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BARCELONA (ICIS)–Chemical markets around the world are suffering from collapsed demand conditions and oversupply with no prospect of a turnaround in the coming months. Demand failure globally in Q2, traditionally the strongest of the year Hopes of rebound in 2024, but no evidence for this Consumers focus on basics as wages not keeping pace with high inflation, interest rates Economic drag caused by rising elderly demographic Huge growth in chemicals capacity, especially in China Prospect of deflation if Ukraine war ends China switches from world’s biggest net importer to exporter of many chemicals In this Think Tank podcast, Will Beacham interviews ICIS Insight Editor, Nigel Davis, ICIS Senior Consultant Asia, John Richardson, and Paul Hodges, chairman of New Normal Consulting. Editor’s note: This podcast is an opinion piece. The views expressed are those of the presenter and interviewees, and do not necessarily represent those of ICIS. ICIS is organising regular updates to help the industry understand current market trends. Register here. Read the latest issue of ICIS Chemical Business. Read Paul Hodges’ and John Richardson’s ICIS blogs.

LONDON (ICIS)–The outlook for all fertilizers is weak in H2 2023 as buyers are too scared to dip their toes into the market – several of them paid too much in 2022 and were stuck with high priced stock. The disappointing outlook means that many will continue to buy hand-to-mouth and will only step into the market at the last minute. The ICS fertilizers team discusses the latest from the International Fertilizer Association (IFA) conference which was held in Prague on 22-24 May.

LONDON (ICIS)–Click here to see the latest blog post on Chemicals & The Economy by Paul Hodges, which suggests China’s move to self-sufficiency is a game changer for the plastics industry. Editor’s note: This blog post is an opinion piece. The views expressed are those of the author and do not necessarily represent those of ICIS. Paul Hodges is the chairman of consultants New Normal Consulting.

SAO PAULO (ICIS)–Brazil’s car sales could be nearly 20% higher in 2023, year on year, thanks to the tax breaks to be implemented by the government on car purchases, the country’s automotive trade group Anfavea said. Last week, Brazil’s federal government said it would implement a programme of tax breaks to lower the price of cars in vehicles of up to Brazilian reais (R) 120,000 ($24,000). The measure seeks to revive a beleaguered industrial sector such as automotive, which in 2023 has had several plants idled at times as consumers retreat due to high interest rates and a slowing economy. Car makers in Brazil, represented by Anfavea, are hopeful the plan will be the inflection point for the industry to start its recovery. At the beginning of 2023, Anfavea said it expected car registrations, or car sales, to stand at 2,040,000 units for the year, up 4.1% compared with the 1,960,000 units registered in 2022. However, the plan to be implemented by the government could increase car sales by 200,000-300,000 units, said the trade group. That would put the upper end of the range at 2,340,000 units, representing – if realised – an increase in sales of 19.3%, compared with 2022. “The plan announced by the Federal Government is very positive [and will help] revive the industry and the automotive market,” said Anfavea. ($1 = R5.00)

