The slow demand growth in the petrochemical industry was further struck by COVID-19 outbreak in 2020. Challenges such as surplus production, volatile prices and transitional shift towards renewable energy will shape up the dynamics in the coming years. Decision-makers across the value chain have to reshape strategies in order to negate the challenges that lie ahead in the coming years.
The article digs into the impact of pandemic on demand-supply, price, upcoming plans and the movement in application areas of Petrochemicals. The list of stakeholders connected to this huge industry is immense and its imperative to understand the percolation of these factors as we move down the value chain.
The industry had witnessed elongated growth since 2008 till 2018 driven by impressive utilization rates and suitable feedstock scenario. Strong economic growth in emerging economies lead to increased demand for majority oil derivatives.
The year 2019 was marked with notable capacity additions and sluggish demand growth. This drop was fueled in 2020 by the COVID-19 pandemic. End-use industries such as automotive and construction were negatively impacted with significant drop in demand levels whereas packaging industry observed robust demand due to growth of medical, food & sanitary applications. Increased application scope, spike in delivery services, and rising demand form healthcare industry facilitated the growth of packaging industry.
Strict lockdowns across major countries had a noteworthy impact on gasoline demand and linked blendstocks including xylene, toluene and Methyl tert-Butyl Ether (MTBE). MEG and PET were also among the ones that witnessed steep decrease in demand. Another major development was Saudi Arabia-Russia crude oil price war towards March end as crude pricing plunged with US WTI futures turning negative in April, 2020.
Disruption in trade patterns due to imposed lockdowns lead to strong increase in transportation prices. With China and few other Asian countries experiencing early recovery, imbalance in goods flow increased in conjunction with array of other disruptions such as Suez Canal blockage and storms in US Gulf coast.
On a positive note, with COVID vaccine program up & running in major economies and plunge in number of new cases per day, petrochemical prices in Q4 recovered. Companies expressed optimism while entering 2021. Doubts were still being casted upon derivatives including monoethylene glycol (MEG) and paraxylene.
The supply side faced different challenges characterized by shipping/container woes, uncertainty in trade flows, and lower operating rates among numerous others. Although, the impact was comparatively moderate in comparison to demand side with companies achieving the stability between running plants despite physical distancing and labor availability issues. Adaptive strategies to run at lower rates and producing isopropyl alcohol and ethanol for pandemic related products were undertaken to negate the impact.
Some of the major companies focused on cost reduction and capital spending to overcome the short-term impact. The Q1 results for 2020 when compared to 2019 were down by almost 3% in terms of EBIDTA margins and earnings before interest. Benzene supply was unusually tight in 2020 and it will continue to persist in 2021, however new downstream plant startups in China will help to maintain aromatics supply in general. Aromatics plants in Asia are anticipated to run at 70-80% of their capacity, with aromatics margins remain to float beneath breakeven points.
The aromatics demand side represents a further intricate scenario due to China adding significant styrene capacity estimated at 5.88 million mt/year. With this development, styrene buyers in Asia will move towards China as the preferred sourcing location creating problems for usual styrene exporters. South Korea continues to export benzene to the U.S. and accounted for 28% of its overall exports.
Demand levels were marked by movement in end-use industries of various products. Consumer good industry in Asia Pacific helped polystyrene and polyethylene to maintain overall demand levels. PU witnessed plunge in demand which is utilized heavily in applications such as flexible & rigid foam and seals & gaskets.
Automotive production & sales number plunged significantly in spring of 2020 and rebounded towards the end of year, however, industry experts have forecasted that sales in EU and the US will not recover to pre-COVID levels until 2023 in an optimistic scenario. Manufacturers Association for Plastics Processors reported that “nearly three-fourths of companies serving automotive are forecasting revenue through the end of 2020 at 75% of their original 2020 forecast, while a staggering 19% anticipate revenue through the end of 2020 to be at 50% or below what they forecasted for the year.”
