GCC chemical industry will feel impact from switch to regional supply chains
By Will Beacham, Deputy Editor, ICIS Chemical Business
The old world order of global supply chains is fracturing, with first the trade war, then coronavirus plus the drive to lower carbon emissions all pushing towards a more regional approach. This has major implications for export-oriented Arabian Gulf petrochemical producers.
When Donald Trump unleashed his trade war against China, he argued strongly that global free trade hurt the US as it exported manufacturing and jobs to lower cost regions. His stance on China and free trade received support from across the political spectrum. It has not been reversed by Joe Biden, the new US president, though he may take a less aggressive approach.
The trade war gave new energy to China’s strategy to boost self-sufficiency and move its economy up the value chain to produce more sophisticated products domestically. Its leaders could now see the downside of relying too much on export markets to boost growth.
In chemicals the country began a huge construction program which is now coming to fruition. Across many value chains the country will become much less reliant on imports to supply its domestic downstream manufacturers.
According to analysis of the ICIS Supply & Demand database by our consultant John Richardson, growth in domestic capacity will reduce the need for polypropylene (PP) imports by up to 53% year-on-year in 2021. Paraxylene (PX) imports could fall by up to 58%, while ethylene glycol (EG) could collapse by 45%.
Pandemic highlights fragility of global trade
In the midst of the trade war, and with the global economy already slowing down, the coronavirus pandemic hit early in 2020. As well as throwing the global economy into reverse, several other factors served to highlight the fragility of global supply chains.
Supply chains became a hot topic for news and political debate early in the pandemic, when there was a huge spike in demand for products to fight the spread of coronavirus. With borders closed and logistics at a standstill, prices rocketed and there were shortages of chemicals such as isopropanol (IPA) and protective equipment such as face masks.
With countries running out of these products and supermarket shelves empty thanks to stockpiling, politicians and the public began to ask questions about the sense of relying on imports from other regions to supply these basic needs.
When it became apparent, for example, that Europe relies almost completely on imports from Asia of active pharmaceutical ingredients (APIs), we saw announcements of investments to re-establish local production. This followed an announcement by India that it would freeze exports of these products for paracetamol to satisfy domestic demand instead.
Next phase – logistics meltdown
During the first half of 2020, the top five companies which control around 65% of the global container shipping system, according to shipping services group Clarksons, reduced capacity in the face of the collapse in economic activity and trade. But they were caught by surprise when demand rebounded strongly in the second half of the year. With lockdowns in progress, people swapped from spending in services (such as travel and holidays) to spending on physical products.
The ensuing spike in demand for finished home goods such as electronics and white goods, saw a big bounce back in Asia to Europe trade but with little travelling in the opposite direction. Ongoing restrictions in Europe plus pre-Brexit stockpiling contributed to a logjam of containers in Europe.
Delays increased and prices shot up from under USD 2,000 to more than USD 10,000 for a 40 foot container on the Asia to Europe route. The situation is still bad and may last for several more months until more containers are added to the system and the global economy stabilizes.
The only people not complaining about the situation are the shipping companies. The world’s largest shipper, Maersk, saw fourth quarter 2020 profits rise 75% with the outlook for the first quarter even more rosy.
In Europe, the container issue, plus other supply problems, have led to serious shortages for plastics converters. Trade group the Polymers for Europe Alliance says it is alarmed by the situation, and says some of its members’ plants are running short of material.
Europe relies heavily on imports of polyethylene (PE) and polypropylene (PP) to satisfy domestic requirements, but these have been disrupted whilst demand remained strong.
Frail supply of semiconductors
Disruption to global supply of semiconductors – which rely heavily on a handful of manufacturers in Asia – has dented automotive production in 2021. Competition for the computer chips from electronics for domestic use such as games consoles has soaked up supply, forcing several car producers to cut production.
More extreme weather events
Whether more extreme weather events are linked to climate change is a matter for debate, but the impact on global supply chains can be startling. The active hurricane season in Texas late last year was followed by February’s polar ice storm. As of 2 March, ICIS analysis showed that it had knocked out a quarter of US chemical capacity, including 100% of epichlorohydrin, propylene oxide and toluene di-isocyanate (TDI).
To illustrate the global impact, 90% of US polypropylene (PP) capacity, or 7.7 million tons was offline in a market that was already reeling from extremely tight supply and healthy demand. Global PP markets now face a severe supply crunch and steep price hikes.
Circular economy, climate emergency
The trade war and fallout from the pandemic have forced a rethink on how to ensure supply chain resilience. But underlying all of this is the climate emergency, and radical moves required to reduce the carbon intensity of supply chains.
In the chemical industry we now see a big ramp up in activity around recycling, especially of plastics. Mechanical recycling is already quite well established but there is now a lot of interest in chemical recycling, which allows mixed plastic waste to be reprocessed back into building block feedstocks.
From an environmental and carbon intensity perspective it does not make sense to ship plastic waste around the world for reprocessing. Ideally the recycled material can be reprocessed and reused locally, creating local jobs.
So the idea of recycling at a local, national or regional scale is gaining traction, helping to push the concept of more regional supply chains.
The price of carbon is rising, especially in Europe where the chemical industry faces a bill of more than €1 billion in 2021, up from €619 million in 2020. Carbon markets have been introduced in China and in parts of the US.
Gulf petrochemical companies exporting to Europe could find themselves subject to a carbon tax known as the carbon border adjustment mechanism (CBAM). This proposal, part of the EU Green Deal, is aimed at creating a level playing field on carbon with countries which do not place a price on carbon.
According to Yann Andreassen, ICIS senior analyst – EU Power and Carbon Markets: “Companies with products subject to the CBAM will have to adjust their strategy in the context of that additional cost. Next, countries in which those companies operate might be forced to act and implement carbon regulations which in the end could also provide more flexibility in terms of risk management, such as hedging, than having to face the carbon border tax.”
Manufacturers are looking down their supply chains, searching for ways to reduce the carbon footprint of the products they sell. Cutting the amount of carbon-intensive transport involved may be an easy win, if more local sourcing is an option.
Implications for global and Gulf chemicals
As the fragility of global supply chains has been exposed, amid increasing self-sufficiency in China, and the drive to lower carbon, shift towards more local or regional supply chains seems unstoppable.
What does this mean for Arabian Gulf petrochemical producers, which are so heavily export-oriented? One answer is to locate plants near to major markets. SABIC, for example, was an early mover here by acquiring DSM’s petrochemical assets in Europe and establishing a manufacturing footprint in the US and China.
US and European chemical companies are responding to the breakdown in global trade by scrapping or delaying more US projects and locating them instead within their main export markets.
ExxonMobil’s next world-scale cracker won’t be in the US but in China’s Guangdong province. Downstream production would be polyethylene (PE) and polypropylene (PP). BASF looked at a big methane-to-propylene project in the US, but passed. Its next mega-Verbund site featuring a world-scale cracker will also be in Guangdong.
Gulf petrochemical companies sit next to plentiful supplies of feedstocks, and their leaders feel a social responsibility to help create jobs and diversify local economies. So it makes a lot of sense to retain existing local production for these reasons, but perhaps think of future production growth closer to the big markets.
In a podcast with ICIS, GPCA Secretary General, Dr. Abdulwahab Al-Sadoun suggested that the region’s industry could look to India and Africa for future growth.
“Maintaining a healthy trade with China will depend on cost leadership and this will get tougher due to competition from local producers and the US. So it is expected that regional producers will focus more on developing the regional industry and looking for new markets. India is a key market and we anticipate it will offset any loss from the self-sufficiency drive in China. The close proximity of Africa gives us an advantage and we will leverage this opportunity.”