“People didn’t think about the demographics enough. They didn’t think about the role of real estate and debt. And they built capacity on the assumption of, say, 6% or 7% consistent growth, which we are unlikely to experience in the future.” – John Richardson, Senior Consultant, ICIS
In this episode of The Chemical Show, host Victoria Meyer and guest John Richardson of ICIS discuss China’s aging demographic and the future of the chemical industry. They delve into China’s projections for becoming a net exporter in polypropylene, limitations on becoming a net exporter in polyethylene, and the current oversupply and weak demand growth in HDPE.
Topics covered include:
- China’s aging demographic and its impact on the future of the chemical industry
- The growth in China’s petrochemical capacity and its impact on supply and demand in the market
- The factors influencing the chemical industry’s margins and pricing, including fluctuations in energy costs
- The impact of geopolitical factors on the industry, including concerns about energy costs in Europe
- The impact of demographic changes on housing demand and local government spending in China
Whether you’re in the industry or just curious about the global forces at play, this episode is essential listening.
Watch the episode here
Listen to the podcast here
China’s Aging Demographics and the Future of the Chemical Industry
Hi, this is Victoria Meyer. Welcome back to the Chemical Show. Today, I am speaking with John Richardson, who is a senior consultant with ICIS. Based in Australia, originally from the UK, as you might be able to tell from his accent, John is an expert in polyolefins markets, a bit of a contrarian and a really smart guy. We’re gonna be talking today and getting an update. And you’ve heard John previously on the podcast. He’s been on a number of times, but what we’re doing today is talking and getting an update on the polymer’s markets, the global economy, the effect of China and the effect of low carbon investments. So stay tuned. John, welcome to the Chemical Show.
Thank you, Victoria.
All right. So you’ve been on previously, but maybe people need a refresher, they haven’t heard you before. Give us a little bit about who you are and what your background is.
Yeah, sure. I mean, I’ve been in the chemical industry now for 26 years working for ICIS. Originally as a journalist. So I moved to Singapore in 1997. To be honest, I knew nothing about chemicals then. So I sort of learned from the bottom up just by talking to people and reading books. And then from 2006 I’ve been a consultant and I moved to Perth about 10 years ago, but my specialty is global polyolefin markets with a big focus on Asia. So it’s the usual stuff, it’s short term supply demand pricing margins and trying to work out what’s around the corner over the long term.
Awesome, awesome, awesome. All right, John, so 2023, the year that we were kind of supposed to return to normal, although I know, you know, heading into the year people have said, first half is kind of not so hot. Second half is supposed to be better. What are you seeing? So based on what you thought was going to be happening in 2023 versus where we are, what’s the story?
Well, I don’t always get things right. We don’t have to, otherwise we’d be sitting in Monte Carlo. But I did say, I didn’t think there’d be a 0 COVID bounce or post 0 COVID bounce in China. And the reason I said that was because the real estate bubble had popped in late 2021, and that’s worth some 30% of GDP. And it’s the end of the government put option. In the old days, prices always rose and the government guaranteed that. So why on earth wouldn’t you buy 3 condos if you got the credit? It was a one-way investment. And prices have fallen, they may rise again, but they’ve fallen and they’re very weak at the moment.
Real estate sector is very weak. So that’s gone as an investment driver. I’ve been saying for many years really, since probably 2011, the demographics would catch up on China eventually. In fact, The births per woman fell below population replacement rate way back in 2001. And have been below that 2.1 babies per woman since then for most years. And they were 1.2 last year. So we got household formation rate falling since 2013. We’ve got a shrinking working age population since 2015. And it’s catching up. You know, there’s not a demand for housing because young couples, a few young couples getting married, obviously, and the demographics are just…
I’m going to jump in if I can. It’s a bit of a whipsaw effect, right? So this single child policy, which I guess was intended to counteract just the tremendous population growth. I saw on something that you had written recently that in 1963, it was 7.5 children per woman. I mean, that’s just, as a woman, that’s nuts. I’m just gonna put that out there, but it’s astonishing. And now we’re down under, or we’re close to 1. Is it 1.2 births per adult woman? Is that how they measure it? So it’s kind of a crazy whipsaw in 60 years, right?