The industry was able to recoup in the second half of 2020, led by continuous production and improved oil price. Regional dynamics played a huge part in shaping up the supply-demand trend for different petrochemicals. Companies focused on taking rebuilding and measures to overcome the economic crisis, majorly in the area of capital spending, long term strategies and operating models.
Oil price fluctuations moved the revenues across the value chain and with Brent crude prices falling as low as USD 30 per barrel, the financial performance of major companies showcased a steep fall. With oil prices recovering in third and fourth quarter, the recovery was also observed in terms of revenue.
As we discussed above, demand growth in 2020 was driven by movement in end-use industries and regional recovery schemes. With vaccine approvals and lower new cases per day, demand recovery picked up brisk pace towards the year end. Consumer packaged goods industry was performing strongly in third and fourth quarter which helped petrochemicals demand in turn. The industry accounts for a considerable market share in terms of petrochemicals consumption.
E-commerce sales recorded significant boost along with strong demand for hygiene & personal care products contributing towards the growth in demand for packaging application. Polyethylene & polypropylene experienced steady demand with strong demand from food packaging and household goods. With minimal activity in textiles, construction and automotive industries, polymers such as PVC, PET, SBR and PU witnessed plunge in demand.
Ethylene, polypropylene and polyethylene experienced regional variance in terms of demand, supply and pricing. The prices in Q2 went drastically up in North America due to supply crunch as a result of outages and scheduled maintenance. The regional cost benefit of ethane was also compromised at the same time, however, surge in PE prices in the third quarter spiked up the recovery. In terms of integrated margins, Asia and Europe were stable throughout the year with PE leading the way.
The impact of pandemic was felt across the value chain affecting demand and oil prices. Factors such as demand recovery, production output, value pools along with the emergence of alternative energy sources will determine the outlook of the industry in the coming years. The movement within end-use industries will further drive the capacity expansions that have been put on hold due to COVID-19 impact.
The pandemic’s effect on the petrochemical industry occurred in conjunction with significant planned capacity set to come onstream. Companies that are not integrated across the value chain and rely on smaller refineries will face doubtful future with new and improved mega-refineries coming onstream in Asia and Middle East.
The supply dynamic will have a huge impact specifically in Europe with the region already losing production of1.5 million bbl every day in 2020 and there is expected to recover 1/3rd of it by 2023. A significant number of refineries in Europe and North America are anticipated to announce closures as a result of new supply units being introduced.
As per the plan, eight new mega-refineries expected to be commenced between the period of 2021-2025 along with significant expansions at existing sites in India and China adding over 4.2 million bbl/day to overall global capacity considering the closures as well.
The supply outlook globally looks tight driving the prices upwards as seen with PE and PP in Europe. Reduced refinery runs, delayed imports due to shipping woes and other production issues have created an imbalance in Europe and US if compared with the Asian market.
Industry experts believe that demand will only reach Pre-COVID levels by second quarter of 2022 and will largely depend on the performance of end-use industries. China is expected to be one of the key regions to drive recovery with Beijing’s new urbanization strategy. The development will be a welcome boost for polymer demand in end-use industries such as construction, automotive, and machinery/equipment. As per National Bureau of Statistics (NBS) real estate development investment increase over 35% y-o-y and is expected to grow in the next three quarters.
The industry has responded extremely well in Q1 2021, with consumers spending more on physical goods in comparison to vacations and dine-out. Increased demand for e-commerce goods and trade activity has in turn benefitted diesel to power ships, freight trains and trucking. Packaging industry was the saving force last years and continues to lift hydrocarbon demand as the second quarter ends.
The big freeze in North America bolstered global oil demand by almost 1 million barrel per day with high natural gas prices facilitating the switch to diesel generators. Europe’s economic activity has also increased with life gradually returning to normal and experts predict that the result for demand in Q2 and Q3 will be significantly better than last year.
