Listen: Bonus episode: What are the key themes for WPC 2024?

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Vincent Valk:

Hi, and welcome to the Chemical Week podcast. I'm Vincent Valk and we are going to talk a little bit about our recently published petrochemicals cover in light of the World Petrochemicals Conference, which is happening on March 18th through 22nd. And any listeners who are attending WPC or following coverage from WPC might find it as a interesting guide to make sense of what is happening at the conference and what is happening right now in petchems.

Our guests today are Chemical Week markets editors Clay Boswell and Mark Thomas. Hi Mark. Hi Clay.

Clay Boswell:

Hey there. This is Clay.

Mark Thomas:

Yeah. Hi Vincent.

Vincent Valk:

Thanks for coming onto the podcast. We'll get started with kind of a broad question about the cover story, which ran in the March 4th edition, the March 4th print edition of Chemical Week. What are some of the key themes that you've seen in reporting the petchems cover? And I'll put this one to both of you, seeing as you both had a role in reporting it. So whoever wants to take it first, feel free.

Clay Boswell:

For me, the main topic was the depth of this current trough. It's been really extreme during all the earnings calls. That was sort of the main topic of conversation. And the question is how long will it last? What I thought was interesting was just how deep the current one is. For example, global ethylene operating rates last year are 79%, and they haven't been that low since then below 80% since the early 1980s.

So it seemed to me that it's partly demand, COVID shutdowns wrecked the economy and the economy hasn't come back yet. That's been followed up by the war in Ukraine and the energy shock in Europe, shipping disruptions. One thing I thought that was interesting as I researched the article, the Global Industrial Production Index, that increased only 0.6% last year compared to almost 3% in 2022. So even though GDP seemed okay, the industrial production was really low.

So demand was part of the issue with low operating rates, but mainly, it was over capacity. I talked to Walt Hart, our guy here at S&P who is sort of like our olefins expert in North America, and he was of the opinion that things aren't really going to improve until excess capacity is eliminated and also projects have to be canceled. Ethylene capacity has surged way ahead of demand over the past few years. Between 2019 and 2023, the average growth rate in capacity was 5%, while demand increased only about 2%. And so the operating rate fell from 88% in 2019 to 79% last year. Very poor.

Vincent Valk:

And Mark, I know you did a piece that was focused on Europe, so I don't know if you have anything to add to that. And just by way of a little context there, Clay, I thought your point about industrial production was interesting, and I've heard the current economic situation referred to as sort of a manufacturing recession. And I think if you look at a lot of the figures for PMIs, industrial production, growth, whatever, they show a fairly sharp divergence between manufacturing and services. But certainly, from a petchems point of view, overcapacity is the key issue. But Mark, what did you see as you reported the cover story?

Mark Thomas:

Yeah, hi Vincent. Well, from our point of view, looking at it purely from a European perspective, you had to step back and look at what the Continent has been going through the last two or three years in particular. And despite short-term upticks for the European sector, mainly in the Olefins and Polyolefins in this first quarter, it's been a really backs-to-the-wall survival fight for the last couple of years for the majority of the European petrochemical players. You only have to look at what they're saying about the long-term view. Very few of them expect any kind of upturn at all before the end of this year.

Some of the more optimistic ones are talking about a small gentle revival and an uptick in margins perhaps in the third or fourth quarter. But you sometimes wonder when you listen to companies talking in their financial results for the year, how much of it is really based on slightly blind optimism and how much of it's really based on what they see in terms of actual demand recovery?

Because if you look at a lot of the downstream derivatives sectors, a lot of the users of the big polymers in construction and so on, there is very little to give any of the European producers hope that there's going to be much of an upturn within the next couple of years. And that is just because with demand set to stay low for so long, the only upturn comes from occasional glitches in supply, which is what we've seen with the supply chain issues caused by the problems with the major canals. And what we've seen in the Red Sea. Supply issues will give small upticks in terms of prices for the main petrochemical products in Europe. But long-term, there's only one solution and everyone agrees it has to be permanent capacity closures. Now we've seen a number of companies doing this very recently, Indorama the latest to announce it's going to focus specifically on Europe to trim back its capacity.

We've seen other major players like Sabic also start to close down plants in polycarbonate plant in Spain, for example. Trinzio has done similar with one of its styrene plants in Europe. And we see very little in the short term to give any real sign of optimism. So really when you talk about Europe and the petrochemical scene, it's really an area where the only thing to be done as far as many of the companies is concerned is just to sit it out, cut their costs as best they can.

