Petrochemicals three years from now: A shrinking global market?

WHAT IF this isn’t just a normal downcycle? What if we see no return to the old petrochemical market conditions because of long-term shifts in the global economy due to the end of the China “economic miracle”, ageing populations in most of the world, the sustainability push and the impact on economies of climate change?

Might artificial intelligence lead to such a large loss of employment that petrochemicals demand growth takes a further hit?

“Chemical companies can restructure work to allow gen AI to take on routine tasks, freeing up workers to focus on more creative and meaningful tasks,” wrote my colleague Joe Chang in this ICIS Insight article.

“Production employees, who make up almost half of the [chemicals] workforce, spend 90% of their time on transactional matters and tasks involving simple judgment and only 10% of their time on complex judgmental tasks, according to Accenture,” added Joe.

Getting rid of tedious and repetitive tasks – which can be done far more accurately and in greater volume and complexity by AI – should free-up a surge in creativity.

But much smaller numbers of employees might be required by chemicals and other companies. This could reduce workforces to those able to do non-routine tasks and blue-sky thinking.

And here’s the thing about China, repeating my often-used slide below: How much of the polymers demand growth that we saw in China from 2009 onwards (see the inflection point in the light blue line after 2009) was the result of a one-off construction boom?

“The construction of new homes in China [in 2023) fell to the lowest level last year since 2007, mainly because of weak property market demand,” wrote the Yicai Global in an article from January this year.

“About 693 million square meters of new homes started construction last year, down 21 percent on the previous year and nearly 60 percent from a 2019 peak, according to data from China’s National Bureau of Statistics. The figure dropped 40 percent year on year in 2022,” the article continued.

“China’s housing bubble was the biggest the world has ever seen. At its peak, housing represented 29% of GDP. And it was mostly financed by borrowed money because China’s disposable incomes are very low. Even in richer urban areas, these averaged just $7,322/capita (Rmb 52k) in 2023. So, it is no surprise that the boom is now being followed by a bust,” wrote Paul Hodges in this May 2024 ICIS Chemicals & Economy blog post.

He quotes He Keng, former deputy head of the official Statistics Bureau, a suggesting that today’s housing surplus in China could perhaps house 3 billion people.

In June of this year, China’s new home prices fell by 4.5% month-on-month, the biggest decline since 2015, according to this 26 July article in Property News Time.

As I discussed in my post on Tuesday, China had a 22% share of the global population in 1992 and a 9% share of global polymers demand [the same nine synthetic resins detailed in the above chart]. By the end of this year, ICIS forecasts that China’s share of the global population will have slipped to 18%, but its share of global polymers demand will have risen to 40%.

If we then assume that the Rhodium Group is right in its latest estimate of China’s economy (I think it is. Again, see Tuesday’s post), we can conclude that China’s real polymers demand growth may have already, or will soon, turn negative. In summary, in handy bullet points, here is why:

• As real estate was worth some 29% of China’s GDP, the highest in global economic history, we can assume that because of the end of the bubble this is down a substantial number of percentage points. And we know that construction is a major end-use industry for petrochemicals and polymers.
• There seems no realistic path for China to grow domestic consumption by more than 3-4% a year given its ageing population, the end of the real estate wealth effect and the fiscal and political difficulties in unlocking more domestic demand.
• Using exports as an alternative economic driver looks to be very difficult given global trade tensions, reshoring and lack of overseas demand (see below).
• As China’s population is shrinking, with perhaps its population lower than official figures suggest, fewer people mean less demand for things made from petrochemicals.

“Less is more” and ageing populations

One can argue that the younger generations, even in developing countries, prefer experiences over things given increased concerns over the environment. And why own a car when you can network with your friends on social media?

The chart below, courtesy of New Normal Consulting, should also be familiar to regular readers of the blog.

Amongst the G20 countries, which make up the vast bulk of petrochemicals demand (see the next chart in a moment detailing polyethylene), we need to think of the following categories: Rich but Old, Poor & Ageing and Poor & Young. Saudi Arabia falls outside these categories as it is Rich and Young, but barely moves the petrochemicals demand needle because of the small size of its population.

Now let’s look at the polyethylene (PE) chart.

As you can see, with the outlier Saudi Arabia excluded, since 1992 more than 70% of global PE demand has been driven by the other G20 members.

Between 1992 and 2023, the Poor and Old’s percentage share of the total jumped from 7% to 34%. This was largely down to China as Russia plays a small role in global demand. For the reasons described above, China might now see negative demand growth if this isn’t happening already.

The Old and Rich countries is where the “less is more” push seems to be centred among the ever-fewer number of young people.

While the Old and Rich can more easily afford soaring pension and healthcare costs than the Poor and Old, the crisis facing the UK’s National Health service is a great example of the challenges, even among rich countries, of ageing populations and net immigration.

It is also about one of the basic laws of mathematics. Fewer people mean less demand as populations shrink. And as the number of retirees increases, spending declines. Data show that when you’ve retired you spend less because you’ve bought most of the things need, and you are often living on reduce means.

As climate change accelerates, the pressure on borders can only increase as millions of people seek to escape floods, droughts and food shortages, one may argue.

This leads us onto the Poor but Young.  How will the Poor but Young afford to mitigate climate change given that, for example, in India 70% of the workforce work outdoors, and that they lack the resources of the rich world? Infrastructure shortages, corruption and wars also threaten the growth trajectory of regions such as sub-Saharan Africa.

We also need to think about geopolitics and the risk that we end up in a bipolar world – the US and its friends and China and its friends. What might this do to petrochemicals demand growth?

Conclusion: Challenging accepted wisdom

As I always say, of course I could be wrong. Maybe this is just another downcycle that could be over, as I said on Tuesday, by 2026.

However, you need to plan for the opposite. You need a Plan B, an alternative scenario. Let’s assume this alternative scenario is right. Here are again some bullet point conclusions for what the petrochemicals world would look like in say three years:

• There is sufficient petrochemical supply already available to meet demand as global demand is shrinking.
• As China is said to be some 45% of global petrochemicals and other manufacturing capacity, and because it is so plugged into global supply chains, this is one of three locations where we are seeing some petrochemicals capacity growth. China is adding more capacity, where it can find sufficiently competitive feedstocks, for supply security reasons.
• The other locations are the Middle East because of its feedstock advantages, now improving because of more natural-gas liquids discoveries, and the US where government policy continues to support manufacturing.
• Major consolidation continues to take place elsewhere to accommodate this new supply and shrinking demand. Petrochemical plant closures are taking place in Europe, South Korea, Singapore and Japan, and possibly even Southeast Asia.
• When electrification of vehicles took off, excitement began over petrochemicals demand replacing lost oil demand into transportation fuels. Good look with that idea as petrochemicals demand is, as mentioned, actually shrinking.

Again, can you afford just one scenario, one plan? No, of course. Contact me on how ICIS can support your scenario planning.

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