SAO PAULO (ICIS)–Brazilian producer Unigel’s debt rating was downgraded over the weekend by two credit rating agencies on the back of a “sharp and simultaneous” downturn in both its petrochemicals and fertilizers divisions, according to Fitch Ratings. Moreover, Fitch said Unigel’s new projects on green hydrogen and sulphuric acid may not come to completion within the planned dates due to cash flow constraints. The US credit rating agency was joined by its peer S&P Global, who also downgraded its rating on Unigel’s debt arguing that, after a poor set of financial results in the first quarter, uncertainties about Unigel and the wider chemicals industry’s rebound “remain high”. Earlier in May, Unigel posted sharply lower Q1 sales and earnings, year on year, and its CEO conceded the recovery may not occur until 2024 as high interest rates globally and a slower-than-expected upturn in China post-pandemic take their toll. The company is mostly a producer of styrenics and acrylics, and their derivatives, as well as fertilizers. Also in May, the company said it was idling its large fertilizers production plant in Laranjeiras, Brazil, for 90 days from 1 June on the back of high natural gas costs, the main feedstock for the plant. In a written response to ICIS on Monday, Unigel declined to comment on the credit rating agencies’ downgrades. SHARP DOWNTURNOn Friday (26 May), Fitch Ratings downgraded all its ratings on Unigel’s bonds from BB- to B, or from “speculative” to “highly speculative”, respectively. According to the agency, B ratings would indicate that material default risk “is present, but a limited margin of safety remains” to repay debt commitments. However, the capacity to do that in the future may be flawed if a deterioration in business conditions were to occur. See Fitch’s ratings scale here. Precisely, a deterioration in business conditions is on the cards, with Unigel being hit by poor petrochemicals and fertilizers margins and its main market, Brazil, going through an economic slowdown. “The downgrades reflect sharp and simultaneous downturns in both of Unigel’s business chemical and fertilizer (agro) segments, while Brazilian lending conditions have tightened following the default of Americanas,” said Fitch. Americanas is a Brazilian major retailer which filed for bankruptcy protection in January; it holds creditor debts of around Brazilian reais (R) 43.0bn ($8.6bn). “The timing for a recovery by either or both segments [petrochemicals and fertilizers] remains highly uncertain … Proactive measures may be required for Unigel to shore up liquidity including some combination of shareholder support or asset sales, in the absence of additional funding being supplied by lenders or a sharp recovery of one of its business divisions,” Fitch added. Moreover, the pressure on cash flow could prompt Unigel to halt one of its star projects, a green hydrogen facility in Brazil, according to Fitch, which also called into question whether Unigel could complete its new sulphuric acid plant currently under construction. Fitch spreads forecasts (in $/tonne) 2023 2024 Styrenics 125 160 Acrylics 335 430 Fertilizers 27 25 ‘LARGE REBOUND’ IN 2024Meanwhile, S&P Global also downgraded from BB- to B+ its rating on Unigel’s debt, also justified on pressured cash flows and poor performance at the company’s divisions. According to S&P’s methodology, both BB and B belong to the “speculative grade”. See the agency’s ratings scale here. “The company will continue to face challenges in the next few quarters to revert this trend, resulting in poor credit metrics this year … Uncertainties about the industry’s rebound remain high,” said S&P. This credit rating agency was particularly sanguine about the myriad of problems Unigel is to face in coming quarters. For Unigel’s chemicals divisions, S&P is also forecasting a “significant” drop in spreads in 2023, compared with 2022, which would be more severe in styrene and polystyrene (PS) than in acrylonitrile (ACN), and a fall in sales volumes of 5-10%. For the beleaguered fertilizers division, there is also more pain ahead: the agency expects spreads to decline around 70% in 2023, compared with 2022, and bounce back by 30% in 2024; it said it had already considered the Laranjeiras stoppage “for some months” this year. Because of that stoppage and poor market conditions, S&P is expecting fertilizers sales volumes to fall around 35% in 2023, year on year. Unigel sold 1.14m tonnes of fertilizers products in 2022; for 2023, S&P expects that figure to be between 700,000-800,000 tonnes. According to the agency, Unigel would not recover those levels until 2025 at least. For 2024, S&P expects fertilizers sales volumes to stand at “close to” 1m tonnes. S&P concluded arguing it is assuming “a large rebound” in both the chemicals and fertilizers industries as they return to mid-cycle growth levels. However, while that much-hoped-for rebound arrives, Unigel could face further pain when it comes to its debt commitments. “We could lower the ratings [on Unigel’s bonds] in the next six to 12 months if we don’t see the gradual rebound that we expect in profitability over the next few months, resulting in higher cash burn for the year,” said S&P. “In this scenario, we would see the company potentially facing increased difficulties to get waivers for breaching the covenants and to refinance its bank debt. Revenue and EBITDA [earnings] recovering slower than we expect would also lead to debt to EBTIDA remaining above 5.0x [ratio of five times net debt to earnings] next year as well, likely leading to a further rating downgrade.” The net debt to earnings ratio is a debt ratio that shows how many years it would take for a company to pay back its debt if net debt and earnings are held constant. Unigel’s current ratio stands at 10.0x. Anything below 3.0x is normally considered financially sound; ratios higher than 4.0x or 5.0x typically set off alarm bells because this indicates a company could struggle to repay its debt burden. ($1 = R5.00) Front page picture: An Unigel production facility in Brazil Source: Unigel Focus article by Jonathan Lopez

HOUSTON (ICIS)–Here are the top stories from ICIS News from the week ended 26 May. Brazil aims to prop up automotive with tax breaks for car purchases Brazilians who purchase a vehicle will experience considerable tax breaks from the state as the government tries to prop up the petrochemicals-intensive automotive sector. US May propylene contracts fall on lower spot prices US May propylene contracts for market participants settled 8 cents/lb ($176/tonne) lower from April as spot prices continued to decline on length in supply and weaker than expected demand. US railroad NS commits to enhanced safety as legislation works through Congress US railroad Norfolk Southern (NS) and the leaders of 12 NS labour unions sent a letter to their employees and membership on Tuesday committing to working towards improvements in rail safety as legislation targeting the same works its way through Congress. IFA ’23: Sulphuric acid tanker market in desperate search for ‘fuel of the future’ Freight rates remain a key concern for sulphuric and phosphoric acid players across the globe – especially as shipowners continue to delay investment in new-build chemical tankers, as the market searches for a path to achieve carbon-neutral shipping.