And in many cases that means trimming workforces as well. So it's quite a grim outlook at the moment and it'll be really interesting at WPC this year to get the perspective from the European players and those companies that have European facilities, to get their take in Houston on why and how they are going to make any kind of profit from the area in the next year or two because there are those who have serious doubts that it will return to profitability for at least a couple of years.

Vincent Valk:

Yeah. And I think Mark, you raised a couple of good points there. First of all that some of the producers or the relatively more "optimistic" ones, and maybe putting optimistic in air quotes here a bit because they say, oh, maybe we could have a slight rebound in Q4 or something like that. And there is the sense that maybe that's a little bit based on some combination of wishful thinking or maybe just some kind of a forecast model that really errs very far to the side of reversion to the mean. It's hard to see where that uptick comes from.

But the other thing I just wanted to ask you about, specifically, is what's going on in the Red Sea and the Panama Canal and the Red Sea in particular, which has given a bit of a boost, as you said, to prices for some products at least in Europe. Is this having any impact on how producers in Europe are viewing the outlook or really are they just kind of looking at this as a temporary blip that provides them with a bit of a boost but doesn't really amount to much?

Mark Thomas:

That's a great question, Vincent. I think the main thing it shows us is that like in the previous year or two, despite all the best laid plans, it only takes one or two Black Swan events for things to not exactly crumble, but to be severely challenged. Supply chains, although they have bent and strained under the pressure from the transit problems through the Red Sea and having to steam for much longer distances around Africa in order to get to Europe, it's not really made that much of a difference. It's just meant a delay in the arrival of some products rather than the complete blockage of trade routes.

So it is seen as a, I would say, purely a temporary phenomenon. But the thing that many have said is that it does prove that the industry has to a large extent learned its lessons from the problems that followed the COVID pandemic and the issues with supply chains and logistics that followed from there and the severe shortfalls in products and inventories.

I think the industry has put in place better and more flexible routines for surviving these kinds of glitches, but it would not take much, perhaps continued problems in the Panama Canal if water levels drop again. We're getting a lot of issues with logistics in terms of more industrial unrest, which is something that's becoming a big issue in Europe. Strikes in Germany, strikes in the Netherlands directly impacting intermodal routes for logistics and supply chain. These are things that will continue to possibly give slight pushes upwards for prices in Europe, but they're all seen as a temporary and not long-lasting-enough measures.

Vincent Valk:

Not enough to really change the fundamental situation.

Mark Thomas:

That's right. Long term, nothing has changed. That is the message that we got from all the companies in their fourth quarter of full year results. It's seen as something that perhaps helps a little in the short term, but long term, nothing has changed. And Europe is in, what some companies have described, as a bit of an existential crisis. It really is battling to survive now, and it has a decision to make properly as an industry the next year or two as to whether it's really going to invest in petrochemicals or chemicals heavily, or whether it's going to sink more of its money into the energy transition, which is perhaps where Europe's future lies.

Vincent Valk:

Sure. And certainly it'd be an interesting thing to watch there. Speaking of fundamentals, I want to shift to the US now, and for the US low cost ethane means fundamentals for petrochemicals remain relatively strong, but as you pointed out earlier, Clay, demand is still subdued. So wanted to ask you Clay, what impact is this dynamic, the strong fundamentals on the one hand, but still fairly subdued, weak demand having on the US industry?

Clay Boswell:

Well, essentially, the US producers have been able to maintain higher operating rates than most of the rest of the world aside from the Middle East. Certainly volumes are down, but also there's this relatively strong domestic economy. So the immediate market for them is demand is still good and they have the cost advantage in the export markets. I think they've been fairly restrained in the past few years as far as announcing new capital investments or maybe that's also partly a permitting problem. But in any event, the overcapacity situation is not an issue here in the US. So they're keeping their heads up. They just simply have the advantages, cost advantages fairly bright, even though it's generally gloomy overall, they're not going to sink.

Vincent Valk:

The cost advantage outweighs the soft demand for the US to the extent that producers are still doing okay.

Clay Boswell:

Oh yeah, yeah. The US is, well way down on the cost for the higher cost producers are in Northeast Asia and Europe, and only the Middle East is cheaper.

Vincent Valk:

Yeah. And I wanted to also bring Northeast Asia and Asia into the discussion. Looking at some of the data on cost and margins, as you just pointed out, Clay, it looks like Northeast Asia also very high cost. And I believe some of the data that you had referenced in your story would indicate even margins even worse than Europe. But the talk of major rationalization, as Mark pointed out earlier, is really focused on Europe despite Asia being in just as bad of a position on the cost curve, or arguably perhaps worse.

