By John Richardson
I SINCERELY want to help you guys. That’s what I am here for. To this end, here is another warning not to heed what I believe is wrong advice about the polyethylene (PE) demand being to some extent immune from an economic crisis that Bruno Le Maire, France’s finance minister, yesterday said was “comparable only to the great recession [Great Depression] of 1929”.
There is the destocking and restocking issue you need to consider. For a long time, it has been obvious that what goes up must come down. When people have stopped panic buying enough toilet paper to last almost their lifetimes, and when they have stocked up on sufficient food to keep themselves in quarantine for a month or so, then demand for PE into packaging simply has fall.
Sure, as I’ve discussed before, there might be many cycles of restocking and destocking. But we don’t want that to happen as it would mean that the crisis will take longer than my ideal outcome – a global containment of the disease within six months. The more cycles we see, the more likely it is that my worst-case outcome – another two years before the global crisis is under control – comes true.
The more cycles and restocking and destocking that take place, the greater the damage to demand from all the other lost economic activity – e.g. offices, factories, schools and shopping centres shut down and flights cancelled.
Even if you take my best outcome of the crisis being contained within six months, I cannot see how all the lost economic activity will not more than cancel out any benefit from panic buying, which, as I said is anyway only a temporary stock-building benefit that has to be cancelled out by destocking.
Sorry if I sound a little exasperated and apologies if you feel I am labouring the point. But I am still hearing stories of “pockets of strong demand” across the petrochemicals industry in general, including not just also because of panic buying but also because of demand for medical supplies. This demand is not always being put in the right broader context.
True, in some petrochemicals such as isopropanol for hand sanitisers, producers are absolutely flat out and are likely to remain so for a good while longer. But petrochemicals producers in general cannot escape these three critical issues:
- At least in the short term, global ocean and sea-based supply chains are facing major challenges because of quarantine measures. So many containers are in the wrong positions, sometimes congesting ports and at other times not being available at all to make important journeys, that critical deliveries are being jeopardised. There is a risk of ports shutting down because truckers, dockers and customs officers are either in quarantine or are sick. My post tomorrow will explain how the petrochemicals industry can work with industry associations and governments to fix this problem. But right now, if there is no supply, how can there be any demand? If the isopropanol can’t be shipped around the world in the right quantities, it cannot be made into hand sanitisers in the right quantities and local substitutes will have to be found – e.g. converting more bourbon distilleries to make hand sanitisers. If PE cannot be shipped around the world in the right quantities, lack of supply will constrain demand downstream in plastic processing.
- How are the refineries going to run if there is hardly any fuels demand? Kerosene or jet fuels demand has obviously pretty much disappeared for the rest of this year. Gasoline and diesel demand are collapsing as quarantine measures spread. As refinery runs are cut, naphtha supply to steam crackers will be reduced, creating more supply- driven demand damage.
- The big energy and petrochemicals might have enough cash for now, but not many of their customers, the plastics converters and some the customers of the converters do not as they are SMEs. If the PE producers lose many of their customers who are they going to sell to? A plastic processor I spoke to yesterday said he has had a good February and March as his customers have stocked up. But because his customers, like him, are SMEs, he faces having to make big redundancies in April as he essentially mothballs his business.
The effects will be not uniform. Some countries and regions will do better than others. I also believe that in the medium term, the above three problems can and will be fixed as we must maintain essential supplies of transportation fuels, food packaging and medical services.
But by then we will be on an entirely war footing as we live with a much smaller global economy. This is inevitable because, repeating Bruno Le Maire’ words, this is a crisis “comparable only to the great recession of 1929”. Global PE demand will as a result be a lot lower in 2020-2022 than any of us had forecast before the crisis.
Two outlooks for global PE demand
As usual, therefore, as I try to help you with sensible contingency planning, see the above chart where I take global PE demand down in line with my revised forecasts for global ethylene consumption. This is based on the ICIS Supply & Demand Database estimates of ethylene production that will be consumed by PE in 2020-2022. Contact me at john.richardson@icis.com if you would like a breakdown by specific grade.
These forecasts will of course be wrong in this incredibly uncertain world, but they are a useful starting point for you to frame your internal discussions.
The above chart shows:
- In the best case – the crisis being contained within six months – global PE demand falls to 104m tonnes this year versus 107m tonnes in 2019, a 3% decline. In the worst case, where the crisis drags on for another two years, this year’s demand is 99m tonnes – 8% lower than last year.
- My best-case outcome sees total global demand in the three years from 2020 until 2022 at 17m tonnes smaller than our pre-crisis forecasts for the same three years. The worst-case outcome involves demand no less than 47m tonnes lower.
Conclusion
We are in this together as a business community. We can and will come through this and emerge from the other side in a stronger and more resilient position.
Think of this: We have the best online tools we have ever had. This will enable us to communicate with each other in ways that would have been impossible just a few years ago. In today’s virtual world Microsoft Teams and Skype calls etc. are a good temporary substitute for face-to-face meetings.
We can move forward by sharing data, ideas, theories and market intelligence as we assess what the outcomes will be for our industry. ICIS is part of this debate. For more information on how we can help through free Webinars etc. please contact me at john.richardson@icis.com.