INDUSTRY INSIGHTThought Leadership

2023 macro-economic outlook and its impact on the chemical industry

By John Richardson, Senior Consultant Asia, ICIS

The question at the front of mind of the petrochemical industry, as they stare at charts such as the one below is, “how did we end up in this situation?”

The chart shows global capacities exceeding demand (consumption subtracted from capacities) in equivalent demand for the six big petrochemical building blocks – ethylene, propylene butadiene, benzene, mixed xylenes and toluene.

“Equivalent” refers to the consumption of these building blocks into all their downstream derivatives. In other words, this is the whole of the petrochemical universe.

The different colored blocks show overcapacity in each of the olefins and aromatics and their derivatives with the line at the top of the blocks the totals.

Between 1990 and 2021, capacity exceeding demand averaged 76 million tons per year. This average was skewed higher by the big build-up in overcapacity in 2019-2021.

But still, 2022 was much worse. Last year, capacity exceeding demand soared to 191 million tons and is forecast by ICIS to reach 218 million tons in 2023.

So, back to the question of how our industry ended up in this situation.

One reason appears to be overestimates of China’s petrochemical and polymer demand growth in 2021 and 2022.

During those two years, growth turned negative for some products or was in the low single-digit positive territory. This compared with expectations of growth of around 5% or higher.

Why this mattered so much is because China has come to completely dominate global consumption, as the chart below illustrates.

China’s share of global demand for seven of the synthetic resins was just 6% in 1990. In 2006, China became the world’s biggest consumer and in 2021 it accounted for 42% of global demand – way, way more than any other region.

Another reason thought to be behind record excess capacity is overestimates of consumption growth in the rest of the developing world aside from China.

The rest of the developing world comprises Africa (the Middle East’s biggest export market in some products), Turkey, the Middle East itself, Asia and Pacific minus its developed economies, the Former Soviet Union and South and Central America.

Growth was damaged by the pandemic and more recently by currency weaknesses against the US dollar. The dollar has strengthened on higher interest rates.

Another likely candidate for the record oversupply is the failure by some companies to accurately access the full scale of new capacities.

When China announced in 2014 that it would push much more aggressively towards petrochemical self-sufficiency, the sceptics thought that many of the projects subsequently announced wouldn’t be built.

It was assumed that cost-per-ton economics would scupper many of the projects. But in China, downstream job creation, supply security and adding long-term economic value to the broader economy have always been other factors behind constructing projects.

So, we are where we are today. China is the main location for most of the biggest-ever wave of new global capacity that started to come to on-stream in 1919, with this current wave continuing until 2025.

China’s demand and supply in 2023

One can easily fall into the trap of being too pessimistic. Market conditions have had a habit over the last 30 years of improving more rapidly than was commonly expected.

But the global demand challenges are significant.

For example, China’s recovery after the end of the zero-COVID policies, which had shut down large proportions of the economy, is a lot weaker than had been expected.

The reasons for this are China’s deepening demographic crisis (this is, I am afraid no exaggeration) and the end of debt-bubble economics.

China’s household formation is declining due to the ageing population. This means that an attempt to reinflate the deflated property bubble would likely have a limited effect because demand for housing is declining.

Another reason why the property bubble probably cannot be re-inflated is China’s worryingly high levels of bad debt – the result of the world’s biggest ever economic stimulus package that took place in China in 2009-2021. Real estate is worth some 29% of China’s GDP.

China’s economy will continue to recover this year because its proverbial automobile was only travelling at, say, 30 kilometres-an-hour during zero-COVID.

China’s economy will reach perhaps 70 kilometres-an-hour by the end of the year. But for the reasons detailed above, it will likely never go back to the old speed of 110 kilometres-an-hour.

We live in immensely uncertain times, hence the chart below which shows four scenarios for China’s polypropylene (PP) demand in 2023. Standard practice is to provide only three scenarios.

The ICIS base case is for very strong 7% demand growth in 2023, up from 1% last year. But I feel that around 3% growth is more likely as the economy moderately rebounds.

The other two scenarios – flat growth and minus 3% – seem unlikely. But producers must plan for this full range of outcomes.

And they must also plan for the four scenarios below for China’s PP net imports or net exports in 2023.

As recently as 2020, China’s net PP imports totalled 6.1 million tons. But they then collapsed to 3.4 million tons in 2021 and 3.2 million tons last year.

With local PP capacity scheduled to increase by a further 14% in 2023, this year might mark the tipping point. As the chart illustrates,  China’s capacity has become so big that just minor changes in operating rates could make a huge difference.

The best of outcomes under the above scenarios is for China to be a net importer of around 500,000 tons in 2023; the worst outcome is net exports of some 900,000 tons.

But note that even if China does slip into a net export position in 2023, this will only be because of a big shift in trade flows of homopolymer PP.  China will still need to import copolymer grades.

The chart below shows the ICIS estimates, drawn up last year, for the other big net PP import markets in 2203, aside from possibly China.

Please note that the estimate for Turkey was of course compiled before the tragedy of this year’s earthquake.

As China becomes more self-sufficient not just in PP but also in polyethylene (PE) – and with China likely to see only moderately strong demand growth for all petrochemicals in 2023 – the key takeaway of this chart and other charts like it is this: the Middle East producers need a razor-like focus on other markets as we move through this downcycle.

Managing the downcycle

The good news is that the Middle East is already very well diversified. As mentioned, Africa is the region’s biggest exporter for some products. In 2021, only around 6% of Saudi Arabia’s total PP exports went to China.

But even for the Middle East with its diversification and big production-cost advantages, the next two years or more years will be challenging as we work through this downcycle. I see us reaching the bottom of the cycle no earlier than 2025.

With challenges, though, come opportunities. In previous downcycles – and this one is proving to be the same – there was very big inter-regional price volatility.

Not all markets are going to be simultaneously bad. There will be some regions of genuinely strong demand and improved pricing and demand that is only driven by sentiment.

But these periods of strength are likely to continue to be short-lived as we head towards the bottom of the cycle.

The key is to read the volatility through a close study of pricing netbacks and demand and supply conditions across all the countries and regions.

And all downcycle come to an end, of course. A separate theme for a later article is how the Middle East looks set to be ideally placed to take advantage of the next upcycle.