Exactly. And you think that, I mean, the old cliché has value that China’s getting old before it’s rich because last year per capita incomes were $13, 000 versus developed world average of $48,000 according to the IMF. So, you know, the developed world can kind of cope with an older population. We’ve got aging populations in the West, in some parts of the West. So I think the US will be all right. I think it keeps renewing itself, but other parts of the west not so much so they can cope with it.
But China, it’s still a poor country and it’s got big issues with its pension health care system so of course savings rates are going up. And the further factor I was pointing out was it’s all tied to real estate because local governments, provincial governments are responsible for 70% of government spending in total. And how they raise money for infrastructure, which is a key way of boosting any economy, isn’t it? The multiplier effect from the New Deal, you know, was to issue bonds, which were very popular. But those bonds were backed by rising land prices. So land prices are falling.
And interest rates are rising.
And interest rates are rising, exactly. There’s something the economists pointed out, which I hadn’t thought about as well, good feature in the economists, which kind of reflects of what, you know, some of what I’ve been writing for quite a few years and the other week on the cover, that in the developed provinces, most of the infrastructure investment is tapped out. You’ve got enough bridges and roads, high speed rail, et cetera. So the only infrastructure left to develop if you can raise the money is in places like Tibet where the population is lower. So you bang for your book in terms of stimulus is less, multiplier effect is less. So you add all this together and of course the 8% decline in exports in April, after a few months of decline because of inflation in the West.
China enjoyed a fantastic year in 2020. So we’re all in lockdown buying durable goods, there was inevitably going to be a cycle out of, you know, goods into services at the end of the pandemic. So you knew that was going to be a problem for Chinese exports of washing machines, refrigerators, electronics, etc. But that’s been worsened by the interest rate increases, inflation. So you think it’s kind of a perfect storm. Everyone said, you just wait till after the Lunar New Year, after the Zero-COVID came to an end, and chemical prices and demand boom. But so now hold on, there’s all these factors that have built up now. Services are recovering, of course, because people are out spending money, Labor Day holidays, you know.
Although interestingly, I was talking to people in Shanghai this week, and they’re saying young people are very cautious about spending. So they were traveling during the Labor Day holidays in May, but they weren’t willing to open their wallets that much, they were careful about what they spent. So is that a sense of lack of continuity? Yeah, I mean, you sort of talk to people. So chemicals demand, you get back to polyolefins. The point is that China is the biggest demand driver in the world, as we’ve discussed before on this podcast. Way, way, way more important than the rest of the developing world. We can see per capita and by millions of tons. And it’s outpunching its population size and its wealth. And that’s because of 2 things really. A youthful population which drove their manufacturing efficiency and became the workshop of the world. Up to 2009, by which time the population was aging. And then 2009 onwards, it was this massive economic stimulus, which kind of brought forward demand, if you like.
Driven by real estate or driven by this whole, I mean, the country strategy to become self-reliant as well as an exporter. Was it, or what was driving that? What’d you say?
I think that the stimulus was really responsible to the global financial crisis, because they were panicking a bit. Oh my goodness, there’s all these jobs. So in February 2009, whoosh, this massive stimulus program, and yeah, into real estate, into manufacturing capacity, we can talk about in a minute, into infrastructure. So massive amounts of wealth creation for the wealthy, for those who have access to credit, the middle classes living in the big cities. And there’s some very rich people in China, of course, made a lot of money getting in and out of real estate at the right time. And that basically led to, I mean, look at polypropylene back in 1990, if you go back to 1990, the developing world is 5 billion people, right? Outside China. China’s 1.4 billion people. In 1990, they had about the same per capita consumption of polypropylene. By 2022, the gap was enormous. I can’t remember the data from my own chart now, but the gap was huge. But basically, in millions of tons, 1.4 billion people consuming more polypropylene than 5 billion people. 5.2 billion people to be exact.
