VINACHEM

Conventional wisdom suggests that the petrochemicals cycle may have bottomed out as the prospects of interest rate cuts increase.

There are signs of recovery in the Europe. And even in a high inflationary environment, the US consumer kept on spending with unemployment at record lows.

This, in my view, is a misreading of the data. Because of the disproportionate influence of China, what happens elsewhere doesn’t really matter in the short- to medium-term.

China had a 22% share of the global population in 1992 and a 9% share of global polymers demand. 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%.

Too much global capacity was planned on the basis of China’s petrochemicals demand growth being at 6-8% per annum over the long term, whereas 1-4% now appears to be more likely.

China’s petrochemicals capacity growth was underestimated because of cost-per-tonne economics used to assess projects. History teaches us is that national strategic objective also come into play.

One can argue, as the Rhodium Group does in an 18 July 2024 research paper, that China’s economic growth may never return to previous levels. This would mean no return to the double-digit annual growth rates we saw in petrochemicals demand during the Petrochemicals Supercycle.

In today’s main chart, I kept to our base case assumptions on global polypropylene (PP) virgin production growth between 2024 and 2030, which is almost the same as demand growth. I then manually reduced capacity growth until I got back to the historically very healthy operating rate of 87% (operating rates being production divided by capacity).

(What applies to PP applies to other petrochemicals and polymers. The ICIS data for other products suggest similar steep reductions in capacity growth versus our base to get back to the long-term history of operating rates).

This led me to the conclusion that global PP capacity growth would need to be just 1.6m tonnes a year versus 5m tonnes a year under our base case. Under our base case, we see global operating rates averaging just 76% in 2024-2030.

Capacity growth of just 1.6m tonnes a year versus our base case would require substantial capacity closures in some regions. Closures are never easy and take considerable time because links with upstream refineries, environmental clean-up and redundancy costs – and the reluctance to be the “first plant out” in case markets suddenly recover.

The sale of rationalisation suggested by just 1.6m tonnes a year of capacity growth therefore suggests no full recovery in PP and in other petrochemicals until, I am guessing, 2026.China events suggest no global petchems recovery until 2026

Conventional wisdom suggests that the petrochemicals cycle may have bottomed out as the prospects of interest rate cuts increase.

There are signs of recovery in the Europe. And even in a high inflationary environment, the US consumer kept on spending with unemployment at record lows.

This, in my view, is a misreading of the data. Because of the disproportionate influence of China, what happens elsewhere doesn’t really matter in the short- to medium-term.

China had a 22% share of the global population in 1992 and a 9% share of global polymers demand. 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%.

Too much global capacity was planned on the basis of China’s petrochemicals demand growth being at 6-8% per annum over the long term, whereas 1-4% now appears to be more likely.

China’s petrochemicals capacity growth was underestimated because of cost-per-tonne economics used to assess projects. History teaches us is that national strategic objective also come into play.

One can argue, as the Rhodium Group does in an 18 July 2024 research paper, that China’s economic growth may never return to previous levels. This would mean no return to the double-digit annual growth rates we saw in petrochemicals demand during the Petrochemicals Supercycle.

In today’s main chart, I kept to our base case assumptions on global polypropylene (PP) virgin production growth between 2024 and 2030, which is almost the same as demand growth. I then manually reduced capacity growth until I got back to the historically very healthy operating rate of 87% (operating rates being production divided by capacity).

(What applies to PP applies to other petrochemicals and polymers. The ICIS data for other products suggest similar steep reductions in capacity growth versus our base to get back to the long-term history of operating rates).

This led me to the conclusion that global PP capacity growth would need to be just 1.6m tonnes a year versus 5m tonnes a year under our base case. Under our base case, we see global operating rates averaging just 76% in 2024-2030.

Capacity growth of just 1.6m tonnes a year versus our base case would require substantial capacity closures in some regions. Closures are never easy and take considerable time because links with upstream refineries, environmental clean-up and redundancy costs – and the reluctance to be the “first plant out” in case markets suddenly recover.

The sale of rationalisation suggested by just 1.6m tonnes a year of capacity growth therefore suggests no full recovery in PP and in other petrochemicals until, I am guessing, 2026.   – Source: ICIS –