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The future of petrochemicals
Base chemicals capacities transform the industry
Our latest report details massive but gradual shifts in the global petrochemicals industry (petchem) that are changing the way base chemicals capacities are added and utilized. Forces from end-markets and the upstream oil and gas sector are influencing how regional base chemicals capacity additions are happening and which chemical feedstocks remain the most preferred. Generally, the price dynamics in crude oil and natural gas markets will continue to heavily influence how, where, and what base chemicals capacities will be added in the future.
- Petrochemicals industry growth
- Government influences
- Capacity growth and C4 chemicals
- Underlying recessionary issues
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Petrochemicals industry growth depends on automotive and oil and gas sectors
Vehicle electrification and increased fuel efficiencies in new vehicles will continue to decrease petrochemical fuel demand. According to our latest report, government mandates to increase vehicle fuel efficiency and reduce carbon dioxide (CO2) emissions are contributing to this pessimistic outlook for fuel demand while short-term regulatory uncertainties remain.
Meanwhile, the shale gas revolution has triggered a wave of low-cost production of feedstocks, primarily natural gas liquids (NGLs) or ethane.
Government influences weigh on future plans
The Middle East and China are shaping the future of petrochemicals with new imperatives. The Saudi government, for instance, is pushing for a more significant presence in the downstream industries, especially petrochemicals, since it wants the country to get out of the excess crude oil dependency.
In terms of regulatory trends, the International Maritime Organization (IMO) initiated a bunker fuel directive to reduce sulfur content in marine fuels (mainly heavy/residue oil from refineries). This is pressuring refineries to produce more of ultra-low-sulfur diesel fuel for shipping freights.
As a result, the price of diesel has shot up, and the price differential between diesel and gasoline has increased, with gasoline prices touching a new low.
Overall, the effect of IMO bunker fuel regulations has triggered a cascading effect on the supply of petrochemicals. More details are available in the full report.
Ethylene and propylene capacity growth and C4 chemicals and aromatics
Demand for ethylene and propylene has grown over the past 10 years, and global petchem and integrated oil-and-gas players have tried to add new capacity to keep up.
However, recent capacity constraints and delays come into play. Ethylene capacity utilization rates, for example, have gone past the 90 percent mark.
While high capacity utilization rates bode well since they indicate strong demand, they also indicate a downside. Shutdowns and maintenance activities may inhibit current capacity required to sustain the production needed to keep up with the demand, thereby introducing volatility in base chemicals prices.
The switch to lighter chemical feedstocks over the past five to ten years has also impacted the production of C4 chemicals and aromatics (like benzene, paraxylene, butadiene).
Since 2014-15, these C4 chemicals and aromatics markets are riding on increased demand, though the future looks a little uncertain. However, many crude-oil-to-chemicals complexes are coming up in China by 2022 which will focus heavily on producing aromatics, primarily paraxylene and benzene. This should sufficiently take care of aromatics supply in case demand spikes.
Underlying recessionary issues
While growth projections of base chemicals capacities like ethylene, propylene, and paraxylene are in excess of 4 percent per annum till 2022, these forecasts assume strong demand end-markets.
Yet, there are murmurs of an imminent recession in 2019-20. The chemical activity barometer (CAB)—a leading indicator of the US economy’s business cycle—declined for three consecutive months recently, pointing to an imminent recessionary event.
While forecasters expect the downturn to be less severe than the 2008-09 recession, companies are still exercising caution and are well-advanced in their preparation after an extraordinarily long cycle of economic expansion.
- Lower demand for petrochemicals resulting from recession might lead to an excess capacity surplus, lowering the capacity utilization rates for all major base chemicals.
- Construction of new petrochemical plants might get delayed, and some may even get scrapped, as companies grapple to maintain margins, cut costs, and rationalize capital allocation.
- The cash margin performance gap between
production based on naphtha vs. NGLs/ethane will diminish, as crude oil prices are expected to remain low and steady. petchem
More detailed petrochemicals industry trends are available in our full report.
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