By Nigel Davis
LONDON (ICIS)--While looking forward to a period of more robust growth and tightening markets, petrochemical companies have to be mindful of changing demand patterns.
Shifting demographics in the developed economies, particularly, will eventually have an impact on demand for olefins, aromatics and their derivatives. Likewise, China’s demand for chemicals ultimately will be coloured by the shifting age profile of its population and the ability of workers and consumers to contribute to economic prosperity.
The operating environment for the petrochemical industry can hardly be described as buoyant at the start of 2014. Companies might wish for stronger chemicals growth but few can be optimistic that uncertainty and volatility will give way to a clearer growth trajectory this year, never mind the next.
President of Germany’s VCI, Karl-Ludwig Kley, probably summed it up best in the chemicals trade group’s 2014 outlook, published in December. “There will be an upward development – but a slow one,” he said.
The association thinks the global economy has passed through the trough and most VCI member companies believe that business is going to pick up. “We are cautiously optimistic,” Kley added.
There are those who remain anxious and feel that 2014 will be a re-run of 2013, in essence that the long-expected economic recovery has not yet taken hold, while others are more upbeat. Demand will improve as global economic growth strengthens but in mature markets there may be not much room to manoeuvre.
Producers may have become more sophisticated in addressing market needs in the developed economies but they would probably benefit from more on-the-ground understanding in what have been some of the faster-growing parts of the world. The slowing of demand growth in China and in Latin America has taken the shine off these markets for numerous players.
Certain chemicals still have the potential to grow at a healthy multiple of GDP in certain locations while parts of the market clearly have matured, although there always seem to be surprises.
This industry thrives on investment – one producer’s product is another’s intermediate and oft times vice versa. So the build-up of capacity in the US, in Asia and in the Middle East can be seen as a sign of optimism in the future.
The American Chemistry Council (ACC) has catalogued 136 new chemical production projects in the US since 2011 worth about $90bn. That is a huge bet on the competitiveness of the US in an era of cheap natural gas.
More than half of those projects have been advanced by non-US producers which want to take advantage of lower manufacturing costs and of demand growth – in the US and on export markets.
The ACC believes that growing demand will drive demand for basic chemicals in 2014, with the cost-advantaged segments performing particularly well.
“Looking ahead to 2014, we anticipate a sustained global expansion that will result in growing trade,” the ACC’s chief economist Kevin Swift said. “Following a decade of lost competitiveness, American chemistry is re-emerging as a growth industry.”
“Globally, growth fundamentals in Europe and many emerging markets will be stronger in 2014 and the fragile recovery will gain traction,” Swift said. “World GDP growth and trade, which are closely linked, will accelerate.”
The ACC says that 2012 and 2013 are years to forget given that austerity in the developed nations, recession in Europe, and China’s slowdown, and uncertainty, hindered growth.
But Europe is climbing out of recession, the US is in “slow-growth mode” and China appears to be improving. The global industrial cycle is beginning to turn upwards and monetary policy is accommodative, it adds.
Its latest forecast for year-on-year production growth in bulk petrochemicals and organics is 4.1% in 2014 from 2.1% in 2013. Plastics production growth could be 4.0% this year from 3.2% in 2013. The improvement in petrochemicals and organic chemicals growth this year and in 2013 exactly matches estimates of global industrial production increases for the two years.
Hopes for 2014, then, centre on a sustained improvement in the US and in the European economies combined with continued strong growth in China and, largely, in wider Asia. Policymakers are optimistic that stimulus can deliver growth in the world’s major economies.
Yet, “while companies clearly have to take account of policymakers’ optimism, experience tells us to be cautious about believing everything they say,” says ICIS blogger on the economy, International eChem chairman, Paul Hodges, in the latest edition of ICIS Chemical Business (ICB) .
Hodges is among those who ascribe to bond fund managers PIMCO’s assertion that markets will come to realise that the policy Kings and Queens in the world’s major economies “have no clothes ... and that monetary and fiscal policies cannot produce the real growth that markets are priced for”. PIMCO suggests that the global economy is approaching a critical T-junction.
Global economic growth is increasingly at risk from shifting demographics and from ageing national populations, Hodges says.
A business scenario based on demographics offers a realistic alternative view of the world in which there are clear opportunities for chemical producers but not based solely on the assumption that policy can deliver constant growth.