What factors are driving petrochemical markets in 2024? Explore the intricacies of the chemical industry’s landscape with a deep dive into the obstacles encountered in 2023, such as the Chinese property bubble burst and geopolitical tensions. Learn more about the valuable perspectives on the shifting landscape of the chemical industry and the potential impacts of a shift towards de-globalization.
Join this conversation between Victoria Meyer and industry-expert John Richardson of ICIS as they discuss the trends and influences on the Asian and global petrochemical markets. Including:
- Looking back over global petrochemical markets in 2023
- 2024 outlook and expectations for chemicals
- Global co-dependence on China for petrochemical consumption
- Overbuilt capacity and impact on chemical market recovery
- The plastics recycling conundrum
- Future scenarios for the chemical industry
- How industry leaders are responding
Killer Quote: “2024 and beyond will be a roller coaster ride for the industry, with China’s dominance in global demand dictating the trajectory. The key will be for companies to navigate this landscape, whether they are giant international players or small local companies.” –John Richardson
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John Richardson Episode 102: China’s Aging Demographics and the Future of the Chemical Industry with John Richardson
John Richardson Episode 79: How The China Market Affects Chemical Prices With John Richardson
John Richardson Episode 36: How China’s Response To Chemicals Is Affecting the World With John Richardson of ICIS
John Richardson Episode 22: Understanding Market Demand To Manage Your Business Amid Uncertainty With John Richardson
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Listen to Victoria and John’s Discussion Here:
Petrochemicals in 2024: Capacity Overbuild and Codependent Markets with John Richardson of ICIS
Hi, this is Victoria Meyer. Welcome back to The Chemical Show. Today, I am speaking with John Richardson, who is the senior consultant with ICIS, focusing primarily on the petrochemical market and polyolefins market in Asia and the Middle East. He brings that perspective, as well as a global perspective. Interesting fact, John’s been on the podcast several times, three or four times already. His most recent, Episode 102 which is titled China’s Aging Demographics and the Future of the Chemical Industry, was according to Spotify, our most shared episode in 2023. So we’re going to see if this episode could become the most shared episode in 2024.
We’ll find out. John, welcome to The Chemical Show.
Thank you, Victoria.
So let’s talk a bit about a reflection on 2023. So we spoke a couple times, we spoke at the beginning of the year, and we spoke mid-year. Just talking about some of the challenges going on. From where you sit, what was going on in 2023, now that we’re at the end of the year and can look backwards.
I think it really probably all started in late 2021. The momentum’s built up this year, which was the ever grand moment when you suddenly realized the Chinese property bubble had burst. That is like 29% of GDP and then you got this drip effect of the worsening demographics in China. So I think the big shock for people in 2023 was that there was no post zero COVID recovery. I didn’t think there would be, to be honest, because I felt that the effects of that real estate, loss of momentum, the youth unemployment, and the increased geopolitical tensions with the West, all of those would keep consumer confidence very dampened in China and we’ve seen that, so that’s been a shock for people.
Then the consequence of what we talked about before was that, back when all these projects were being planned, all these crackers and polyolefin plants were being planned, people thought that China would grow at 6 to 8% a year, in terms of polyolefins demand, whereas now we’re seeing 1 to 3%. When I saw the data originally about how much China dominates global demand, I thought our data was wrong, to be quite frank. But I’ve checked it out and it’s right, China completely dominates global demand. So you build a project anywhere to serve any market, and obviously in an export focused project in particular, and it’s affected by that effective demand growth gap between earlier expectations of what’s happening.
So that explains why we’ve got the lowest operating rates on record.
There’s no doubt that we overbuilt. I think we probably even overbuilt, even if you assumed a 6% growth rate in China, would you say?
Yeah. Actually look at polypropylene surprisingly now because I modeled it. So I assume that, we would see six to 8% growth. I pushed it with 8%. And by 2028, we had global reinvestment conditions for polypropylene, assuming 8% growth.
Do you think that’s still true?
Absolutely not. We’re now going to see 1 to 3% polypropylene growth. Same with polyethylene. We might even see some minus years of growth going forward. And, we’re seeing an extended trough of very low operating rates, we’re at the point now where the problem that we face is the less competitive producers in South Korea, Singapore, Thailand, perhaps Taiwan and Japan and Europe. Having to look really hard at their assets, those exposed to China directly, the South Koreans and Singaporeans have a huge problem because of rising Chinese self sufficiency as well.