Why is this? And is it just that Asia's growth outlook is stronger or are there other factors at play as well? Just to throw a possibility out there off the top of my head, is there a sense of sort of industrial policy playing a role in Asia, particularly in China, or is it really just that, well, there's growth in Asia so it can weather the storm a little bit easier?

Clay Boswell:

Well, I would say, as you said, I think industrial policy in China is a big part of it. That's where most of the overbuilding has been. That's our... It's incentivized by the national policy of self-sufficiency. And then as well, I think the rationalization is sort of disincentivized by the same issues industrial policy there in the kind of opaque market. Businesses are operated in a different way than they are in the US, Europe, elsewhere in Northeast Asia. Japanese producers have been rationalizing for years. It's really China. I think that's the issue there. And as well in Europe, and as you said, the growth is in Asia, so that's why things continue to be built there. And of course, in Europe you've got older capacities and what do you have to say, Mark?

Mark Thomas:

You're absolutely on the right track. Clay, I think you only have to look again, it depends whether you are looking at the short or the longer term picture. If you're looking in long term, Asia is where all the growth is. Include India in that as well. These are huge markets. You look at where all the growth is. It is in Asia. I was speaking to the CEO of a company in Europe, Borealis, which again, is involved and has owners in the Middle East and has markets in Asia and the CEO of Borealis, Thomas Gangl, he was really blunt about the fact that Asia is where all the growth is. And in Europe, pretty much you can forget it is essentially what he said. There's no growth in Europe. It's all in Asia. So why would you look to do anything else other than invest in Asia in the long term?

He said that there might be some sort of short-term pauses in Asian growth. Every company is waiting for China's demand to start to bounce back. It's been delayed, but it looks like everyone expects it to come back and for demand and growth to get back to somewhere close to those rates that it was achievable before. There's no mistake that companies, big players like Saudi Aramco continue to sink large sums of money buying into Chinese ventures in order to secure outlets for their crude oil. And they're doing this based on a 20, 30 year outlook. So Asia is where the growth is, and that's why it will, as Clay said, companies will be able to behave differently to the case in Europe.

Vincent Valk:

Yeah, that's a great point, Mark. And I'd certainly probably also worth noting here in terms of Asia, obviously Asia is a massive continent. The majority of the world's population, and the statistics I was referring to in my question, I believe are for Northeast Asia, which is perhaps a bit more mature versus if you look at Southeast Asia or India, where you're probably going to see some bigger growth figures, especially if you compare it to somewhere like Japan or South Korea, which is a developed market. And China, obviously, has its own issues, as both of you have pointed out.

Finally, wanted to ask a bit about WPC, specifically. Clay, you will be at the conference. So what will you have your eye on at WPC?

Clay Boswell:

Well, I think as Mark said, certainly the outlook in Europe and what are people expecting and the outlook more generally. When is this trough going to end? Is it going to be 2026? It'll be very interesting to get sort of a sense of the mood there. I'm also very curious on the perspectives on China. The outlook seems always to depend on the recovery in China that's just around the corner, just around the corner.

And people seem to make a lot of assumptions about China that I don't know what it's really based on. It seems like it's sort of a black box, and I'm really curious when people think that's going to change, and also, does it still pay to continue investing there as opposed to elsewhere in Asia? I think delinking from that economy, somewhat more diversifying to other parts of the region that offer the same low costs and perhaps more security in certain ways, more predictability.

The outlook for capital investment in the US, we've had this past 10 years of massive, really a renaissance in the industry that was just on its back 10 years ago. It's slowing down, but there's still plenty of feedstocks pouring out of the ground. In fact, we're probably going to be seeing increasing exports of ethane. When it comes to investing in the US, people have been complaining a lot about the permitting problems, so they want to invest here.

Feedstocks are here, the cost advantage is here, but there's a lot of opposition to the petrochemical industry here. There's the whole Beyond Petrochemicals organization and various other activist schools pushing against new investments and then dissatisfaction with the state of permitting, how difficult it can be. And of course, my favorite topic, so dash recycling, is to see how that's where that's going. There's a lot of promise and I don't know where that's going to go. So I really want to know what other people think. It seems like the plastics industry's depending very heavily on making that work.

Vincent Valk:

Great. Thanks very much Clay, and thanks very much, Mark. Certainly a lot to keep an eye on at WPC, which again will be March 18th through 22nd, so you can follow all the news on Chemweek.com if you will not be at the conference yourself. So thanks again. This is Vincent Valk signing off for Chemical Week.