Petrochemicals after the Supercycle: Revised scenarios

LET ME AGAIN bang away on the same old drum which I’ve covered with a new skin: The above slide is an updated version of the slide I first published late last year. Note that there is a new scenario added to the original two, A Bi-polar World. Also note that I have this time included percentage weightings of my views on the likelihoods of the scenarios.

The post Petrochemicals after the Supercycle: Revised scenarios appeared first on Asian Chemical Connections.

LET ME AGAIN bang away on the same old drum which I’ve covered with a new skin: The above slide is an updated version of the slide I first published late last year. Note that there is a new scenario added to the original two, A Bi-polar World. Also note that I have this time included percentage weightings of my views on the likelihoods of the scenarios.

I could be wrong, of course. I might have given the wrong weightings to each of the scenarios, or more simply have chosen the wrong scenarios entirely. But today’s events point to very different outcomes than we saw during the 1992-2021 Petrochemicals Supercycle.

Now let me as briefly as possible detail the three scenarios as this is complicated stuff.

Supermajors – 25% likelihood

A small number of big oil-and-gas-to-petrochemicals players dominate the business as they have increasingly turned oil and natural-gas liquids into petrochemicals at competitive costs. This is in response to the decline in crude-oil demand into transportation fuels because of the electrification of vehicles.

The giants convert game-changing quantities of existing refinery capacity into petrochemical feedstock centres, where feedstock output reaches around 40% of total output. Aramco and SABIC are also able to build grassroots refineries with 70-80% of output as petrochemical feedstock (the Aramco and SABIC crude-oil-to-chemicals breakthrough technologies can only operate, I am told, in new refineries).

Whether this transformation can occur before 2030 given the scale of investments required needs to be questioned, so I am hedging my bets here. Either the industry is transformed in this fashion before 2030 (less likely, I feel) or this doesn’t happen until after that year.

Under such an outcome, the non-integrated petrochemical producers in Europe, South Korea, Singapore, Taiwan and Southeast Asia consolidate. Large swathes of capacity closes-down in these countries and regions to balance markets.

For the Supermajors scenario to happen, the investment costs will as I said be high. Building grassroots refineries heavily focused on petrochemical feedstock isn’t going to be cheap. This is one reason why I give this outcome a probability of only 25%.

The second reason for my low rating is that for the Supermajors scenario to fully happen, we need to operate in a world largely free of trade barriers, enabling the Supermajors to export just about anywhere they like. Given today’s geopolitics, this seems unlikely.

A Bi-Polar World – 50% probability  

The split between China and the US – and possibly the EU as well (there is a scenario where the EU moves closer to China, which I shall explore in a later post on the autos industry) – widens.

The rest of the developed world, including petrochemical players in countries such as South Korea, Singapore and Japan, will need to decide where they stand: With the US and its partners of with China and its partners. They are at risk of losing access to the China market.

We end up a bi-polar world which I first suggested as a possibility during the Trump presidency. Petrochemicals trade splits and is largely confined to between China and its partners and between the US and its partners.

As China’s relationship with the developed world worsens, it moves closer to the developing world in terms of overall trade and investments.

No one scenario will, of course, be completely right. We could end up at any of many points between each of these three extreme outcomes.

This is the case with Supermajors and A Bi-polar World. It could be that the closer relationship between Saudi Arabia and China allows Saudi Arabia to supply more of China’s petrochemical deficits, allowing the Kingdom to perhaps realise some of its COTC ambitions.

“According to Upstream Online, Saudi Aramco has made a whopping seven new oil and gas discoveries in Saudi Arabia’s Eastern Province and Empty Quarter,” said this 4 July article in World Oil.

“The discoveries include two unconventional oil fields, one light Arabian oil reservoir, two natural gas fields, and two natural gas reservoirs,” continued World Oil.

This is an event I need to explore further in future posts. Here is one question not addressed here: What could these discoveries mean for Saudi Arabia’s ethane-based petrochemicals competitiveness versus the US?

The relevance for this post could be that the discoveries give Saudi Arabia the ability to expand petrochemicals exports.

“Hold on,” I can hear you say, “you told me that China could be completely self-sufficient in polyethylene (PE), polypropylene (PP), mono-ethylene glycols (MEG) and paraxylene (PX) by 2030.

Yes, I did. But such is the pace of events that, as I discussed in my Tuesday post, the outlook for China’s petrochemicals capacity growth has become a lot murkier. We now need to consider province-by-province limits on carbon emissions as part of the push towards Net Zero, and the capping of local refinery capacities because of the electrification of transport.

Equally unclear is the outlook for Chinese demand growth due to very different estimates of the size of China’s population and the population’s rate of decline as the country ages. The lower the demand growth the easier it might be for China to continue to accelerate its petrochemical self-sufficiency.

A De-globalised World – 25% likelihood

Markets are in general much more regional. Instead of just a bi-polar world, we end up with beggar-thy-neighbour trade barriers similar in scale to the ones which led to the Great Depression.

Petrochemical companies become much more “local for local”. Governments put up barriers to protect jobs and to ensure refineries don’t shut down along with uncompetitive petrochemical plants, thereby by protecting local supplies of transportation fuels.

Again, we should be careful of a “cooky cutter one-size-fits all” approach to scenario planning. While extreme outcomes help push people out of their comfort zones, supporting local petrochemical companies might instead fit at some mid-way point between all the scenarios.

And “local for local” shouldn’t be viewed as automatically a bad thing. One can argue that because of today’s highly uncertain geopolitical world, local supplies of at least some petrochemicals are essential. Paul Hodges, chairman of New Normal Consulting, wrote in last week’s issue of ICIS Chemical Business:

Can Europe simply allow the chemicals industry to disappear? As Bloomberg notes. “Chemicals are critical to the supply of plastics and products used in everything from textiles to electronics and construction. The sector is not only crucial for industrial growth, but also accounts for almost 10% of European output, with sales of around €597bn ($640bn) before the recession.”

The issue is therefore very stark. Chemicals are used in almost aspect of our lives – from consumer products such as soaps and pharmaceuticals to industrial materials, agriculture, water treatment and energy. If today’s crisis is allowed to continue, Europe will become increasingly dependent on imports of these vital products for its economy. Doing nothing is therefore not an option.

Conclusion: Preparing your teams

Calling all the senior management teams out there: You need to prepare your teams for the world after the Petrochemicals Supercycle. We should accept that this isn’t a typical downturn. A combination of geopolitics, debts, the sustainability push and climate change have changed the nature of industry cycles. Are traditional cycles in fact dead? Probably.

What you’ve just read is only a taster of the kind of confidential scenario-planning work that ICIS provides. Contact me to discuss more.  

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