Seven petrochemical trends to watch this year
By Chuck Venezia, SVP Petrochemicals, Argus
The past year has required all of us in the petrochemical industry to adapt to external disruptive forces: the sharp drop in crude oil prices flattened the ethylene cost curve and led to the re-examination of many planned capital investments; shifting trade policies and treaties that are forcing international supply chains to reconfigure to accommodate re-shoring of demand; and the most impactful disruption of all, the Covid-19 pandemic and subsequent economic lockdowns which destroyed demand in many industries.
The drop in crude oil prices largely coincided with China’s pandemic-related lockdown of its economy. Demand and prices for refined products, including naphtha, declined, but the lower-cost crude preserved refinery margins despite the decline in demand. As western economies went into lockdown, oil refineries reduced throughputs due to a sharp drop in demand for transportation fuels. Crude oil consumption in Europe and the US dropped by 7mn barrels a day (b/d).
“Demand and prices for refined products, including naphtha, declined, but the lower-cost crude preserved refinery margins despite the decline in demand.”
A number of refineries, totaling 2.4mn b/d of crude distillation unit (CDU) capacity, were closed or idled indefinitely. Given consensus expectations that demand for petroleum-based motor fuels will decline in the west, Argus expects additional closures of CDUs, which could result in reduction of merchant naphtha supplies for olefins production in other regions.
In response to the pandemic and the negative outlook for oil demand, the world’s largest energy companies have reduced capital and operating budgets for 2021. But austerity is not only for the upstream — many petrochemical projects in the final planning stages are also being re-examined and delayed.
Compared to other major commodity groups, energy and olefins prices experienced much more disruption, as evidenced by price volatility. Iron ore and precious metals increased prices through the pandemic, while fertilizers, agricultural commodities and base metals suffered modest price deterioration. Olefins (and polymer) prices recovered owing to burgeoning demand for packaging and personal protective equipment (PPE).
“Compared to other major commodity groups, energy and olefins prices experienced much more disruption, as evidenced by price volatility.”
At first, the sudden drop in gasoline demand left naphtha in oversupply and led to a sharp drop in prices to nearly $100/t in Europe. The low-cost naphtha temporarily inverted the ethylene cost curve, i.e. the cash cost of European ethylene production from naphtha, which had been disadvantaged by USD 600/t in January, was actually negative in April. Naphtha prices steadily increased and by the end of May, US ethane-based ethylene production was once again advantaged, but only by USD 200/t.
“Naphtha prices steadily increased and by the end of May, US ethane-based ethylene production was once again advantaged, but only by USD 200/t.”
What to watch for in 2021
Many expect significant GDP growth rates as world economies rebound from the pandemic and production surges to meet pent-up demand. Some sectors of economies such as travel and hospitality, apparel, automotive and energy were particularly hard hit by lockdowns. Despite the promise of vaccines, the return to pre-pandemic levels is expected to be slow in most sectors.
1- Post-Covid travel
For full-year 2020, the International Air Transportation Association estimates that demand as measured in revenue passenger kilometers will decrease by 66pc year on year from 2019 and by 46% in 2021. (1)
Polyester demand from the apparel industry has also suffered greatly, and paraxylene margins have suffered all year with supply-side pressure from new world-scale assets capacity and a steep decline in demand. Through November, China’s output of yarn (-21.3%) and cloth (-32.5%) was lower than last year (2). High unemployment and discontinuing of government transfer payments could limit demand for travel and apparel.
“For full-year 2020, demand as measured in revenue passenger kilometers will decrease by 66pc year on year from 2019 and by 46% in 2021.”
2- Status of major petrochemical projects
Post-Covid, global energy firms continue to adjust to receding margins and high costs, against a difficult backdrop of a global economic downturn. The market downturn led to petrochemical projects around the world being delayed and spending decisions deferred as companies scrutinize costs. Canadian midstream operator Pembina Pipeline and Kuwait PIC deferred construction of an integrated propane dehydrogenation (PDH) plant and polypropylene (PP) facility. Thai petrochemical producer PTT Global Chemical also pushed back making a final investment decision on its planned ethylene plant in Ohio in the US, as Covid-19 cut demand and prices.