China keeps building out this capacity. The net imports are going down and the demand growth is weak. For the South Koreans, it really is a play almost entirely on Chinese markets. So what do we do next?
Yeah. So let’s just talk a little bit about what we’re looking at going into 2024 and beyond. So you see a protracted trough, is that what you’re saying? How long and how protracted? That’s the billion dollar question.
The problem is that from 2026 onwards, they’ve got even more capacity. Particularly China and the Middle East and the U.S. So you think, what’s going on here? Saudi Arabia faces this challenge of declining crude oil demand. Electrification, I believe the IEA figures, we’re going to see a steep declining crude oil demand in the next 10 to 15 years. Obviously the number one asset for Saudi Arabia is crude oil. Or shall I say, Saudi Aramco are turning more of their crude oil to chemicals.
Crude oil to chemicals is a group of new technology. It’s different from the earlier work on increasing chemical feedstock from refineries. This is a step change. So the crude oil to chemicals can go from 30% of refinery output to chemical feedstock to 45%. The ultimate aim by Aramco is to get it to 70 or 80%. They’re not there yet, but they’re investing in these giant crude autochemical projects in the Middle East and in China because they want to make sure they consume the oil. These are huge.
So is this about economies of scale or is it more about cheap feedstock consumption?
Both. I think it’s the alternative value of leaving the crude in the ground for good. What does that mean? Obviously the incentive value is zero if you can’t exploit it. Building these giant chemical plants that are super efficient, making also lots of basalts and low sulfur diesel and other fuels as well. So you still get quite high output of fuels. So these giant complexes and also lower carbon, which is what they say because of carbon capture and storage.
They’re saying that in a world where we’re seeing a higher price on carbon, particularly in Europe, who are thinking of introducing a carbon border adjustment mechanism, applying to organic chemicals and polymers by 2030. So that’s in effect, you’re going to pay a higher import tariff if you have a high carbon output, your scope one and two emissions. So if Aramco can demonstrate that they’re lower carbon, they can export to Europe very competitively.
So effectively what’s happening is, Europe has set some very high environmental standards, so they’re making it less cost effective to produce there. Saudi Arabia and China are coming in with crude to chemicals that basically they’re using a zero feedstock cost and then they’re getting tax benefits to import into China on the premise of being a more carbon efficient manufacturing. Is that right?
It said it applies to Europe eventually if the C-ban comes in, which we don’t know if it will, but the EU might bring it in before 2030. Clearly that’s the objective for Europe. I don’t think that applies to China yet. But actually you’re right, in terms of domestic expansion, they want to be lower carbon. So they’re looking at, the BSF project, which is a different group of chemicals we’re not covering, it will be run on Italian renewable energy, so the oxo-alcohols I don’t cover, but that’s certainly objective within China. So yes, that’s right within China, so Aramco and BSF and Shell can help with the lower carbon agenda in China. The other side to this as well, which is quite shocking from an industry perspective, is that the standard view is that China will still be a major importer of Paray and MEG polyethylene and polypropylene by 2030.
But the theory out there, and of course we dunno if it’s true, is under the 15 five year plan, which is 2026 or 2030, they want to get pretty much balanced positions in all these products by 2030, China does. If that were to happen, then what does South Korea do? What does Singapore do? They’ve lost their main export market and of course it won’t happen immediately. So you start doing the math about what it would mean and I did it for HGP for South Korea. Assuming that they lost all their exports to China and also to Europe, assuming that they can’t compete in terms of cost of carbon and scale, the effective HGP operating rate in Korea goes down to 23 percent by 2030.
Which is inoperable at that point.
Of course. Obviously you’re talking about shutdowns, you talk about shutdowns long before we get to that point. So that’s how serious it is. You can assume that if they build out this capacity, the COTC capacity, they will get into Europe at very competitive prices that squeezes the South Koreans out of Europe. You can assume that Southeast Asia. as the third biggest net import market in the world behind Europe and China, because it becomes a real battleground. So then South Korea struggles in Southeast Asia against all this Middle East stuff. Now, this is an extreme scenario Victoria. I’m saying it goes from where it is this year to zero by 2030.
Yeah, that’s pretty fast.
Yeah, it’s an exaggerated scenario, but it’s explaining that the pressures that could take longer than that. South Korea’s got to reinvent itself and think of what it does next.
