Chemical makers plot their low-carbon future

Everybody says they want a circular economy, but it costs more to recycle plastics at high quality than it does to fashion them from hydrocarbons fresh out of the ground. Chemical executives say they need someone—the government, consumer product companies, or consumers themselves—to foot the bill, or the entire “ecosystem,” as they call it, won’t work.

Eastman Chemical CEO Mark Costa weighed in on this conundrum at last month’s World Petrochemical Conference, organized by S&P Global, during a dialogue about technology and sustainability. His company is starting up a plant, the largest of its kind in the world, that can depolymerize 100,000 metric tons (t) per year of polyethylene terephthalate (PET) into its raw materials. He pointed out that 45 firms—Camelbak and Stanley Black & Decker among them—have agreed to pay a premium for the specialty polyester resins that Eastman will produce from the materials coming out of the process.

And even for goods less pricey than reusable hydration vessels and power tools, such as a humble PET water bottle, a premium “is feasible,” Costa said. He grabbed one off the end table and held it up for the 1,200 attendees in the Houston ballroom. “The premiums we need mean this bottle will cost 1 cent more,” he said.

The episode captured the current state of the petrochemical industry and the meeting’s biggest theme. Petrochemical makers are doing what they have always done: manufacturing intermediates and polymers at the lowest possible cost. But now they must do so while also eliminating greenhouse gas emissions and mitigating plastic waste. Executives are concerned about how they are going to pay for the additional equipment and technology—and increasingly they welcome government support.

“If there is one thing maybe that can align every single one of us in this room coming from different parts of the industry, it is lower emissions. That’s the objective. And yet maintain that balance of economics, society, and environmental stewardship,” Mark Eramo, global head of fuels, chemicals and resource solutions, S&P Global Commodity Insights, told the audience.

But achieving that balance has been difficult lately. In 2022, the petrochemical industry entered what could amount to its longest trough in a generation. Nearly every molecule is in oversupply because of an overbuilding of capacity—mostly in China—compounded by sluggish economic growth. Europe and East Asia, both expensive places to make chemicals, have been hit hardest.

The market downturn, said Jean-Marc Gilson, the outgoing CEO of Japan’s Mitsubishi Chemical Group, “creates a problem in the energy transition for us. We don’t make a lot of money. We don’t have a lot of money to reinvest.”

Consultant after consultant at the conference spelled out the dire financial scenario in each sector of the industry. “We appear to be in mud up to the axle, so it’s been tough,” said Walt Hart, olefins Americas lead for S&P Global Commodity Insights, in a talk about ethylene.

Demand for ethylene—the most fundamental petrochemical building block—held up during the COVID-19 pandemic as sales for nondurable items such as food packaging remained strong.

Ethylene demand typically grows by about 6 million t per year. But chemical producers have been adding new capacity at a much faster clip—about 12 million t in 2022 and 8 million t in 2023. The overbuilding will continue through 2028. China alone will add 23 million t by that time, double the production growth that is expected from North America and the Middle East combined.

“Operating rates won’t return to 2021 levels until the early 2030s,” Hart said. They were about 85% in 2021, according to his figures.

Asian ethylene makers, which predominantly make ethylene from oil-derived naphtha, will likely lose money through 2027. Similarly, European petrochemical companies can expect a couple of years of losses. “Margins in the US and the Middle East should remain positive owing to the ethane feedstock advantage,” he said.

The situation is similar in propylene, a market where capacity is expected to increase by 1.6 times the rate of demand growth. Larry Tan, Asia Pacific region lead for S&P Global Commodity Insights, expects the downturn in market conditions to last through 2027.

Again in propylene, a big part of the story is a surge of construction in China, which will be the source of 65% of the world’s new propylene capacity. Much of the capacity in China is coming from propane dehydrogenation plants, which have been producing propylene at a loss of about $70 per metric ton.

Even though they are losing money, the dehydrogenation plants are attractive because of their lower capital costs and the desire of China, which consumes 40% of the world’s propylene, to become less reliant on imports. In a question and answer session, Tan noted that many of the facilities have been propped up by government-backed private banks.

Government support is also becoming important for chemical makers elsewhere, which want help paying for ambitious environmental projects. The US Inflation Reduction Act (IRA), passed in 2022, drew hefty praise from presenters. The law has attracted government financial incentives to the industry for projects that reduce greenhouse gas emissions.