3- Middle East consolidations
Consolidation among major petrochemical producers in the Middle East is picking up pace as state-owned companies look to manage costs in a challenging global market. Qatar’s state-owned energy firm QP integrated petrochemical marketer Muntajat into its operations this year. This follows last year’s integration of state-owned oil company OOC, refiner Orpic and seven other domestic energy firms into Oman’s OQ.
Petrochemical consolidation is also a major theme in Saudi Arabia. Sipchem, a Saudi producer of methanol, polymers and acetic acid, last year merged its operations with fellow Jubail-based Sahara Petrochemicals, a supplier of PP. Saudi Aramco is also in the process of acquiring a majority stake in Sabic, as part of a wider drive to expand its downstream operations.
Middle East consolidations are closely watched globally, and the impact of new marketing and commercial arms will be felt from Turkey to China.
4- Re-shoring of production
Geopolitical tensions, disruptive trade disputes (US-China trade war and Brexit) and new trade treaties will create more incentives for brand owners to move production closer to demand centers. This could further limit cost advantages for producers, and require reconfiguration of supply chains and trade flows.
The big news in Asia is the Regional Comprehensive Economic Partnership (RCEP). China, Japan, South Korea, Australia, New Zealand and the 10 member countries of the Association of Southeast Asian Nations (Asean) signed the multilateral agreement on 15 November. The pact seeks to reduce tariffs and other trade barriers in the region. The most immediate impact of the RCEP could be the regionalization of polyethylene (PE) and PP trades within Asia, northeast Asia and Oceania. Middle East and Indian producers, which are regular exporters to Asean, will face bigger entry barriers to exports because of a lack of lower or zero import tariff privileges.
“Geopolitical tensions, disruptive trade disputes (US-China trade war and Brexit) and new trade treaties will create more incentives for brand owners to move production closer to demand centers.”
5- US Policy Shifts under Biden Administration
Trade deals are a foreign policy priority for Joe Biden but the incoming president said that labor and environmental conditions will be included in any future trade deals with the US. That includes the RCEP and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), originally negotiated by former US president Barack Obama’s administration, in which Biden served as vice-president.
The Biden administration is expected to return to many of the environmentally focused policies set out during the Obama administration, including adherence to the Paris climate agreement, more regulation on hydrocarbon production, higher fuel-efficiency standards and incentives/subsidies for development of renewable energy sources. If Biden were to issue an executive order which banned fracking on public land, individual states, which receive important royalties from hydrocarbon production, would likely challenge the order in court. Initially, natural gas should be the least impacted of all fossil fuels, and this would ensure production and supplies of natural-gas liquids (ethane and propane). Implementation of any major policy shift that limits production of fossil fuels would eventually limit supplies of NGLs and lead to higher ethylene production costs in the US.
“If Biden were to issue an executive order which banned fracking on public land, individual states, which receive important royalties from hydrocarbon production, would likely challenge the order in court.”
6- Drive towards automation
A drive to maximize supply chain efficiency is accelerating petrochemical producers to move quickly into automation. With petrochemical plants shut during nationwide lockdowns globally this year, producers are keen to lessen the reliance on physical labor. This is especially the case in emerging countries with large petrochemical production such as China and India, where lockdowns decimated operating rates. Companies are now aiming to develop new technologies to shorten production times and adopt more automated manufacturing. Customers are also increasingly seeking materials produced from sustainable feedstock as they move towards green manufacturing. The real price of automation could mean the loss of jobs at a time when petrochemical producers and customers are pushing for maximum cost efficiencies.
“The real price of automation could mean the loss of jobs at a time when petrochemical producers and customers are pushing for maximum cost efficiencies.”
7- Impact of home working
According to a survey by Barclays bank, employees in Europe expected an average 60pc increase in days working from home in a post-Covid environment, up from an average one day a week before Covid. In the US, about 39% of surveyed employers said they would encourage more work from home to reduce commute times — with higher percentages for companies with more than 50 employees. The impact of home working on textile and plastic demand could be detrimental as employees buy fewer clothes and spend less on packaged or takeaway foods. Brooks Brothers, a major clothes retailer, filed for bankruptcy this year, partly due to the lack of demand for men’s office wear. Such trends may continue beyond Covid-19.