LONDON (ICIS)–Here are some of the top stories from ICIS Europe for the week ended 26 May. Supply concerns lead to heightened focus on Europe C2, C3 export potential The prospect of lengthier olefins balances for European producers developing over the summer months has ramped up export interest, with propylene and to a lesser extent ethylene volumes already fixed. Europe caustic soda under downward pressure in May European caustic soda’s rocky road has continued in May, with contract and spot prices falling and demand remaining low. Europe butadiene contract falls by €80/tonne for June The European butadiene (BD) contract reference price for June has been set at €880/tonne, down by €80/tonne from May. IFA ’23: Sulphuric acid tanker market in desperate search for ‘fuel of the future’ Freight rates remain a key concern for sulphuric and phosphoric acid players across the globe – especially as shipowners continue to delay investment in new-build chemical tankers, as the market searches for a path to achieve carbon-neutral shipping. Europe PP contracts move past monomer pass through in May European polypropylene (PP) prices have continued on a downward trend with contracts agreed down for May beyond the monomer passthrough.

SINGAPORE (ICIS)–PETRONAS Chemicals Group’s (PCG) first-quarter net profit shrank by 74% year on year to Malaysian ringgit (M$) 536m ($117m) on margin pressure as production costs increased. Q1 earnings before interest, tax, depreciation and amortization (EBITDA) margin declined to 14%, while plant utilization rate during the period averaged 96%, the Malaysian producer said on Monday. In million ringgit (M$) Q1 2023 Q1 2022 % change Sales 7,557 6,634 13.9 EBITDA 1,083 2,422 (55.3) Operating profit 592 2,097 (71.8) Net profit 536 2,072 (74.1) EBITDA slumped 55% over the period due to lower product spreads and higher energy and utilities costs. “Though we saw some positive movements in selected regions in the first quarter, the overall chemical sector remains cautious given the still volatile energy prices,” PCG managing director and CEO Mohd Yusri Mohamed Yusof said. “There has been some uplift in demand from China post-Chinese New Year for selected chemicals, but we have yet to see meaningful recovery,” he said. Operating expenses were driven up by energy and utilities cost “adding pressure on margins”, he said, but noted that this cost should ease in the coming quarters. “We continue to be cautious of the outlook for 2023, given the recent developments of the US banking sector and its potential impact to the global economy, the prolonged Russia-Ukraine conflict as well as slower than expected China recovery,” Mohd Yusri said. On the company’s operations within the Pengerang Integrated Complex (PIC), he said: “We resumed gradual plant start up at the end of last year. So far commissioning works are progressing well, and we expect to bring the plants on board in the fourth quarter of the year.” In the long term, Mohd Yusri said that the chemical industry is expected to continue growing at an annual pace of about 3% on the back of rising consumption across industries including pharmaceuticals, automotive and construction. ($1 = M$4.60)

SINGAPORE (ICIS)–Here are the top stories from ICIS News Asia and the Middle East for the week ended 25 May 2023. NE Asia ethylene plummets; spread against naphtha narrowsBy Yeow Pei Lin 26-May-23 12:21 SINGAPORE (ICIS)–Northeast Asia’s ethylene import prices on 25 May fell to levels last seen in January, pummelled by plentiful supply and slack downstream demand. PODCAST: Rampant China chemicals overcapacity could rebalance by 2024/5 By Will Beacham 25-May-23 21:00 BARCELONA (ICIS)–Excess capacity plaguing China’s petrochemical markets could return to more balanced conditions by 2024/5 as the current wave of additions ends and demand gradually improves. Nippon Shokubai launches Indonesia AA plant; signs green chems deal with Chandra Asri By Pearl Bantillo 5-May-23 13:49 SINGAPORE (ICIS)–Japanese producer Nippon Shokubai has inaugurated its new acrylic acid (AA) plant in Indonesia and has signed an initial deal with local producer Chandra Asri Petrochemical to explore green chemical business opportunities. APIC ’23: INSIGHT: Asia petrochemicals navigate poor demand amid China start-ups; carve ‘green’ path By Pearl Bantillo 24-May-23 19:50 SINGAPORE (ICIS)–Uncertainties will hound Asia’s petrochemical markets for the rest of the year and possibly into 2024 amid the global economic slowdown at a time of strong capacity additions in regional powerhouse China. INSIGHT: APIC ’23: Rapid capacity expansion poses risks for Asia’s synthetic rubber industry By Ann Sun 23-May-23 13:36 SINGAPORE (ICIS)–China’s reopening brings some hope to global synthetic rubber demand, but China-led capacity expansion is putting the synthetic rubber industry in the region at risk with overcapacity a growing concern. APIC ’23: INSIGHT: Asia phenol, acetone capacity expansion cycle to peak in 2023 By Jenny Yi 23-May-23 11:57 SINGAPORE (ICIS)–Asia’s phenol and acetone capacities entered a new round of expansion cycle in the second half of 2020 and will reach its peak in 2023, which can be regarded as a record wave of capacity increase in the markets’ history. INSIGHT: Rapid olefin capacity growth in China intensifies Asia supply-demand imbalance By Amy Yu 22-May-23 19:35 SINGAPORE(ICIS)– China ethylene capacity is expected to exceed 50m tonnes/year in 2023, with a compound annual growth rate (CAGR) of 18% from 2019 to 2023. INSIGHT: APIC ’23: Asia petrochemicals industry needs to recalibrate for sustainable growth By Nurluqman Suratman 22-May-23 14:20 SINGAPORE (ICIS)–Industry leaders at the Asia Petrochemical Industry Conference (APIC) in India last week were fully focused on one topic – sustainability – as the region battles to meet the needs of its fast-growing population with future net-zero targets. INSIGHT: Rapid olefin capacity growth in China intensifies Asia supply-demand imbalance By Amy Yu 22-May-23 19:35 SINGAPORE(ICIS)– China ethylene capacity is expected to exceed 50m tonnes/year in 2023, with a compound annual growth rate (CAGR) of 18% from 2019 to 2023. VIDEO: China PP prices plummet to three-year low; late-Q2 pressure likely By Zhibo Xiao 23-May-23 11:26 SINGAPORE (ICIS)–In this video, ICIS Industry Analyst Zhibo Xiao discusses the polypropylene (PP) market in China and how its sluggishness is a result of weak demand and increasing supply.