Which was driven by this being the manufacturer of all the cheap and cheerful products for export.
It’s not actually people in China consuming it, it’s re-export, absolutely, Victoria. It’s not a real number. But also there’s a lot of local wealth as well, created in that kind of real estate bubble around. But if you did an equalizer, a lot of that is re-exported. So it’s not really that consuming that much per capita at home, but it’s created a lot of wealth. So they’re punching above their weight and they consume more than the developed world, which is about 1.4 billion people. You know, China’s 1.4 billion. So the developed world is way rich, isn’t it? But again, of course, it’s to do with this manufacturing for export.
So anyway, all these things come together. And we’re seeing possibly 1 minus 1% growth of polypropylene this year based on the data. So it might get a bit better than that. I think it might go to 123%. But people have expected 6%. That’s the thing. People had expected China to slow down. That’s been the sort of given for years. And they expected to slow down to 6% or 7% growth in all the chemicals and polymers. But what we’re looking at now, I think, is some years of minus growth but by 1, 2, 3% growth. So the capacity was built on the assumption of 6 to 7. In this down cycle, in this cycle. So because China is so important for demand, I mean, a lot of people say, oh, don’t worry, the rest of the world is doing really well.
But look at India. I was in India a few weeks ago. It’s absolutely booming, no question. But one product, high-density polyethylene. Last year, India was about 3 million tons of high-density polyethylene demand China was 17 million tons as we know the India population is just about to get bigger than China or has already There’s a big lot of the media about that, isn’t there? But in terms of chemicals, you have to answer the question, so what? Because even if India grew at 12% a year, and we’re saying 6% this year of HD, it would take many years for it to catch up with China. And because China’s only growing at 1, well actually in HD, it’s minus 4 percent this year. So far. That again, I think it might get better in the second half, I think it probably will, but it’s minus 4 percent if you annualize the January, April data, which is extraordinarily low.
I think there’s something weird going on with HD, but still say it’s 1 or 2%. You know, even if India consistently grew at 12% every year for the next few years, how long would it take mathematically to catch up with China? And this is the challenge we face, the chemical industry. I think people have assumed people didn’t think about the demographics enough. They didn’t think about the role of real estate and debt. And they built capacity on the assumption of, say, 6% or 7% consistent growth. Down, yes, because it’s been a double digit since 2000 in China, average, because they thought that the economy would mature. So that’s the problem we face.
You say that it’s actually a pretty interesting story. I’ve been in a lot of conversations about growth drivers. And Honestly, John, not a lot of people were talking about real estate and Asian real estate and its effect on polymer growth. I can guarantee that. I mean, going back even a decade ago, I was not hearing those conversations. So I guess it’s not really a surprise because I think a lot of people take the growth at face value and they take a look at it. I think kind of similar to the stock market, like, ooh, it keeps going up, this is awesome. Without necessarily understanding the fundamentals, right? So there’s a big assumption that people actually understand the fundamentals, believe the fundamentals and recognize the differences and that they’re willing to be contrarians to the rest of the crowd, right? So if you look at investment in crackers and polyolefin plants, some of it’s to meet the goals of growth and these growth expectations, it’s to meet stock market investment and investor sentiment. It’s keeping up with the Joneses as well.
Yeah, you’ve got to get bigger and bigger to maintain market share. And I guess with, how do we say this diplomatically, in the US you’ve got incredibly cheap feedstock and amazing low interest rates, so why not? You know, of course, the main market for US exports is not China. It’s Latin America, Europe, isn’t it? I think I’m not sure which order that is in. As you know better than me, but still China makes the pie bigger, doesn’t it? I would have made the pie bigger if we hadn’t been in this situation for the US.
So this negative growth, so negative growth in polypropylene, you’re saying negative 1% this year, negative growth in HDPE, which is down 4% this year. What’s the effect? And I know certainly let’s talk polypropylene first because China has been investing heavily for years in polypropylene. So if growth is down, demand growth is down, capacity is up, what’s going on from a global supply demand perspective?
