility in Tortuguitas, Buenos Aires province.

SLOWER PETCHEMS RECOVERY
To the dismay of central bankers, inflation remains at multi-decade highs in many countries and that is filtering down to consumer spending, with shoppers postponing purchases of petrochemicals-intensive durable goods, those with a lifespan greater than three years.

Although far from the peaks of 2022, inflation remained high in the Americas’ three main economies in February, with the US at 6%, Brazil at 5.6%, and Mexico at 7.6%.

“We would have expected inflation to come down faster than it has. … Durable goods are perhaps one of the biggest challenges, more so than packaging, and part of this has to do with inflationary costs, not just for raw materials but for everything else involved,” said Powers.

“There has been an escalation in labour costs as well, significant changes in logistics and transportation costs, and in many product lines you have trade barriers. So, consumer goods prices have gone up dramatically and that is impacting consumer demand.”

In 2022, around 85% of SABIC’s sales in the Americas of $5.2bn came from North America – Canada, the US and Mexico – and around 15% from Central and South America, according to Powers.

In 2023, the speed of China’s reopening will be key the Americas’ petrochemicals industry: a healthy recovery there can lift global manufacturing output and prop up petrochemicals prices along the way, he added.

“A strong China lifts the entire global GDP,” said Powers.

However, some of the pandemic-induced woes globally are now compounded by a slowing economy.

In Brazil’s petrochemicals-intensive automotive sector, for example, to which SABIC serves from its Campinas facility, the persistent shortage of components and slowing consumer demand has forced some plants to idle production for some time in the first quarter.

In the US, Powers would not disclose what the capacity utilisation at the Texas joint venture has been, although he conceded it could have been higher due to “limitations” by the end 2022 decided “strictly according to the market” and not based on the facility’s operational performance.

Last week, the largest Latin American petrochemicals producer, Brazil’s Braskem, said it expects global demand for petrochemicals to remain in the doldrums for much of 2023.

“In the Americas, demand in Q1 has not been as strong as Q1 2022 was. A lot of things need to be reset, because inflation is so severe in some parts of consumer spending. The recovery is not going to be the same in automotive than in food packaging, for example,” said Powers.

“In China, a lot has shifted over the course of the pandemic. There has been a shift trade balances [resulting] not just from tariff exclusions but also from availability of product and containers, and some production has shifted. It will take some time to get back to where things were.”

“The recovery [globally] will come. It’s coming right now. It’s just slower than we would have hoped.”

US, EU GREEN PLANS
The passing of the Inflation Reduction Act (IRA) in the US in August 2022 dramatically shifted the country’s gear towards a greener industry, with several investments announced by petrochemicals companies taking advantage of tax breaks and other financial support instruments.

So much so, that some in Europe worry the 27-country EU is falling behind in a sphere it used to like to think it was the sole champion. In response to the IRA, the EU has announced its own plans to support industrial players transition towards more sustainable operations.

“There are some strong economics in the US that have been initiated by the IRA and everybody in the industry is looking at how this will play into these investments. We are looking at an investment driven by CCS or driven by carbon neutrality, where we incorporate the CO2 into the value chain,” said Powers.

“There is a concern that we won’t drive change just by brand owners making a visionary statement saying they will reduce carbon footprint; they need economic incentives, either by tax or other economic incentives.”

Powers went on to say that two models to transition to a greener energy are emerging thus. In the EU, he said, there is a “clear understanding” about carbon costs and the potential tax burden of that on companies.

In the US, meanwhile, there is no expectations such a tax will be implemented and, on top of it, the IRA is now incentivising investments.

“They need economic incentives, either by tax or other incentives. The IRA puts the US in a very different pathway: instead of putting a tax on everything, it incentivises investments in CCS or those which integrate CO2 into products. You avoid the CO2 emissions, and it gives you the financial incentive to do so.”

Powers said the Texas joint venture was built when the IRA-like incentives were not in place, although there was already “an expectation” petrochemicals plants would aim for carbon neutrality.

To achieve that, he said the facility will aim to follow SABIC’s target of 20% reduction in its emissions by 2030, compared with 2018 levels, although he did not elaborate how that can be achieved in the short term.

“The facility has flexibility for its feedstocks. … We will have a multifaceted approach, in which we will include both electricity as well as the fuel sources for the crackers. Fundamentally, we don’t have all of this established yet,” said Powers.

Asked whether these changes could take 10 years or more, he said it would be “much sooner” than that.

To conclude, Powers was also asked whether life for a petrochemicals executive was much easier before, when the climate emergency had not come into full view and industrial plans were made without the need to pay attention to carbon emissions.

Chemical engineer by training, Powers also worked in executive positions at US chemicals majors DuPont and Dow before joining SABIC.

“Well, I think it was much less complex. But now, the future of this industry and others depends on this. There is even the question about whether you can continue to operate if you don’t drive for these solutions,” he said.

“Where are we going? Towards circularity of products as well as carbon neutrality. The 2050 net-zero target is a challenging target. … The biggest challenge is that some governments are not looking at this holistically, or they don’t have the funding [to implement the required changes]. For industry, however, I am confident we can deliver carbon neutrality by 2050.”

This interview took place in Sao Paulo on 27 March.

Front page picture: SABIC and ExxonMobil’s joint venture in San Patricio county, Texas
Source: SABIC

Interview article by Jonathan Lopez