Demand doesn’t have to decrease if new mindset applied – study

LONDON (ICIS)–Although the current demand model for the petrochemical market is no longer workable, the future does not mean a decrease in orders, but a shift to different areas of consumption, International eChem and ICIS Analytics & Consulting said in an exclusive interview this week.

Shifts in demographics and the end of the baby-boomer era are central to their reasoning, published in a new joint study co-authored by John Richardson, a consultant at ICIS Analytics & Consultant, and Paul Hodges, chairman of consultants International E-Chem, released on Tuesday.

After the second world war there was a great consumption binge, Hodges said, with a great deal of cheap housing available that had not been before. Demand growth was being sustained by a wealth creator group of those aged 35-55.

“We just didn’t have (anything). So, understandably, what you saw with the boomers was a consumption fest because they never had this before,” Hodges said

“But now two things have happened, one is that the boomers have moved into retirement, secondly your generation has been brought up having all these things. It’s not exciting to have a car, it’s not exciting to have central heating. The whole driver to get more and more has gone, and this coincides to the shift towards sustainability,” said Hodges.

Instead of the traditional focus on increasing efficiency and demand growing from underlying population growth, new demand will come increasingly from solution-based thinking in new market segments and product areas.   

“You have the [WTO] Nairobi conference in November, and you have the climate change conference in Paris, where 195 countries signed up… [that] shows you that the direction has moved to quality of life and a much more considered approach. As Mark Twain says history doesn’t repeat, but it does rhyme… It’s no longer the value of the product but the value you can create with the product,” Hodges said.

The pair pointed out that the new approach would require petrochemical companies to actively pursue new business routes, citing the example of London reservoirs as a possible industry that petrochemical companies could move into.

“We lose 40% of our water in London through reservoirs…. Why are you not using PVC (polyvinyl chloride) or HDPE (high density polyethylene) pipes to stop that leakage? The answer is that nobody in the petrochemical industry has gone to the water companies and said what do you need, what are the problems and we can create a product. That’s because we’ve been so focused on the volume side they’ve not been sending people,” Hodges said.

The demand challenge requires an immediate shift in perspective and investment if firms want to get ahead, according to the duo, and some opportunities for growth in the millions of tonnes have already been lost, such as in the automotive industry.

“There’s a great example of how not to do it, which is the drive towards fuel efficiency in cars. In 2009, Obama said you’re going to move towards the fuel efficiency standards, but you’re seeing less sales of plastics because the plastics companies didn’t go in and instead the steel companies did, and you’ve seen a resurgence in light weight steels,” Hodges said.

When asked whether there were any regions more optimised for the shift to the pairs’ vision for a new demand model, Hodges said that different regions had different challenges, and although China may have already begun the shift, none had a clear advantage.

“I think everyone starts with a set of positives and negatives – it’s really a mindset thing. If you look at China you’ve got a powerful president, Xi Jinping who wants to re-establish China as the Middle Kingdom and set himself a target to get there. Our problem is that we haven’t had to think in terms of years and decades, we’ve only had to think on a quarterly basis. We didn’t used to be like that, we were very long term,” Hodges said.

“China – because they’ve got such a firmer government… they can do things on a scale that can surprise people,” Richardson said.

China, though, has its own challenges to move to a new demand model, not least of which is the service economy, Richardson added.

“They’ve got to replace all this lost investment with a service economy, and the big issue is taxation – very few people pay income tax [and Local government tax revenue has] been based on selling land – so local authorities are bust. Why that’s a problem is that they know they’re going to have to support the old because of the aging population, so they save a lot of money because they know they won’t get a pensions,” Richardson 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