Well, I mean, China’s become a major exporter since 2021. What you have now is raffia grade and it’s going through to traders at the moment. It’s going all over the world. China used to export primarily to Southeast Asia because of the ASEAN China free trade deal duty free. So it was really the 2 big markets being Vietnam and Indonesia. Indonesia is the biggest, actually, in terms of net imports at the moment. But now it’s going to Turkey, South Asia, India, Pakistan, Brazil, Guatemala, Mexico, Peru, everywhere, where the material flow and it’s obviously competitively priced, It’s raffia grade. So that’s 1 effect. And that’s putting some pressure on the established exporters in Saudi Arabia, Kuwait, Abu Dhabi, more importantly, South Korea, Singapore, Thailand, Taiwan, and Japan. They’re the big polypropylene exporters. So it’s putting pressure on them.
In terms of new capacity in China, the government in 2014 said across petrochemicals generally, we’re going to become more self-sufficient. At the time, people said, hey, ain’t going to happen because the cost between economics don’t work. But the projects in China have never been built just for cost between economics, social, political, more recently geopolitical about supply security, adding value to the economy because of an ageing population. You know, petrochemicals are a high value industry are perceived as such. So we’ve seen this steady growth of capacity and the big new plants, a lot of PDH based, PPP based on imported propane, sometimes from the US, of course, and the Middle East. And big refinery based, big crackers, less emphasis on coal, because of environmental reasons. So bigger units. And this is petrochemicals in general, just not polypro. Right. And it’s carrying another 4.6 million tonnes due on stream this year. And if you look at my latest estimate of demand at minus 1%, I said it’s probably a bit too bearish. I think it will get better. But let’s assume that’s right. Capacity is 124% of demand. And it first went above 100% in 2021 for the first time ever. So you’ve got 124%. So what’s keeping net imports flowing in?
Which implies like what, a 70% to 75% operating rate? If we flip it is that the implication?
That’s that’s good math. That’s great math. That’s exactly right. Well done is exactly right. It’s about 75 percent, spot on. And you know that they have to still import copolymer, right? They haven’t got the technology yet to do years of high melt flow stuff, you know, the clever stuff they’re having to do, you know, import that. So that’s that’s keeping the South Koreans and Saudis interested in China. And, you know, it’s maintaining those. So net imports this year about 2.9 million tons based on the data so far, but that’s down from 6 million tons in 2020, 6.1. So it’s a big drop. But yeah, I mean, it’s just creating big supply globally, obviously. And pressure, as I said, on the on the raffia grade.
And they’re going to work to upgrade that, right? I mean, sell out, sell up, right? That’s a strategy. Absolutely. So selling out at these lower raffia grade products, but China’s not gonna be content to sit there with the cheap stuff. They’re gonna wanna upgrade their products. Am I right?
Yeah, I mean, there are unconfirmed reports that Chinese companies are setting all these overseas offices up, right? And to sell directly because they don’t want to go for the traders. And obviously, you don’t sell higher value grades through traders, do you? You want to do it yourself because it’s all customer service and the rest of it. So again, I was talking to people in Shanghai on Monday and they were saying, yeah, they think that will happen eventually to be exporting co-polymer grade and don’t assume they can’t get the catalysts and the process technologies. I think history has proven they can do that in other products. So inevitably they’ll go into those. And the only thing is whether geopolitics will stop them from doing it.
So tell me more about that. What are the geopolitical pressures that you see going on right now?
Well, whether it will extend to, obviously there’s a big issue on semiconductors with the US and supplying technology to China. I mean, Bill Gates thinks that China can actually make its own semiconductors of a high enough quality and he should know a bit about semiconductors, Bill Gates. So he thinks that China will be okay, but there’s that gap and whether that applies also to things like catalysts or polypropylene, I don’t know, and process technology, but there’s that challenge that they can’t get access to the technologies they need to upgrade their industry to be a real threat in copolymer.