So what are the trends that you are monitoring? I know you’ve talked a lot about a declining Chinese growth. So we’ve gone from an environment where there was 6-8% annual growth down to 1-3% percent growth. So what is it that you’re watching? Are you watching what trends should we be watching as we wonder about whether is China going to recover its growth? Is it not going to recover its growth? How’s this going to play out? What are the trends that you’re feeding into your assumptions and your point of view?
In terms of China, the Chinese economy, there’s a great piece by a guy called Michael Pettis, a rock in a hard place. The investment led growth model, what’s happened is since the collapse of real estate, China’s put more money into manufacturing capacity, including chemicals. In order for them to carry on with the investment led growth, the rest of the world has to cut back on investment in manufacturing by 1% of crop. Now, is that going to happen in the EU and the US and India? No, because of the Pledge of Induction Act. Maybe politics might change.
Honestly, from where I sit, it feels like the EU doesn’t want to invest in itself anymore. That’s certainly what the policies are driving.
Could make room, but then China starts exporting deflation in effect. If they cannot go the investment led route, which is deflationary, it would also increase The debt ratio to GDP to perhaps on sustainable level. That’s another argument. They’ve gotta try and raise domestic country consumption by 6 to 7% per year. No country in the history of the world, in this stage of economic development has managed that kind of consumption. Before the pandemic, it was growing at 4%. You’ve got an aging population, you’ve got issues with government financing to pay for it.
You’ve got the fact that if you transferred wealth from businesses to homes, you undermine export competitiveness because you’d be raising wages. So I think it’s a rock and a hard place. You’ve got to accept China will grow, but a lower growth rate than we should.
How can China continue to afford investment given, as you say, the financial woes were tied to real estate and the declining population. I’ve seen some interesting things. If you recall earlier this year, we talked a lot, not just you and I, but just the media was talking a lot about unemployment for youth or young adult unemployment. College grads couldn’t find jobs, and now it’s gone silent which is also notable and yet I know that there’s this longterm strategy to get to a net zero. So balanced import perspective or self sufficiency. Where’s the money coming from? How are they affording this? Is it realistic?
Yeah, if they want to hit 4 to 5% growth every year to 2035 to double the size of the economy. The government could just create more debt, right? Building more manufacturing capacity. What’s the return on that debt? Now it’s a closed account. You say China hasn’t got a fully convertible currency, so you all get something like the global financial crisis about that. It’s a closed economy. So in theory, it could just create more debt, get the policy banks to lend more money.
But of course, the return on investment is getting weaker and weaker, and then your problem is you’re exporting into a world that says we don’t want these exports. So you get more trade protectionism pushing back, potentially, or you get deflation as you flood the world with stuff. So yeah, it’s very difficult. And the other route, as I said, is to grow consumption in a world where you have high youth and employment, lack of confidence in the economy, aging population, people saving more for pension and healthcare, when you have very poor pension and healthcare coverage. So I think there’s still really to your point, though, it could be they don’t reach petrochemical self sufficiency because it just doesn’t make sense. So we don’t see these big build outs, we slow down and therefore there’s more imports, and there’s still a strong import market by 2030, which is certainly a scenario to consider.
More broadly looking globally, we should talk about the ethane crackers as well, right? So we’ve talked about CO2 a lot, but there’s a lot of ethane crackers that have been built in Qatar, in Abu Dhabi, in the U.S., and in Canada. That’s a lot of capacity by the oil and gas majors, isn’t it? I think there’s a scenario where we end up with a petrochemical industry dominated by the supermajors. Fewer companies dominate, and then what happens to the older assets, the smaller assets, the ones exposed to China? Do they stumble on at very low operating rates for many years? Or do they shut down in mass? Now shutting down is really hard, isn’t it? As you’ve got environmental clean up pensions.
Then there’s, depending on how you run these economic scenarios at times, let’s just say paid for and depreciated, it’s just cheaper to run them at cost.
Yeah, and you might be looking at rolls.
Which is one of the things I feel like we’ve seen, we’ve not seen a lot of shutdowns because these assets are fully depreciated. They may not be truly economical, but when it’s cheap to operate and the costs that you have to cover are low, you just keep running.
You’re exactly right. And we’ve never seen this big wave of shutdowns. Also it keeps the upstream refinery going as well. Where else do you sell naphtha in an inland refinery chemical plant in Europe? So therefore you can’t operate your refinery. Then you’ve lost your local fuel’s self sufficiency. In Korea you have the chaebol that back these companies as part of a huge industrial complex, so it’s not straightforward.
So I think probably a more likely scenario is they stumble on under the super majors outcome. But there’s another scenario of de globalization. These are two extremes, and we could be anywhere.
