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Chemical demand continues to be robust across most sectors, with
growth rates at gross domestic product (GDP) or multiples of GDP
around the globe. Manufacturers continue to develop new products
using plastics and other chemically derived materials, while growth
in existing products remains strong in developing markets with a
growing middle class. This robust chemical demand growth must be
supplied by new chemical production investments. These investments
can be located where there is strong demand growth, where ample
low-cost feedstocks are available (such as North America with
ethane from shale gas), or where capital cost advantages exist
(such as China, where building costs can be 60% of US costs).
While these crude-to-chemicals investments are a big part of the
aromatics overbuild, ethylene investments into traditional naphtha
crackers are forecast to move most chemical and derivative chains
into a supply surplus environment over the next few years. Outside
of North America, companies have been holding back on ethylene
investments as North American investments in shale gas ethane
crackers and ethylene derivatives accelerated. However, the pace of
these investments has been insufficient to fully supply the global
market demand growth. Thus, margins moved to levels that support
new China naphtha cracker investments. As these assets start
production, margins in nearly all the chemical chains will be under
pressure. Unlike ethane crackers that yield minimal co-products,
naphtha crackers yield large quantities of co-products.
One area where investment is limited compared to annual demand
growth rates is the chlor-alkali chemical chain. The margins in
this chemical chain are dependent on many downstream derivatives on
both the chlorine and caustic side of the equation. The main
derivative for chlorine, polyvinyl chloride (PVC), makes up only
about one-third of total chlorine demand. Compare that to the main
derivatives for ethylene and propylene, where polyethylene (PE) and
polypropylene (PP) make up 60% to 70% of total demand. Chlorine
demand is more closely tied to construction, where demand growth
has been relatively slow since the global recession a decade ago.
Caustic soda demand is even more diverse, with the largest segments
being in the alumina and pulp and paper sectors. Together these
sectors make up only about 25% of the total global caustic soda
demand. The chlor-alkali chemical chain continues to mop up excess
capacity. While there are new chlor-alkali-related projects under
construction, margins that would catalyze an investment cycle are
not forecast to appear until the mid-2020s. Figure 2 shows the
trend in chlor-alkali operating rates and cycles over the last two
decades.
As mentioned earlier, sustainability is at the forefront of
discussion and action from consumers and governments. Single-use
plastics bans, mandated recycling rates, carbon-neutral
aspirations, and new chemical recycling technologies are just a few
ways that sustainability will shape future demand-growth and
investment decisions. Looking at the entire supply chain picture,
expected low oil and natural gas prices will make these
sustainability decisions come at a cost to consumers. Just
developing the necessary infrastructure to collect, separate,
reprocess, and reuse plastics will require a large capital outlay,
which must compete with investments to produce virgin rawmaterials.
Technology and innovation will likely have a major impact on how
these investment decisions are made. IHS Markit is well-positioned
to look across not only all the major chemical chains, but also at
how the energy market and any sustainability initiatives impact the
future.
Global chemical markets are experiencing greater uncertainty
than ever before. Hindsight is 20/20. Improve your strategic vision
for 2020 and beyond with IHS Markit Chemical World
Analysis.
Posted 25 February 2020 by Chuck Carr, Vice President Refinery Petrochemical Integration, IHS Markit