I think what’s interesting with that though, John, is I’ve worked with some of the technology and catalyst companies, and they’d be delighted to sell the higher value catalyst that allows anyone, China, whomever, to India to make a higher grade product, their concern is that they won’t buy it. Right, that they’re that they’re going to be unwilling to buy the imported product, not so much on not allowed to but unwilling to. And so I think there’s a there’s a bit of a a gap in either understanding or intent around that.
Right, so they would prefer to develop their own stuff, you think, or they’re not as interested in the high volume?
That’s the perception.
I didn’t realize. Okay, so, whether they feel they can close the gap themselves, or they’re not interested in exposing this question? I guess somewhere in between the 2 conclusions.
Yeah. I don’t know if this is still falls into the geopolitical realm, or if this is just political and not. So the UN Plastics Treaty negotiations are going on right now. What’s China’s involvement and stance on this? You know, when you talk about the polypropylene growth that they’ve got based on PDH, much of it is imported propane that they’re utilizing. All I can think is huge logistics footprint, right, which has its own sustainability issues. And I know that we’ve got a lot going on right now with the UN Plastics Treaty, trying to have some better solutions on, well, plastic waste, circularity, advanced recycling, other things. There’s a number of agendas going on depending on where you sit. What’s China’s agenda and role in this?
Well, before the pandemic, they published a lot of regulations on plastic recycling. And in the big cities, forcing people to separate into different types of plastic. And, you know, they’ve cleaned up the Yangtze, so it’s no longer this kind of horrible, virtually not flowing plastic waste as it was described. So that’s happened the last few years. But again, you know, what do I know? What’s really happening? Well, only my network. We don’t know what’s happening at the highest level. Nobody knows, do they? If they pretend to know, I think they’re being a bit disingenuous. So the people I talk to say it’s not a priority at the moment. It may become a big priority in the dealing with the economic slowdown, the dealing with the pandemic, 0 COVID, eventually may build a very modern plastic recycling industry. And if they want to go for it, of course, it can go for it in a big way. So that seems to be the again, I mean, this is just my network and what people are saying.
Interesting. All right. What about the world of polyethylene? What’s going on? We’ve talked a lot about polypropylene. What the heck is going on in polyethylene?
Well, the good news is, in polypropylene you can draw a scenario and China becomes a net exporter next few years, even if it goes, Palomaro has said, it’ll take a while longer. But in polyethylene, if you play around with the data in a very bearish pessimistic way, it’s impossible to make China a net exporter. And you know that really the net imports will carry on for a long time because they just can’t build enough steam crackers. Even if you sort of take demand down to 1 or 2 percent and up the operating rates and assume new capacity Which is very hard to justify in that circumstance big new crackers. So that’s good news.
China will still be importing but HD is the weakest as we said. The most oversupplied and explains the weak demand growth and I think that’s a lot of new capacity in HD in China again. LDPE is interesting because LDPE became very expensive versus LLDPE and what you saw the premium for LLDPE went to an all-time high up to the second half of last year, all time high. And that was because people making less LDPE because we’re making more EVA on the swing plants and EVA is driven by solar panel encapsulants. What’s happened since the second half of last year is the premium of LDPE of a LLDPE has collapsed. Now why that’s happening I’m trying to find out but it means it’s made LDPE more affordable and so in fact LDPE looks like growing at 3 percent this year so far whereas the last 3 years it’s been negative growth in China. Yeah.
So it’s a it’s a it’s a pricing thing as well as performance, right? Because LDPE has some unique performance.