The extreme is full globalization.
And the other one is we end up with the EU saying, hold on. Every one job upstream equals around a maximum of 10 downstream, so we close.
Do they recognize this?
I know they should. They say we need to adjust the whole carbon mechanism, the trading system. We need to support local chemical industry and decarbonization. We need to recognize that we need to keep our local industries because of the employment reason.
And there’s another factor, and that’s recycling. We know that’s a niche business, but it’s an important business. The problem is the collapse of Virgin prices has made recycling very difficult. To give you an example, in Australia the Murphs, the guys who sort the plastic waste process to hand out to the recyclers, they were getting paid around $150 a barrel last year. Right now they’re having to pay the recyclers $30 a barrel to take the bales away because of the collapse of the Virgin prices. The merch is still operating because they get a lot of money from the deposit returns for bottles, so they still make money, but for the plastic bales they’re losing money.
It’s a conundrum John. So I’ve talked to a number of people across the value chain on this. Consumer products companies for instance, have all set these targets about the quantities of recycled material or recyclable material, which is an interesting thing when you just lump it together. But if you’re targeting a recycled content, they have targets but they’re not willing necessarily to pay for them. There’s not enough recycled feedstock to support that. As I shared with you earlier, I think we can have these municipal recycling systems, the MRFs, as you talk about it. But it’s still human behavior that’s required to make the effort to recycle, I certainly know many people that don’t recycle even though it’s easy.
In my community and other communities around Houston, most of us have curbside recycling. All you have to do is throw it in a different bin and people don’t do it.
As you say if the targets are being missed, if recyclers are shutting down, if it’s not economic, then where’s the confidence in the public and without the public support, it’s not going to work. That’s a very good point.
We’ve got the plastics treaty under negotiation, we’re just at the tail end, which I think has maybe not produced the results people had hoped. There seems to be a desire to put the burden of reused and recycling on the resin producer. Which is a bit of a conundrum because they’re not the ones that can influence. They have an influence on recycling, making sure that something is able to be recycled, but the physical act of recycling is on a consumer basis.
Very good point. And also the brand owners as well, because if you’re a brand owner, you’ve got good margins already. You’re not going to pay more for recycled material. You’re having to pay more at the moment, but that’s the pressure and you’ve got the virgin price that’s going to be cheap for a long time. So it’s a disincentive, isn’t it? You’ve got to get the policy levers right to incentivize everybody up and down the value chain, including the public.
If you want a thriving recycle business in Europe and in Australia and elsewhere in the developed world, you’ve got to think about how we change the policy leaders to protect the industry from a flood of virgin polymer. Australia’s got a very small virgin industry, but that’s still important in Australia, but Europe’s got a huge virgin industry. We need to support that virgin industry as well. So I think deglobalization, if the policymakers wake up, is a pretty likely outcome.
To be fair, the other thing that deglobalization does theoretically is, at least it reduces type three emissions, which is where a lot of the targets are because of the emissions from transportation. So you’re transporting things long distance, and there’s a lot of emissions tied to logistics.
And how do you know as well, in life cycle analysis, if it’s a chemical plant in the U.S. and Middle East taking oil and gas out of the ground, fugitive methane emissions, as they say. How do you know from the gas well to the polyethylene pellet delivered into a converter, what is the true emissions versus a local supply chain that perhaps you can monitor better?
Yeah, I don’t know. That’s the billion dollar question. I think people are waiting still as well for common standards. To help define that measurement. So we’re in a period of flux and transformation. There’s no doubt about it.
It’s a new landscape. We’re not returned to business as usual. As I said, I’m leaning a bit more towards deglobalization, but come back in a month and I may have changed my mind, but it depends on the politicians.
Does deglobalization go along with smaller asset sizes? So if you look at the trend that we’ve been on for the past 20+ years, the size of the crackers, the size of the polyolefins units, the size of everything has just gotten massive. A lot of it’s this view of economies of scale, a part of its ego and bragging rights. Does deglobalization imply a shift to smaller units?
I think it would imply that some of the mega units I’ve been talking about won’t get built. So some of the absolute giant COTC plants may not be as viable. Although of course it’s using oil as it will be left in the ground. So it may still happen anyway. Project number get delayed, ethane and oil based projects. I think it could give more life to smaller, older units. So yes, I think the answer is yes, because basically you have project cancellations and delays for the ever bigger unit.
