By John Richardson
THE above chart should give every analyst who thinks low feedstock costs are by themselves guarantee of success in petrochemicals pause for thought:
- US net polyethylene (PE) exports in 2016 were 5,000 tonnes lower than in 2015, even though one would have expected exports to have been ramped-up last year. Increased exports would have helped pave the way for the start-up of 4.5m tonnes/year of new PE capacity over the next few years.
- Even more worrying is that US exports were 22% lower than their 2009 peak in 2016, and exports to China were down by 50% due to its self-sufficiency having increased.
If you look at cost curve economics in isolation then China should not have raised it PE self-sufficiency so aggressively since 2009. In theory, China should have looked at the cost curves and realised that, even with its cheap coal, it couldn’t compete with US ethane-based PE. Importing PE rather than building local capacity should thus have made more economic sense.
But bigger picture thinking tells you that it was not just cost-per tonne economics that drove the increase in self-sufficiency in PE – and in polypropylene (PP), and in many other chemicals and polymers – since 2009. It was also about protecting and creating new jobs in order to minimise the damage caused by the Global Financial Crisis.
Increased US-China trade tensions further illustrate the importance of the big picture. Today’s “War of Words” may descend into a full-blown trade war. This could make it harder for the US to export to a China market that looks set to remain the No1 export target for PE. For example, we expect China will need to import around 4m tonnes of linear-low density PE in 2020, up from 2.8m tonnes this year. The next biggest deficit region is Europe where imports will be at 2.3m tonnes in 2020 compared with 2m tonnes this year. South & Central America’s deficits are by comparison very small: In 2020, it will need to import 800,000 tonnes over 700,000 tonnes in 2017.
Sure, trade tensions could blow over – let’s hope that they do and there is a “win, win” result for the US economy and the rest of the world. What Donald Trump is attempting might bring about a series of compromises where all sides emerge happy.
But it seems unlikely that China will hang around, waiting and hoping for a favourable outcome. It is instead likely to push much harder on PE and other petrochemicals self-sufficiency, both internally and via the partners in its huge One Belt, One Road (OBOR) trading bloc. The US is not part of the OBOR. The OBOR could produce a major economic “win,win” for China and its partners.
The Middle East, though, crucially is part of the OBOR with economic ties between the region and China growing ever closer. Take an example the recent signing of an MOU between SABIC and Sinopec to study what the companies said in a joint statement were “opportunities for joint projects in Saudi Arabia and China”.
Saudi Aramco CEO and President Amin Nasser added:
This could change the competitive dynamics of petrochemical feedstocks and assist in developing advanced new materials as well as new uses… And given China’s pioneering work on coal-to-chemicals, the case for collaboration in this area is perhaps strongest of all.
Interestingly, also, Saudi Aramco has taken a 50% stake in the Refinery & Petrochemical Integrated Development (RAPID) project in Johor, Malaysia. Malaysia, too, is part of the OBOR.
The future might thus result in a very different petrochemicals landscape, which is why ICIS and International eChem are publishing a new series of quarterly reports that will help you prepare for a new landscape. For more details contact john.richardson@icis.com
These reports will focus not just on olefins and PE, but also the other major value chains – propylene, benzene and paraxylene.
The first issue of our report, which will be published shortly, will focus on these two critical issues for the petrochemicals industry:
- Prudent companies and investors will take advantage of the “War of Words” period to start repositioning their business models for the potential end of globalisation. For example, overseas companies who wish to continue to supply the US may want to develop domestic manufacturing options. Similarly, companies operating outside the OBOR group of countries may want to develop strategic relationships that will enable them to participate in its development.
- Companies and investors will need to question current planning models, based on the concept of global operating rates, cost curves and efficiency. They need to prepare for a world where the ability to operate effectively within key trading blocs may well become the critical driver for profitability.