Yeah, true. So I mean, processability and things like that. Yeah. You know better than me. That seems to have so far this year, it’s like about 3% growth. But as you know, it’s a very small market relative to the other 2. About 6 million tons in China or thereabouts. So it’s not 17 million for H about 13 or 14 for linear. So even at 3% is not not big deal. Linear low. The data is a bit delayed I only got the January March data for some reason, I don’t know what’s happened to the customs data, but last time I checked, we hadn’t got the customs data for April. January, March suggested 3% growth, but I think there might’ve been some overstocking because we saw a big increase in imports in Q1, as we did in polypropylene and then they fell off in April on this, oh, everything’s going to recover after 0 COVID. So I’m not convinced 3% is quite right for linear low. I think as the data comes out, it might go down a bit. But again, people are expecting 6% or 7% for linear low. So even though it’s free, it’s still less than people have expected.
At least, compared to some of the other grades, at least it’s positive is the sentiment.
Oh yeah. And I think that’s the thing. I don’t think China’s economy is going to collapse by any stretch of the imagination. And I don’t think consumption, I mean, it won’t go negative in some years for certain reasons. But certainly in the medium term, you know, it’ll just potter along to grow. But it’s just less than people have expected.
Yeah. So John, are we at the bottom of the cycle? When we look at where we are in the chemical cycle, the petrochemical cycle, are we at the bottom? Are we approaching the bottom? I mean, how would you characterize where we’re at?
Very good question. And the question everybody asks. They want the answer. I’m hoping that by say 2025, we’ll get to the bottom. But I’m not saying that’s an expectation, that’s a hope.
So you think we’re still sliding for another 2 years, John?!
I think so. So let’s look at the positives, right?
Okay, please.
Yeah, absolutely. I’m hoping inflation has peaked in the West. I don’t know what you feel in the US. Will the US suffer any kind of recession? If it’s a recession, it’s a mild one. I think you’ve managed to avoid the debt ceiling disaster, thank goodness.
Yeah, the debt ceiling has been the biggest pressure recently. So hopefully we’re skating past that.
Can’t stop you lot from spending.
Although to your point, what we’re really seeing this still is more spending on services than goods. Right? I mean, airplanes are full. I assume restaurants are full. I really don’t go out to eat very much. So I have no judgment there, John. Yeah, But services are busy, right? That’s where people spend their money.
Although, there’s some weird conundrums, right? So you would say that the real estate market should be dead, given where interest rates are, and yet houses are selling at all price points. Maybe not to the extent that they were in 2020 and 2021. But the real estates market is still moving. And plane tickets are expensive. Like if you want to fly someplace, forget it. It’s so stinking expensive because planes are full.
Tell me about it. It’s really expensive. But I wonder if to some extent there’s not as many flights available. So it’s tight. But in Europe, you’ve had this big fall in energy costs, of course, because they seem to wean themselves of Russian gas, which is good. And well, we’ll see what happens with the winter and whether the geopolitics affects it. But at least that seems to be. Although my colleague Will Beacham, our deputy editor of the ICS chemical business magazine, looked at sort of loads of news stories on Monday, right, And all of them reporting negative markets in Europe. So I think that’s still this effect of inflation and the general sentiment. So it’s taken a while. I think and I’m hoping inflation is peaked. Hope the US will carry on as it has done. And this will support demand, right? The rest of the developing world outside China should be OK. I think growth in India is great. Southeast Asia is good. So that’s positive. But I still think the effect of China, given the fact that it’s so important for global demand, we’re going to reach a situation where capacity will simply have to shut down. Along with hopefully better demand in the rest of the world and accepting that China will grow at 1% or 2%.
It seems that in the past though, China’s maybe been reluctant to shut down capacity. I mean, let’s look at the situation even in the past 10 years. There has not been much capacity shut down, partly because these older assets, they’re cheap to run, right? They’re paid for, you’re just running, you’re generating cash. At times it’s a lot of cash, at times it’s a little bit cash, but you’re still generating cash. What’s going to be different? What’s going to prompt anyone to start shutting down assets?