Which are fundamentally dependent on exports and going to the biggest markets.
When I started this, I think back in 1998, a world scale cracker was 700,000 or 800,000 tons, something like that. But now it’s 1. 5 or 1. 6. So maybe we stop there, that’s the ceiling. And we don’t go any higher and you get all these smaller local assets that thrive and gradually over time, you get recycling, but that’s going to take a long time.
Makes me wonder if there’s lessons that we can learn from other industries. For instance, the steel industry that went from mega units down to smaller more nimble units. Is there a model there that we should be looking at? Is there a model in refining where we actually have quite a blend of mega sized refineries as well as smaller focused refineries. I think some of the investment tends to be in smaller refineries these days versus oversized ones.
The carbon issue, if you’ve got sustainable aviation fuel, you’ve got electrification of transport, but you’ve still got need for some refinery products, maybe biorefineries, cooking oil to make into SAF on a scale, you’re hydrogenated and everything we’ve been talking about in Australia, maybe that creates more viability for the small oil refineries around the carbon story. You don’t have to make the Middle East refinery because I know in Australia we’ve got two refineries left and the one in Victoria, it’s got great plans around SAF and sustainability. Does that give it a niche? Maybe. And it’s got a polypropylene plant downstream.
So John, we talk about this whole landscape and how it’s shifting and there’s a lot of uncertainty, although the way it’s playing out, it seems it’s moving to a longer term trough, certainly in polyolefins, this shift to crude to chemicals, and demographic challenges. You talk to a lot of different companies and different leaders. What are the most effective companies or leading companies doing to respond to and to thrive in this business environment? What are you seeing from the leaders?
If you can’t beat them, join them. So you have people basically saying China is going to get self sufficient. So you’ve got BSF, you’ve got Shell and Exxon investing heavily in China and of course Aramco. So if that’s your play and you think that’s the right thing to do, that kind of makes sense. From the giant oil and gas majors, we’ve got Aramco converting oil into chemicals, but I do wonder about the others. I’m just purely speculating now. Is that the right process? Because then you can change more oil into chemicals.
That would make sense. I really think the strategy depends on where you see the world ending between deglobalization and supermanagers, and the winners will be the ones who get that right. So will it be the small local companies who turn to biorefineries and recycling and recognize that the EU is going to be more of a protected market? And they survive and thrive. Or is it the giant companies that relocate to China or end up dominating global export flows? I’m not giving you an answer here.
So you’re going to tell us to all stay tuned.
I think that’s it. Probably maybe a mixture of both that in certain regions, the niche level company does really well with the right regulatory framework. But if you wanted a big international player, there’d be enough international room for you to be a mega exporter of really cheap petrochemicals or also support China’s self sufficiency. So there’s three strands there.
I think we’re in for another roller coaster ride for 2024 and into 2025.
I think no recovery in 2024, I hope I’m wrong.
Some people are predicting recovery by end of the year. You don’t see that?
Hard to see.
What has to change for us to see a recovery in 2024?
We talk about closing assets down, which is really hard. You end up running your assets really low for a long time, which seems quite likely. China isn’t going to suddenly pull all this demand in, it can’t. I think the rest of the world’s okay in terms of, hopefully we got on top of inflation. The U.S. will be all right and the EU should be alright.
But it’s the fact that China dominates global demand. This is the problem. What’s the upside for China? And because of the overcapacity, either you shut it down or you run it low. The higher operating rates require major shutdowns, to see that. If we weren’t so unbalanced, and if Europe and the U.S. and the rest of the developing world consume more of demand, it’s the fact that China dominates global demand, that’s the problem.
The world has come to rely on China to buy resin and produce all kinds of plastic stuff.
India is a fantastic story, but it’s tiny compared to China. That’s the problem. The rest of the developing world is small compared to China. So that can’t really lift operating rates without major plan closures. And we’re not going to see that.
I actually think that we’re starting to see it. Will we see it in polyolefins? Will we see it in all the places we need to? There’s certainly been some rationalization in 2023, across various companies and my projection is that we’re going to see more.
That could mean by the end of the year we see a big uptick in operating rates. That would be the scenario, so watch that closely. We’ll see.
All right, John. As always, this was good and it’s always an interesting conversation. I know that you shared a deck with me. I’m hoping I’m going to be able to post this and share this with folks. Thank you for joining us today on The Chemical Show, John.
Thank you very much.
And thank you everyone for reading. Keep reading, keep following, keep sharing, and we will talk again soon.
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.