The petrochemical growth model is broken – study

LONDON (ICIS)–The petrochemical growth model of the last twenty years is broken, and petrochemical companies must radically change their approach to get ahead, according to the authors of a new joint study from ICIS Analytics and Consulting and International eChem this week.

In an exclusive interview with ICIS, Paul Hodges, chairman of consultants International E-Chem, and John Richardson, a consultant at ICIS Analytics and Consulting, argued the aging of the baby-boomer generation meant the idea that demand will always catch-up with investment is no longer valid.

“The critical thing [for petrochemical companies] is that what you did for the last twenty years doesn’t work anymore,” said Hodges.

Hodges explained that in the past few decades demand was based on extrapolations from IMF-style growth forecasts to determine the number of plants to be built.

“We said ‘Look there’s an IMF GDP report out… so if you take today’s volume, the market in five years is going to be x, so we need to build x plants, and now we get to the important bit of where do we put the plants,’ you didn’t need to think about demand because of the baby-boomers” Hodges said.

The model worked, Hodges said because the population increase caused by the baby-boomers meant that any gap in demand would always be filled.

“Demand will always catch up, that is where it’s been for the last 20 years,” Hodges said.

Nevertheless, with a slowdown in population expansion and an increasingly ageing population that typically spends less, this model is already showing signs of collapse.

“You can either be supply driven – I’ve got the cheapest product in the world, I’m going to go out and sell it – or be demand-led – I need to find a customer because otherwise I won’t be able to sell anything,” Hodges said.

The pair cited China as an example whereby additional capacity has not been met by increased demand, and where lowering the price point has not stimulated additional consumption.

“We see that a lot in China, no matter how cheap you are… you can build it, you can have the best cost curve in the world, but nobody wants to buy it. That’s the problem the industry is coming up against,” Hodges said.

“China is changing its economic growth model, but also a legacy of chemicals is demand, polymer. PTA’s (purified terephthalic acid’s) gone, PVC’s (polyvinyl chloride’s) gone, a lot of chemicals in the propylene chain have gone. It’s a very good chance these will never come back as import markets, it doesn’t matter where your cost curve is. PP (polypropylene) is moving towards self-sufficiency, the next will be polyethylene. China is no longer the market where you can just dump product, and that’s going to require a change of thinking.” Richardson added.

The solution, according to Hodges and Richardson, is for petrochemical companies to stop thinking about volume and efficiency and instead focus on where demand is coming from.

“Instead of thinking about volume all the time and efficiency we have to think about being more service lead and efficient. This is not impossible… if you look at what we went through with PET, it was the newest polymer we didn’t know who would buy it and we couldn’t make it well because it was new, and we sold it to pharmaceuticals and learnt how to do it, and then could go to [soft drinks firms] and then ten years later put in the oxygen barrier… we do know how to do it we just haven’t done it in 20 years,” Hodges said.

“Our problem is that we haven’t had to think in terms of years or decades, we’ve only thought on a quarterly basis, how do I get another 100,000 tonnes out the door next quarter. We didn’t used to think like that,” he added.

Petrochemicals cannot afford to be complacent, the pair said.

“You need to get out there pretty quickly… we’re already behind the curve on this,” Hodges said.

The new scenario study by ICIS and the independent UK chemicals consultancy, International eChem, is the culmination of five years of ground-breaking forecasting work. It has been developed by a team of experts who have many decades of industry experience in all the main product areas and geographies, and is under-pinned by data from the ICIS global Supply & Demand data analytics platform. It enables you to examine the data and analysis underlying key trends and to see how our experts predict three very different potential scenarios will play out for petrochemicals markets.

Guidance is also provided on how to correctly prepare, plan and pivot for different crude oil price scenarios, and to identify major new revenue and profit growth opportunities in the petrochemical value chain. To view “Demand – The New Direction for Profit,” click here

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