Starting with China, that’s a very interesting point. Of course, we still don’t know. I mean, they’ve got these little powder polypropylene plants. They don’t even make pellets. Attached to what we call teapot refineries, but they’re owned by local governments. So why would they want to shut down? It’s a good source of revenue, as you say, cash. There’s a feeling or a hope out there, nobody knows, a hope out there that the smaller plants will shut down this time. I mean there are a few plants in polypropylene, I was talking to my colleagues in China, they’ve been idle for about a year now, they’re not operating, but they don’t disappear. So they may disappear in this down cycle.
But then if you move to the other side of the world, to Europe. Now, as you know, Europe’s got great pipeline systems and it’s got great feedstock flexibility. I mean, we talk about old crackers, but they’ve added furnaces over the years, I mean, proved the efficiency, energy efficiency, heat transfer and all that stuff. They’re very good at it in Europe. Very, very experienced. But the feeling is, I was in Vienna a few weeks ago talking to people, that you’ve got 2 squeezes now. First of all, you’ve got carbon mitigation, you know, electric furnaces reducing carbon because of the European carbon regulations, and you’ve got refineries potentially, well they will be closing down eventually because of electrification and transport, so you’re losing your feedstock. So the feeling is that that will cause some rationalization in Europe, I’m saying.
John, it feels like Europe is regulating itself out of business. I mean, I talked to Europeans who, I’ve heard some astonishing stories, even of how they’re shutting down farmers because of carbon footprint and the impact on, you know, transportation of farm goods and other stuff. So, is it gonna get fixed? I mean, does Europe have a future as a manufacturer or are they simply gonna be a consumer?
It’s a good question. I’ve got the big INEOS investment, of course, at Antwerp, which would be a- !Well, they like to be contrarians.! Well, it’s based on low-cost imported ethane, isn’t it? And that would be a super efficient asset, I think. I think it will. What support do they provide for the chemical industry? And with electrification of transport, that’s a major challenge because a lot of European refinery capacity, as you know, electrification transport is galloping ahead and that’s not exaggeration if you look at the numbers in Europe supported again by the legislation.
Coming back to the cycle. What seems strange when you think about it is that from 2026 onwards, there’s more investment in primarily bio-RAMCO in cruder chemicals. So they’re taking the crude out of the ground, putting it through refineries that are making 70% of their outputs going into chemical feedstock from about 30% maximum previously. I think the drive here is of course the risk of cost of electrification that crude stays at the ground for good. That’s the number 1 asset for the kingdom, isn’t it? And also the Aramco cruder chemicals both in the kingdom in South Korea and in China is lower carbon. So talk about carbon capture storage and electric furnaces.
Then similarly, you’ve got assets being planned by Chevron on Dow in the US and Canada, and the INEOS project, which are branded as lower carbon, they’re ethane crackers. So you can see the logic here that Europe may introduce a C-BAM, which affects chemicals and polymers in a few years. Europe is the second biggest import market for HD linear alloy in the world, and the third or fourth for polypropylene. Behind of course, China. So you can see the logic here. They can beat that C-bomb, can’t they? And the scale of these projects…
Especially with these new assets that are theoretically better, lower carbon, right? From a holistic perspective, that’s the objective with it.
Yeah. And they’re very big and very efficient. So they’ve got good economies of scale. So I think this may put more pressure on older assets as we get towards the end of this down cycle. So I think a combination of hopefully better demand in the West, developing market, you know, developing world X China doing okay, and you know, some rationalization.
Yeah. And I guess, to a certain degree, it’s the carbon pressure that is gonna put the pressure on these smaller plants in its own way, right? There’s a knock-on effect, right? If with these new world-scale plants coming in from Saudi Arabia, from in North America with Dow and Chevron, etc. Better able to meet lower carbon requirements, starting at a low cost and putting pressure on some of these older assets that may not have the same effectiveness, and the same carbon footprint efficiency.
That’s right. And it’s not just the assets potentially in Europe, but also if you look at the export stats, some, some, not a lot, of polymers go from South and North East Asia to Europe. So if they’re from sort of less efficient carbon assets, that will sort of squeeze them a bit more. Yeah, not huge amounts, but some, some. So that sort of adds to their pressure, doesn’t it? And I think you could sort of argue that some of the Northeast Asian assets are challenged. Although it’s complicated. I mean, there’s some very good assets.