TORONTO (ICIS)–Canadian chemical industry executives are defending the government subsidies and incentives that help drive the sector’s decarbonisation. While a lot of people look at these incentives as “corporate welfare, I would push against this wholeheartedly”, Mike Burt, president and global director, climate and energy for Dow Chemical Canada, told participants at an industry webinar this week. Rather, a company like Dow may get an incentive that was “miniscule” compared with the overall investment, and the payback to the country’s economy on a 30 or 50-year project was “magnitudes” bigger than the incentive, he said. Dow is still in talks with the Canadian government about plans, announced in October 2021, to build a net zero carbon emissions cracker project at Fort Saskatchewan in Alberta province. It expects to make a final investment decision (FID) in October. Bob Masterson, CEO and president of trade group Chemistry Industry Association of Canada (CIAC), said that the incentives for decarbonising the industry involved investment tax credits or production credits. As such, companies have to build and operate the plant before the incentives kick in, with no risk for taxpayers, he said. The industry was not looking to the government “to pick up the tab” for its decarbonisation, he added. It was the government’s role to create the right conditions for companies to  make the investment, he said. In addition to new projects such as the Dow complex, Masterson stressed that the existing facilities need to be kept in mind in addressing decarbonisation. Canada’s built chemical production infrastructure has a roughly estimated value of Canadian dollar (C$) 300bn ($220bn), and almost all of this would need to be recapitalised in coming years for the industry to get to net zero emissions, he said. The country therefore needed to “radically” raise its ability to attract capital, in particular with the challenges from the US incentives under that country’s Inflation Reduction Act (IRA), he said. Oliver Sheldrick from Clean Energy Canada, a research centre at Vancouver’s Simon Fraser University, said that 10 big production sites accounted for more than half of the emissions in Canada’s chemicals and fertilizer industry. Concentrating on those sites would go a long way to reduce the industry’s emissions, he noted. According to Clean Energy Canada’s recent white paper, “Decarbonizing the Canadian Chemical and Fertilizer Industry”, the top emitters are: 1 NOVA Chemicals’ ethylene and polyethylene (PE) complex at Joffre, Alberta, which includes a cogeneration power plant; 2 Canadian Fertilizer Ltd, Medicine Hat, Alberta; 3 Dow’s existing petrochemicals complex at Fort Saskatchewan, Alberta; 4 Redwater Fertilizer, Sturgeon County, Alberta; 5 NOVA Chemicals’ Corunna petrochemicals site in south Ontario; 6 K+S’ Bethune potash mine in Saskatchewan; 7 CF Industries Courtright fertilizer complex in Ontario; 8 Koch Fertilizer complex, Brandon, Manitoba; 9 Mosaic’s potash site in Belle Blaine, Saskatchewan; 10 Nutrien’s nitrogen operations at Fort Saskatchewan, Alberta. Critics have questioned whether it makes sense for a relatively small country like Canada to even try to compete against the US IRA incentives. Canada’s incentive policies came under public scrutiny earlier this month when automaker Stellantis halted construction work on a battery cell project at Windsor, at the border to Detroit, Michigan, in a dispute over government funding. ($1 = C$1.36) (Thumbnail photo: Canadian flag; souce: shutterstock) Focus article by Stefan Baumgarten