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Fallow days loom for petrochemical firms

Years of healthy growth are yielding to slowing demand and a capacity overhang

by Alexander H. Tullo
October 30, 2023 | A version of this story appeared in Volume 101, Issue 36


Sitting on a brightly lit stage are four people. The person on the left is holding a piece of paper, and the three others are turned toward him, listening.
Credit: Chemical Market Analytics by OPIS
Dewey Johnson of Chemical Market Analytics chats with, from left, Emma Lewis, senior vice president of chemicals and products for the US Gulf Coast at Shell; Tom Asselman, senior vice president of strategy and chief strategy officer at OMV; and Bob Maughon, executive vice president of sustainability, technology, and innovation and chief technology and sustainability officer at Sabic.

The petrochemical industry is entering a rough period. A building boom of massive new complexes over the past decade—particularly in the US and China—has left the sector with the greatest overabundance of production capacity in decades. Struggling to find a market for the surplus, chemical producers will see lower prices and profits. Some, particularly in Europe and East Asia, where operating costs are high, will likely rack up losses.

Compounding the overcapacity problem will be a slowdown that may be an enduring fixture in the world economy as China cools from the robust growth of the past 2 decades. In addition, the industry must grapple with increased, and often costly, sustainability demands with no guarantee that its green investments will pay off.

Those were takeaways from the inaugural World Chemical Forum, held last month in downtown Houston. The conference was organized by Chemical Market Analytics by OPIS, a chemical consulting firm that split off from IHS Markit last year and is now owned by Dow Jones. The event drew more than 600 attendees.

The turbulent economic times were at the top of the agenda. “We expect to see a continuing downtrend in economic growth globally in the coming decades,” Adrian Cooper, CEO of Oxford Economics, told the audience.

Cooper laid out a case that the world is in for a long period of weak economic growth. Interest rates all over the globe will remain higher than they were before 2020, increasing the cost of investment. Moreover, governments racked up debt during the pandemic, which may discourage stimulus spending—such as investing in infrastructure during recessions.

Access to labor will be another big problem for the world economy, Cooper said. Because of demographic trends such as an aging population, labor supply growth relative to economic output over the next decade will be half what it was over the past 20 years. Increased productivity is unlikely to make up for the shortfall because capital investment will also slow.

And finally, the Chinese economy, which was driven by high levels of private and government investment—45% of its gross domestic product—will also slow, to 4% annual growth by the end of this decade, Cooper said. According to the World Bank, the Chinese economy has averaged over 9% growth since 1978, when it began to adopt free-market reforms.

The slow global growth is bad news for petrochemical makers who bet billions of dollars on expectations of more buoyant markets when they built new facilities. Every major commodity chemical market, with a few exceptions, like chlorine, is now entering a period of severe overcapacity that will make it difficult to eke out profits.

“The overbuild is finally rearing its head,” Steve Lewandowski, vice president of global olefins and derivatives at Chemical Market Analytics, said in a talk about ethylene. “We just had too much supply capability chasing too little demand growth.”

Similarly, Nick Vafiadis, the consulting firm’s vice president of global plastics and polymers, delivered a bleak outlook for polyethylene, which is made from ethylene. “These days of milk and honey for the industry are behind us, at least for now,” he told the audience.

Half the problem with polyethylene is demand, largely because of a faltering China, Vafiadis explained. He expects 3.5% annual global growth from 2023 to 2028, down from 4.5% in the 5 years before the COVID-19 pandemic. In a market that’s more than 100 million metric tons (t) per year, that annual 1 percentage point differential is about the same as two polyethylene plants’ worth of demand.

“China has been an engine for global demand growth,” Vafiadis noted. “I won’t say that the engine has stalled, but it is certainly running at a much lower rpm [revolutions per minute] than we have seen in the past.”

Chinese polyethylene demand growth in recent years has been over 10% annually, representing about 70% of global growth for the polymer. But as the Chinese economy slows, so too will its consumption of polyethylene, sending its growth down to 4.1% annually over the next several years, according to Vafiadis.

At the same time, China has been adding a “phenomenal” amount of capacity, Vafiadis said: it added about 3 million t last year and is expected to add nearly 9 million t between 2023 and 2025. In just 4 years, the country will have expanded polyethylene capacity by 48%.

North America, which still enjoys some of the lowest ethylene and polyethylene costs in the world because of abundant natural gas resources, has also been adding capacity: some 4 million t per year since 2021.

It will take 2–3 years for demand to expand enough to absorb all this extra polyethylene output. Until it does, Vafiadis expects global operating rates to drop to 80%, the lowest levels in almost 4 decades. “The bottom line is that we expect to see pressure on prices and margins for the next several years,” he said.

Polypropylene, the other major polyolefin, is in even worse shape. In a presentation, Joel Morales, vice president of global plastics and polymers at Chemical Market Analytics, said that overbuilding has created a capacity excess in the global market of greater than 14 million t.

Operating rates for polypropylene plants will be around 78% through the end of the decade. “Is there light at the end of the tunnel? It’s a long tunnel,” he said.

“We’re definitely in a down cycle, and it’s a pretty ugly down cycle,” Emma Lewis, Shell’s senior vice president of chemicals and products for the US Gulf Coast, told the audience in a group discussion. “Demand is not great right now. The reality is that we’re seeing a bit of a double slump where demand is kind of off, and there’s oversupply as well.”

And while the industry contends with a downturn, it must also manage customer demands for sustainability. Chemical companies have been increasingly engaging in projects to reduce carbon emissions and recycle plastics. But after a few years of plunging into such initiatives, they are starting to take a sober look at the costs and potential returns.

“Ultimately, decarbonization, sustainability has to be profitable for all of us. We have shareholders, and we have to deliver returns,” Lewis said.

She wondered if the market for sustainable products isn’t as vibrant as it once seemed. Shell has been running sustainable feedstocks, such as fats and pyrolysis oil made from plastics, at its petrochemical complex in Norco, Louisiana, for 2 years.

“A lot of the consumer goods companies, if you go back a couple of years, were very aggressive about the targets for green products,” Lewis said. “And when you are actually able to make them and you tell them what the price is that is associated with those products, they are kind of less than enthusiastic.”

We expect to see a continuing downtrend in economic growth globally in the coming decades.
Adrian Cooper, CEO, Oxford Economics

Lewis did praise the US government’s incentive program for sustainable materials, such as the Inflation Reduction Act, which established tax breaks for carbon capture and storage. “They are allowing us to do some larger-scale things, which as an industry we probably would be more hesitant to do without those financial incentives,” she said.

But those incentives have their skeptics. One is Jim Teague, co-CEO of Enterprise Products Partners. His company operates 50,000 mi (80,000 km) of pipelines and exports 2 million barrels per day of products including ethylene and crude oil.

“At Enterprise, we’re not going to build a business on government subsidies,” Teague told the gathering. The company is working with Occidental Petroleum on carbon dioxide transport, but it isn’t looking for the tax breaks. He said, “All we want is a fee,” just like it gets from transporting any other product.

The economics for schemes like carbon capture and storage work only because of government subsidies, Teague said. “You got people coming out of the woodwork trying to get government money,” he said.

Teague’s remarks prompted seemingly sympathetic chuckles from the audience. An issue that the chemical sector will likely address over the coming years is whether, as times become lean, it will pursue sustainability with the same alacrity that it did when it made hefty profits.


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