They’ve been challenged for a long time, John.
Yeah, and we’ve said this before, haven’t we? And nothing’s happened. It might be that nothing happens in Europe. I mean yeah, we’ve said this before. And why would you be the first to shut down when if you do shut down, there’s an upcycle and you lose potentially a fortune?
Yeah.
It’s a hard decision, isn’t it?
It is not easy. I mean, I’ve made those decisions to shut down and restart assets. Shutting down or idling is one decision. Dismantling is a completely different decision. And so maybe what we actually see is more idling and throttling of plants as opposed to demolition of plants.
That’s what’s happened before, hasn’t it?
Well because then you can crank up the cash cow when the markets are good.
Exactly. Why take that risk when you never know, and when the upswing happens, it could be incredible, couldn’t it? We’ve known that in the past. You know, suddenly, things get very tight very quickly, don’t they? So you’re probably right that feels like history could repeat itself. Certainly I think to end the down cycle we need idling or permanent shutdowns, I think, more idling and a better demand outlook in the rest of the world while living with China growing at 1 or 2, 3 percent.
Yeah, interesting. All right, John, so what should we be watching for second half? What are some indicators we need to be looking for as we progress through the year that’s going to say it’s improving, it’s declining, it’s staying the same? If we were eating tea leaves in a teacup, what would it be?
I mean incredibly boring spreads again. I’m a great believer in spreads. They’re not margins, I know, of course. They’re very crude, but they do go back. Our pricing data goes back to 1993. So, I mean, I obviously focus obsessively on China, but the spreads in polyethylene remain at the lowest level since 1993. Polypropylene in the second lowest level since 2000.
Where are the spreads at currently, from what you guys can tell?
Up until mid bay, the average across polyethylene, they were $304 a ton average. And the long-term average is about 550. In polypropylene-
And when we’re talking spread, cause some people may not understand what you’re looking at when you’re talking about that, John, what’s the spread you’re looking at?
Yeah, sorry. It’s very crude. You just look at the price of polyethylene and the differential from the cost of naphtha. That’s all it is. It says nothing like a margin. But the thing is our margin products only go out to 214, which is okay, but I prefer to go back a bit further to get a more historic feel for it.
So spread versus naphtha.
Yes. And again, of course, that’s not the only feedstock. So we can look at propane, propane spreads over PP are similarly close to record lows this year. Last year was the record low. So polypropylene is sort of slightly better than polyethylene. So in that key China market, And also I look at Southeast Asia spreads because they’re threatened, they’re very much shaped by what happens in China. So if you look at the Southeast Asia spreads, they’re similarly very low because they’re so responsive to China prices. If that starts to recover, get back to that 550 level, say for polyethylene, then we’re on the road to recovery. That has to happen I think, because that means that the markets tightened in China, in that key market sufficiently to bring spreads back. So I just try to check them every week, keep a sort of tally and then see what’s happening. Yeah.
All right. Well, John, this has been delightful. Again, always insightful. Talking about what’s going on in the market, what you’re seeing and what the effect of it is. So thank you for sharing with us today.
You’re welcome. Yeah, thank you.
And thanks everyone for listening to The Chemical Show. Keep listening, watching, sharing, and following, and we’ll talk to you again next week.
About John Richardson:
John Richardson is a Senior Consultant at ICIS. John focuses on the polyolefins markets (polypropylene, polyethylene) in China, Asia and Europe. John has been very privileged to work with many of the smartest people in the petrochemicals industry over the last 22 years, helping steer their strategies in the right direction. Without fear or favor of internal company politics and conventional thinking, John provides the objective analysis you need to manage your business in today’s incredibly uncertain world.
ICIS is the global source of Independent Commodity Intelligence Services. ICIS connects data, markets and customers to create a comprehensive, trusted view of the global commodities markets, enabling smarter business decisions that optimize the world’s resources.
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