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The global basic chemicals industry has been experiencing an
extended up-cycle, characterized by record levels and steady demand
growth, and above-reinvestment level profitability during the past
four years. In early 2019, the strong growth and elevated
profitability appears to be threatened by developing economic
headwinds at the same time a wave of new capacity prepares to
start-up.
Basic chemicals for this discussion include ethylene, propylene,
methanol, benzene, paraxylene, and chlorine. These six chemical
products represent the basic building blocks from which a
significant amount of durable and non-durable consumer goods are
produced. Roughly half of these chemicals are converted into
plastics materials, which have been a primary growth engine for the
chemical industry for decades. Plastics represent one of the
foundations of modern living, enabling basic needs such as clean
water and fresh food to everyday items such as smart devices,
sporting equipment, auto parts, appliances, clothing, and footwear.
These consumer items are more durable, lighter, energy efficient,
and environmentally sustainable thanks to plastics. Demand for
commodity plastics (such as polyethylene, polypropylene,
polyethylene terephthalate, polystyrene, and polyvinyl chloride) in
2018 is estimated at 255 million metric tons, representing about
50% of basic chemicals demand.
IHS Markit estimates that total basic chemicals demand in 2018
increased to 515 million metric tons, a 20-million metric ton
increase over 2017 total demand (see Figure 1). The strongest
growth (in 2018) was reported in the ethylene (8 million tons),
propylene (5 million tons), benzene (1.6 million tons), and
parax-ylene (3 million tons) markets. Starting in 2015, basic
chemicals demand growth averaged 19.6 million metric tons per year,
being fueled by a global economy that has been expanding in recent
years at an annual rate of more than 3%. For the past three years,
all major regions of the world have been growing and urbanization
is on the rise. This combination results in strong consumer
spending on durable and non-durable goods.
Steady and strong global economic growth has been the single
most positive factor influencing strong demand growth for basic
chemicals for the past four years. However, at the end of 2018, and
continuing into the early months of 2019, major headwinds began
threatening to slow global economic growth, which in turn will
impact the demand for basic chemicals. Energy volatility (crude oil
pricing), currency fluctuations, protectionist trade tariffs, and
an endless list of geopolitical uncertainties - from US-China trade
and Brexit, to political turmoil in Europe, Middle East, South
America, and the US - create uncertainties that cause businesses
and consumers to become more conservative with their investments
and spending. If global economic growth begins to slow, it will
occur at a time when new capacity start-ups across most basic
chemicals value chains will begin to be felt in the market. In
markets such as paraxylene, capacity additions will overwhelm
demand growth even under strong growth conditions. If new capacity
growth combines with a slowdown in demand growth, the resulting
oversupply scenario will significantly affect industry
profitability.
In addition to the threat of slowing economic growth, in 2018
the issue of plastics waste was thrust into the global spotlight.
It is now threatening long-term demand growth for the chemical
industry. The growing demand for plastics has created an unexpected
and serious waste problem, as it is estimated that 8 million metric
tons of plastics waste ends up in the oceans every year. Consumers
and governments are responding to the visibility and enormity of
the plastics waste problem by often supporting bans and
de-selection initiatives that impact potential growth in the
future. The industry has been responding to this issue for many
years. The effort was accelerated in 2018, as more producers and
brand owners pledged resources to support global efforts to clean
up plastics waste in the environment and fund research that will
develop economic and sustainable solutions for managing plastics
waste in the future. Long-term forecasts for chemicals demand
growth must now include scenario analysis that evaluates the impact
of plastics waste issues in the future.
GDP elasticity is a measure of the rate of growth in a market
(such as propylene) relative to global GDP growth. For example,
propylene GDP elasticity, represented by the gray bars in Figure 2,
is sustained at 1.5 or higher. This means that global propylene
demand has been growing at a rate of 1.5 times global GDP growth in
the period from 2000 to 2017. IHS Markit is also forecasting this
growth level will be sustained from 2018 through 2025. The forecast
results in an average demand growth for propylene of more than 5.0
million tons per year (or an average of more than 4% per year).
Five of the six basic chemical markets are forecast to grow at a
rate equal to or above GDP for the near term. Chlorine is forecast
to be constrained by a lack of new investment in the near term.
During the period 2019 to 2020, the new basic chemicals capacity
being planned for start-up is well-defined. When combined with the
IHS Markit base-case forecast for demand growth, the resulting
market balances (represented by capacity utilization trends in
Figure 3) show continued strength in global ethylene, propylene,
and chlor-alkali markets, with weakness developing in global
paraxylene that is driven by oversupply relative to demand growth.
The resulting forecast of weighted average cash earnings by major
region (see Figure 4) projects a slowdown in industry profitability
compared to the last two years. That resulting profitability
forecast includes not only the assumptions for supply-demand, but
also the IHS Markit forecast energy and feedstocks. Also, it
assumes no surprises from a geo-political perspective. All four
major regions are forecast to see a decline in profitability as
oversupply in key markets forces chemicals and derivative prices
lower in the face of steady or higher energy and feedstock
costs.
The important question to ask when assessing the near-term
forecast is where are the most significant risks? Are they in
supply? Demand? Energy? Economy? Geo-politics? While one would
conclude today that the "consensus sentiment" in the industry seems
to lean towards a decline in profitability over the next few years,
there remains a chance that continued strong economic growth
combined with supply-side interruptions could enable the upcycle to
continue. If such a scenario develops, is your organiza-tion ready
to capture the opportunity and the related profits? IHS Markit
fully integrated analysis connects energy and economic outlooks
directly with the forecast of supply and demand. It can help
companies develop scenarios for their own businesses, enabling
scenario planning that will allow your organization to respond to
risks and opportunities as they arise.
Posted 20 March 2019 by Mark Eramo, Global Vice President, Oil Markets, Midstream, Downstream, and Chemicals, IHS Markit