However, global oil demand was still looming 4%-6% below the last year level in Q1 as a result of reduced jet fuel consumption. The second wave in India was another blow to the recovering economy with uncertainties looming around the resurgence of pre-COVID demand level recovery. The initial response has been fitting with all the aforementioned factors playing a key role. Macro-economic factors, vaccine drives and policy makers will have huge influence in the coming two years.
The weakening oil prices resulted in flattened cost curves, specifically for ethylene and methanol wearing down value pools, largely for players that have access to advantageous feedstock. There are different scenarios for oil prices inspected by experts, however, the prices are expected to remain low in the long-term outlook.
The industry participants are looking at various strategies to manage utilization such as postponing capacity addition plans and reinventing existing capacity among others. Before the pandemic, ethylene utilization rates were anticipated to remain around 85% between 2020 and 2025 in comparison to 89% in 2019). Although, post pandemic review reports that utilization levels are expected to remain below 85% despite capacity reductions.
In response to the impact of COVID-19 on the market, immense supply reductions were undertaken by OPEC. The alliance’s initial reaction added fuel to the fire and made oil-market crisis worse. Saudi Arabia and Russia also clashed last year March for few weeks which ended up in a vicious price war. However, with impact on demand, they reunified and reduced production by almost 10 million barrels a day which accounts for 10% of the global supply.
OPEC+ did added back a portion of the reduced oil supply to the market in August, however, the alliance is focused on mitigating the problem of oil-stockpile surplus. In a recent development, The UAE in July 2021 made reservations over OPEC oil cartel and allied producing countries plan to extend the oil production cuts beyond April 2022. There are even questions being raised over UAE’s commitment to remain in the OPEC with the country trying to move away Saudi Arabia’s gumshoe and set on its own path.
Oil remain to be the leading energy source for road transportation and will continue to lead for the coming years. As thing stand, electricity accounts for merely 0.5% of the overall energy consumption in road transportation. Although the percentage is relatively small at present, it has tripled in last 10 years driven by continuous R&D, strategic initiatives, and policies driving the growth.
Major driving factors affecting on-demand of the electric vehicle include government initiative such as stringent regulations, incentive and subsidies on purchase of electric vehicles. In order to further support the growth of electric vehicle market government providing incentive and subsidies for charging station infrastructure development.
For instance, Italy ratified the' Eco-Bonus' program in May 2019, which will spend € 60 million (72.89 USD Million) in 2019 and € 70 million (85.54 USD Million) in 2020 and 2021 on subsidies for Charging Via connector electric or very low-emission vehicles and electric charging infrastructure. Under this scheme, from 1 March 2019 to 31 December 2021 individuals, companies and condominiums will use a new 50 percent tax deduction for the purchase and installation costs of EV chargers for a total of up to € 3,000 (USD 3644), split into ten equal annual installments.
As part of the long term strategy, companies should be focusing on eliminating the demand-side dependency on global supply chain. The approach would encompass reinventing along with achieving maximum output from the existing ones. Some of these possible areas are highlighted below,
Despite of the numerous challenges that lie ahead of Petrochemical companies, it is imperative to strategize smartly to achieve recovery. Adapting to the implications of the economic crisis across the globe, the management strategies should learn from the past one year and plan for next five years to negate the impact.
Shubhendra comes with an experience of 6+ years in Chemicals, Materials, Oil & Gas and Energy research & market intelligence. He has worked with leading players across the globe as an advisory on range of projects spread across market opportunity assessment, competitive intelligence, demand-supply analysis and procurement intelligence among others. His experience prior to Straits include Grand View Research, Wiseguy Consulting & GEP Worldwide. At Straits, Shubhendra leads the CMFE (Chemicals Materials Food & Energy) Practice and is key in managing entire research process along with identifying/assessing/tracking markets across the value chain. With educational background in Oil & Gas and Economics, he takes keen interest in Oil & Gas and Plastics Economy and advanced materials.