The measure has spurred a raft of low-carbon hydrogen and ammonia projects as well as other carbon dioxide–reducing investments. Carlos Pascual, S&P Global Commodity Insights’ head of geopolitics and international affairs, noted that the Americas will account for 59% of the carbon capture and storage facilities, many associated with H₂ plants, to be built through 2035. Worldwide, firms have announced intentions to build 74 million t per year of low-carbon H₂ capacity by 2030.

Paul Gruenwald, global chief economist for S&P Global Ratings, said “the US is almost defying gravity” with its economic growth relative to that of other countries. Gruenwald expects the US economy to expand by 1.5% in 2024, avoiding a recession. Europe is forecast to post 0.8% growth in 2024.

Part of the reason for the strong US performance, Gruenwald said, has been the “fiscal juice” of the IRA. “That’s been a big tail wind for US investment,” he said. “We are not seeing that anywhere else in the world.”

The new government funding was very popular among presenters. It’s also the envy of executives from Europe, who see the IRA as a template that could resuscitate the region’s staggering chemical sector.

Executives said the IRA has provided the extra momentum many projects need to move forward. “It drives and enables many things that were already starting to occur,” said Michael J. Graff, CEO of the American arm of the French industrial gas firm Air Liquide.

Costa said Eastman is planning a second US depolymerization plant, this one in Longview, Texas. The process, he argued, reduces emissions from PET production by 90% versus making the polymer from petroleum.

“Without that kind of support for more aggressively improving these technologies, we wouldn’t do that, because the risk factor would be too high,” Costa said. “You have to have that support to take that first R&D leap.”

The week after the World Petrochemical Conference, the US Department of Energy announced that the Longview project will receive up to $375 million in grants.

Karen McKee, president of ExxonMobil Product Solutions, contrasted the US approach with Europe’s. European officials tend to get locked into support for particular technologies, she said, pointing to the singular choice of green hydrogen as a future fuel. “Europe has created too narrow a lane on the solution set that they are willing to recognize for the challenges that they want to address,” she said. It isn’t “letting the market work.”

“Good policy is typically technology agnostic,” McKee said. “Any technology that solves the problem should be incentivized and brought to bear.”

Some executives, like McKee, see the US model of providing “carrots as well as sticks” as a way to reinvigorate the European chemical industry, which is mired in high costs and has been shuttering plants. “We need action in order to avoid the fundamental deindustrialization of Europe,” she said.

Marco Mensink, director general of the European Chemical Industry Council (Cefic), a trade association, called the IRA “a wake-up call for the Europeans to get serious about industrial policy.”

In February, a group of 73 industrial executives met in Belgium with European Commission president Ursula von der Leyen to present a plan for improving European competitiveness. “Something has changed, and I think that’s for the better,” Mensink said.

The Canadian province of Alberta is perhaps even more welcoming to petrochemical investment than the US. It just nabbed Dow’s $6.5 billion investment in a new ethylene cracker. The plant, to be built in Fort Saskatchewan, will be heated with H₂ produced from reactor off-gases; carbon capture and storage will be used to sequester its CO₂ emissions.

“We’re not going to be able to build another cracker and derivatives complex without it being zero emissions,” Dow CEO Jim Fitterling said.

A host of attributes attracted Dow to Alberta, Fitterling said. The province has a CO₂ pipeline and a carbon trading system, and it offers a 12% incentive for capital projects. Alberta even cut red tape, Fitterling said, and had permits in place before Dow made its final investment decision.

And the government couldn’t be more welcoming. Alberta premier Danielle Smith, sitting next to Fitterling, boasted that the province has enough empty crevasses underground to hypothetically sequester all of the CO₂ emissions ever produced by humanity. “We are not transitioning away from oil and natural gas, we’re transitioning away from emissions,” she told the gathering.

Executives at the conference regard such an approach as the way forward. Chemical companies come up with the technologies necessary to achieve emissions goals, and the public sector gives them just enough support to put steel into the ground.

To Fitterling, speaking in Houston, the red-carpet treatment Dow got in Alberta is the ideal. “It set the case for what we can do and replicate here on the Gulf Coast,” he said.