INDUSTRY INSIGHTThought Leadership


By Theo Jan Simons, Global Petrochemicals Practice Group Leader, McKinsey & Company

To understand the key trends that are driving the sector, I looked at the petrochemicals industry in three timeframes: past, present and future, how the sector has evolved in the past decades and how it’s expected to evolve in the future.

Value creation in petrochemicals in the past five decades has been driven by high growth, advantaged feedstock and market tightness. However, going forward, the industry will have to focus on alternative ways of value creation around: innovation, digital capabilities, strategic partnerships across the value chain and bold moves in resource allocation.

Looking at the past, exhibit 1 below shows the historical growth in plastic volume at 6.3% pa in the past five decades, driven by population growth but largely due to >11X increase in per capital consumption from 5 kg per capita in 1965 to 58 kg per capita in 2018.

This increase in per capita demand of plastics is led by multiple sectors but few sectors experienced significant expansion since 1990 e.g., packaging has seen 32x increase, electronics has seen 8x increase, followed by construction and transportation that have experienced 3x increase in demand.

Transitioning from past and current time frame to the future, both growth and margins expected to see a significant decline driven by multiple factors: maturity of products and applications, technologies reaching the end of learning curve, demand and supply side disruptions.

In the current time frame, advantaged feedstock has contributed to half of the value in petrochemicals which is 3x value in alternative uses such as utility. This also has a positive impact on the carbon emissions compared to other feedstocks as shown in exhibit 4 below.

Over the past two decades, advantaged feedstock grew significantly from 7% in 1998 to 42% in 2018 resulting in value pool expansion from USD 18bn to USD 88bn. Growth in advantaged feedstock is highly uncertain going forward and will depend on ethane supply from North American shale, Middle East National Oil Companies (NOC)’s gas agenda and, lastly, the competitiveness of crude to chemicals technology.

Future growth and value creation in plastics will be driven by four areas: digital and analytics, capital productivity, circular economy and finding new growth. The first area, digital and advanced analytics solutions, will play and instrumental role in ensuring robust operational and financial performance of the petrochemicals sector.

The below provides a snapshot of improvement in performance from selected case examples as a result of adopting digital and advanced analytics:

  • 4% increase in profit per hour – by optimizing natural gas, steam, air, fuel and purge gas flow rate through advance analytics modelling
  • +20% Demand forecasting accuracy improvement – using over 2000 internal and external data sources, improving demand forecasting, providing three and six-month outlook and predicting market turning points.
  • – 100% Predictive maintenance – model that analyzes real-time production data and predicts unplanned shutdowns of PP extruder. Implemented in daily operations it reduced annual shutdowns from 19 to 0

Over the past two decades, capital productivity has declined with growing gaps between regions, and now a significant opportunity exists for capex reduction in the Middle East compared to China. Key levers to improve the region’s capital productivity include portfolio optimization, project value improvement, planning and performance management (PPM), re-use, modularization, design to value (procurement), lean construction, and adopting the ‘digital twin’.

The third area that will drive value creation in petrochemicals is recycling. Today, the bulk of used plastics is not recovered or processed effectively, with large amount of plastic being lost to the environment or dumped in landfill. Current challenges with the existing waste split include the lack of education among consumers on their contribution to fostering an effective recycling system; the lack of general waste management systems (formal or informal); low value of waste, hence low incentive to collect; lack of infrastructure and recycling technologies; furthermore, recycling economics are challenging relative to virgin.

To improve the recovery of plastics, a number of recovery processes and technologies are available. These include energy and feedstock recovery, monomer recycling, polymer recycling, and refurbishing or remanufacturing. Each of these processes has its unique characteristics and differing potential for uptake. For instance, feedstock recycling, or pyrolysis, has the highest potential uptake, at 25%, along with energy recycling and polymer recycling. At the same time, reduce, re-furbish, remanufacture and polymer recycling have the most attractive economics, and the highest potential to meet sustainability pledges and generate improvements of carbon footprint.

With all these available processes and focus of the petrochemicals industry on recycling, recycled feedstock will have a significant impact on the plastics value chain by replacing virgin feedstock and contributing to the demand. By 2050, the majority of the petrochemical value chain will be affected by an increase in plastics recovery. Pyrolysis is expected to account for 22% of global polymer demand in 2050, up from less than 1% in 2018, while mechanical recycling is expected to account for 30% of demand, up from 12% two years ago.

Last value creation area which has existed for a long time is the opportunity for plastics to substitute other materials. Exhibit 15 shows the current adoption rate of materials in large material consuming sectors e.g., construction and infrastructure, packaging, heavyweight industries and transportation. With increased focus on innovation, there is a potential to increase the plastic adoption rate in these industries significantly.

In conclusion, the future of plastics will be led by management who focusses on innovation, digital capability development, bold moves in resource allocation and creating strategic partnerships. To be able to compete with the upcoming distributions and adapt to the challenges ahead, chemicals executives will need to double down on targeted innovation areas; acquire new talent and capabilities; make bold moves in resource allocation; and create strategic partnerships across the value chain.