INDUSTRY INSIGHTThought Leadership

Horizon scanning: What are the top trends and developments that will shape the industry in 2024?

By John Richardson, Senior Consultant, Asia, ICIS

Now that the New Year is in full swing, it is essential that we get to grips with the reality that this is not just a very extended petrochemicals destocking cycle. This makes chances of a recovery in 2024 minimal.

During the European Petrochemical Association (EPCA) annual meeting in Vienna last October, the phrase “extended destocking cycle” kept being mentioned. Participants asked if ICIS had seen any signs of destocking bottoming out, which would have been a sign that the end of the downcycle was not too far away.

We should stop talking about what’s happening as a downcycle as this is not a downcycle. We are instead seeing a secular shift in markets, the biggest since the 1990s.

The chart below is further data that confirm the secular shift. All ICIS data indicates a change in the direction of travel.

Global ethylene operating rates were at an annual average of 88% in 1990-2023 versus the ICIS forecast of 79% in 2024-2030.

More significantly, capacity exceeding demand was at an annual average of 17 million tons in 1990-2023. This is forecast to rise to 53 million tons in 2024-2030, which would be an increase of 222% based on the exact numbers.

An argument heard during EPCA, and one that is still being put forward, is that we shouldn’t be misled by this apparently grim picture.

Charts such as the one above should be placed in the essential context that we’d been through sudden surges of capacity like this before, it is claimed.

“We have seen big surges in capacity like previously and demand quickly absorbed the capacity. This time will be no different,” one senior corporate planner recently said.

But consider the chart below.

In 2010, global ethylene capacity increased by 9%, the highest annual increase of any year between 1990 and 2023 (the 1990-2023 average was 4%). And yet in 2011, global operating rates were at 86%, the same as in 2010.

Weaker demand growth is the “smoking gun”

1990-2023 global ethylene demand growth averaged 4% including minus 4% in 2008 during the Global Financial Crisis.

Demand growth was at all-time high of 11% in 2011 as China rescued the global petrochemicals business through the world’s biggest-ever economic stimulus package. This explains why, despite a 9% increase in ethylene capacity in 2010, global operating rates were still at a healthy 86% in 2011.

In 2024-2030, we again see a 4% annual average increase in ethylene capacity. And yet we forecast 2024-2030 operating rates, as mentioned earlier, at only 79%.

The smoking gun responsible for our bearish forecasts for 2024-2030 must therefore be demand, as we forecast average annual global ethylene demand growth at 3% in 2024-2030 – a critical percentage point lower than the historic trend of 4%.

There are significant downside risks to our forecast of 3% global ethylene demand growth, mainly because of the chart below.

China’s demographic crisis has been a long time coming, as the country’s births per woman first fell below the population replacement rate of 2.1 in 1999 and have remained there ever since.

China’s government estimates that the country will be short of 30 million manufacturing workers by 2025.

Consumer spending growth is said to be falling on increased pension and healthcare savings rates.

China’s pension and healthcare systems are poor. Michael Pettis, the Peking University professor, warns that the wealth transfers necessary to improve social safety nets will be politically very difficult.

China is struggling to deal with the end of its property bubble as demand for housing falls on fewer babies. Reinflating the real estate sector, which is worth some one-third of China’s GDP (the highest share on global economic history), could therefore be a major challenge.

Lack of confidence in the economic future, partly the result of demographics, has led to “lying flat” among Chinese youth – Chinese slang which describes personal rejection of societal pressures to overwork and over-achieve.  Young people also face high youth unemployment.

The number of people getting married in China fell from approximately 13.5 million couples in 2013 to approximately 6.8 million in 2022, a 50% decline, according to Chinese government data. A further difficulty is that the ratio of male-to-female births ratio in China is high relative to other countries.

This obviously means an impact on demand for housing and for spending connected with raising kids.

China is at the centre of today’s ethylene and other petrochemicals oversupply crisis because of its increased role in global demand.

Take the main ethylene derivative, polyethylene (PE), as an example. In 1990, China’s share of global demand was 5% but by 2023 this had risen to 34%.

It is important to start analysis of China from 1990, as this is just before China’s economy began to take off. The lift-off was thanks to economic liberalisation and a youthful population that gave the country strong export competitiveness.

Why so much oversupply up and down all the petrochemical value chains? Because projects were approved assuming long-term Chinese demand growth of 6-8% per year whereas 1-3% now seems more likely.

As mentioned, events in China mean that the ICIS forecast of 2024-2030 global ethylene demand growth of 3% should be just one of a range of scenarios. Downsides are very possible.

But assuming 3% global ethylene demand growth is correct, what would it take to achieve strong operating rates in 2024-2030?

The blue line in the above chart involves annual average capacity growing at just 800,000 tonnes/year in each of the years between 2024 and 2030. This is versus our base case assumption of 7 million tons/year of capacity growth during each of the years.

Capacity growth would thus have to be 90% lower than the ICIS base case to achieve a repeat of the very healthy 1990-2023 average operating rate of 88%.

Given new plants with excellent economies of scale and feedstock advantage that are due to start-up in the Middle East, North America and China, this reduction in capacity growth would surely mean capacity closures elsewhere.

Closures would likely be in Europe, Singapore, South Korea and Japan and other disadvantaged countries and regions.

If events in the Red Sea don’t lead to a resurgence of global inflation, a positive for 2024 could be lower global interest rates. Lower rates could, of course, boost consumer spending and thus ethylene and other petrochemical demand.

But we need to keep returning to analysis of China. Because it dominates global demand, even better growth in other regions might still be insufficient to fully counteract a weaker China.

Other risks to consider

Another risk for 2024 is a worsening geopolitical environment if recent conflicts were to continue or even spread.

Meanwhile, China seems committed to achieving much higher self-sufficiency in PE, polypropylene, ethylene glycols and paraxylene despite its economic challenges. There seems a significant possibility that by 2030, China will be close to balanced positions on all the above products.

And every year, we are seeing greater damage to economies, especially developing economies, from climate change.

This is why petrochemical producers must be realistic about the prospects for 2024, and, very possibly, well beyond this year as well.

What we are seeing today is a long, long distance from an extended destocking cycle. Why would petrochemical end-users want to significantly restock, given the events described above?