INDUSTRY INSIGHTThought Leadership

Winners and losers: How crude-oil-to-chemicals, sustainability, demographics and debt will redraw the petrochemical map

By John Richardson, Senior Consultant, Asia, ICIS

We are heading for the biggest period of change in the global petrochemical industry since the 1990s.

This was when globalization took off with the formation of the World Trade Organization (WTO), when China’s economic boom began, when the global population was more youthful and before climate change became a major threat to growth.

And in the 1990s, the petrochemical industry wasn’t under the same pressures as today to decarbonize, to recycle plastic waste and to work with brand owners to reduce polymers consumption through re-use and redesign.

Some petrochemical markets look set to become more regional due to the growing recycling pressures and because of the geopolitically motivated push to re-shore manufacturing supply chains. We seem to be in an era of deglobalization.

Demographics reshape consumption

The loss of petrochemical demand growth in China versus earlier expectations is another element in the volatile mix. This explains today’s vast oversupply in all the major petrochemical value chains.

One of the reasons why China’s consumption growth will fall well short of earlier expectations is its rapidly ageing population. The other reason is debt – see the later section on debt and demand growth.

Ageing populations are a global petrochemical demand problem.

The UN Population Division estimates that between 2025 and 2030, the growth of the perennials age group – 55 plus – will be bigger than the Wealth Creators (24-54) and the Under 25s.

The perennials already own most of what they need and many of them will be living on pensions, reducing their capacity to spend.

For the developing world outside China which has youthful populations, the rise in the number of perennials challenges the idea that relocation of export-focused manufacturing from China (because of China’s rising labor costs) is a route to strong growth.

So does the push against consumerism in the West, especially among the younger generations as “less is more” prioritizes experiences over things.

Climate change is a further threat to the theory that the developing world ex-China can replace lost Chinese petrochemical demand versus earlier expectations. Consider, for example, that some 70% of the Indian workforce works outdoors.

Debt-fuelled petrochemical demand growth

China’s population was already ageing by the time it launched the world’s biggest-ever economic stimulus package in 2009. This further turbo-charged petrochemical consumption growth in a country that was already dominating global demand.

The chart below shows per capita consumption for nine of the big synthetic resins in the world’s three mega regions – China, the developing world ex-China and the developed world between 1992 and 2022.

Economic liberalization introduced following Deng Xiaoping’s 1992 Southern Tour provided the first big boost to Chinese growth followed by the country’s admission to the WTO in 2001. Membership of the WTO removed the tariffs and quotas that had restricted Chinese exports to the West, enabling it to take maximum advantage of what was then a youthful population.

But just look at how China’s per capita growth (the green line) took off from 2009 onwards.

China’s domestic growth since 2009 has been based on its real estate bubble, with prices peaking at 45 times disposable income. Real estate is now 29% of GDP, the highest in global economic history, whilst China’s debt has reached 295% of GDP.

But Pew data show that only 23 million Chinese earned more than USD 50/day in 2021 (India had just 2 million).

Beijing needs to reverse course and focus on supporting domestic consumption – including improvements in social security and pensions – now that the real-estate bubble has burst and as the economic drag of an ageing population increases. But this transition may not occur because of economic and political factors.

Globally, debt is a concern because of the big build-up in lending following the Global Financial Crisis and during the pandemic.

The petrochemical export winners and losers

We must also consider shifting petrochemical feedstock advantages and the role that the cost of carbon abatement will play in reshaping traditional cost curves.

The emergence of Saudi Arabia’s crude-to-chemicals technologies, along with the country’s focus on carbo abatement, could redesign the global petrochemical map.

While, as mentioned, some markets may become more regional, reducing the need for imports, the remaining deep-sea import and export flows could be largely captured by the Middle East.

Saudi Arabia, the United Arab Emirates and Qatar could win bigger shares of export markets because of their strong feedstock cost positions – and because of their push to decarbonize their output in a world where the cost of carbon is going to increase.

Europe’s carbon border adjustment mechanism legislation may provide significant support for their exports if it were to apply to organic chemicals and polymers by 2030, which is under consideration.

Perhaps North America will also be among the winners in long-distance export markets for the above same reasons.

The table below details just some of the new, mega cracker complexes being planned globally, which claim to be lower in carbon output than conventional complexes, including in China as it pushes closer to petrochemical self-sufficiency.

Some producers in Europe, Singapore, South Korea and Japan could consolidate. Capacity shutdowns are already said to be under discussion.

This is because of their feedstock cost disadvantages, the age and scale of assets, lower-than-expected China growth and the country’s increasing petrochemical self-sufficiency. Another factor is the higher costs of carbon abatement relative to the Middle East and the US – and perhaps also China.

Another group may also emerge when the dust settles. This could be “national champions” – regional-only petrochemical players without major deep-sea export positions that are supported by governments for local economic development reasons.

Another group of winners: “Local for local producers”

Plastic recycling offers another route to success for producers. This is provided they can manage a much more complex manufacturing value chain than in hydrocarbons.

Petrochemical producers need to work with waste collection and sorting companies, and they must cooperate more closely with brand owners and retailers on re-use and redesign.

They also need to manage the expectations and perceptions of all the other stakeholders in the circular economy – the NGOs, the academics and the general public.

They must ensure that governments provide the right regulatory framework in countries where policies are heavily shaped and re-shaped by short-term political factors.

But the opportunities are big in niche, local markets where volumes of demand and growth prospects are low.