Producers in denial about chems market shifts – consultants

LONDON (ICIS)–Management teams at some petrochemical companies are not fully facing up to the reality of the extent of shifts that have rippled through the market in recent years, the co-authors of a report by ICIS Analytics & Consulting and International eChem said on Monday.

Firms looking to maintain course in spite of the global downturn and demographic shifts in many key markets are avoiding facing up to the reality of the current state of the economy, according to International eChem’s Paul Hodges.

“The first reaction to a shock is usually denial,” he told ICIS.

“People adopt a position of ‘It’s not great, but I can carry on with what I’m doing, I just need to be a little smarter,’” he said. “That is the comfortable middle, and we can’t go on like that.”

Developments in China are a good example of the major changes underway.  The opportunities for exports into China may not continue for much longer, as the country focuses on increasing its self-sufficiency in the major value chains, according to report co-author John Richardson.

“A lot of the export markets are disappearing in China,” Richardson said, noting that the country’s current five-year plan sets out a target of 93% self-sufficiency for propylene derivatives.

The shift in Asian demand for western product is not the only permanent or extremely long-term change the petrochemicals industry has to face up to, according to the report. The oil price, currently hovering slightly over $30/bbl, is unlikely to return to the $100/bbl or above that many demand forecasts were based on.

Shifts in demographics, as the Baby Boomer generation moves into a lower-demand retirement phase, have been obscured for a time by stimulus spending in the wake of the global economic downturn in 2008.

But lower fertility rates since the 1970s have led to subsequent wealth-creating generations being below replacement size.

The stimulus measures themselves may supplant demand shortfalls in the short term but leave heavy debt burdens for the future, depressing consumption further, according to Hodges and Richardson.

China is also the first country to transition into the ageing population phase without reaching market maturity because of its One Child Policy.  As China is still a developing economy, it lacks the social infrastructure to cope with a rapidly ageing population.

“A big question mark hangs over whether the Chinese government can afford to build this infrastructure, as national income tax collection is low and local authorities are short of money,” said Richardson.

“China wants to transition to a consumer-led economy, where its people spend a lot more money on goods and services,” he added.

“But people are going to save rather than spend money to cover all the healthcare and pension costs associated with an ageing population, unless or until the government can greatly improves its provision of these services,” said Richardson.

A potential solution to sea changes in the industry is to more actively engage with finding consumers, end markets, and necessary products, instead of attempting to divine anticipated market growth and build up capacity in anticipation of that demand, according to Hodges.

“I don’t think this is a volume problem,” he said, noting that numerous global trends such as food scarcity, droughts in California and Africa and sanitation in India will potentially require a huge amount of product from the chemical industry, if the sell-side is more engaged in finding the solutions that are needed and producing them.

“Our problem is that we need to change our mind-set.  Rather than just focusing on quarterly outcomes, we need to go back to planning how to find new applications and new customers.  This demand-led approach worked well before the SuperCycle began, and can work well again now it has ended.” 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.