By John Richardson
NO MATTER where you look the story is the same. In every just about every commodity chemical and polymer, the turning point was the “Evergrande Moment” in late 2021 when Beijing decided to let the real-estate company almost collapse, as it allowed the air to pour out of the property bubble.
This occurred as the “drip, drip” effect of an ageing and shrinking population (some estimates suggest that the Chinese population could be as much 250m lower than the official estimates) continued to erode China’s growth prospects. At the same time, China’s geopolitical relationship with the West was deteriorating.
There is another reason why we are where we are today. This is China’s capacity build-up across many of the chemicals, which in some cases has led to the country moving from the being world’s biggest net importer to being a net exporter in the space of just a few years.
And yet still, from every aspect of this business from how to assess short-term markets right up to long-term strategic planning, the new chemicals landscape isn’t, in my view, being adequately considered. Such is the profound shift in markets that even long-standing seasonal pricing patterns may no longer apply (more on this theme later).
The chart below, showing styrene margins in Northeast Asia, underlines my arguments.
Notice how integrated naphtha-based variable cost styrene margins briefly turned negative in late 2019/early 2020. This was also the case in NEA ethylene and propylene margins (in a classic sign of market distress, downstream in PP copolymer markets, premiums over homopolymer PP shrunk to historic lows as ethylene was “dumped” into copolymer production).
The brief period of negative styrene and olefins margins was the result of China-driven overcapacity combining with lower China demand-growth rates.
But then everything temporarily changed because of the pandemic. The huge dip in transportation-fuels demand constrained global petrochemical operating rates as feedstock supply, of course, also cratered. This meant that the chemicals plants that were operating were operating in tighter markets.
Markets were further tightened by the surge in demand for finished goods as rich-world lockdowners spent state handouts on durable goods – washing machines, computers, TVs etc.
China was the main beneficiary of this increased spending on durable goods because of its role as the workshop of the world, contributing to the big spike in styrene margins that you can see in 2020 and 2021. This was the “China in, China out” story that I identified on the blog; Strong imports of chemicals that were re-exported as finished goods.
In the case of styrene, imports in 2020 were at 2.8m tonnes in 2020 versus 3.1m tonnes the previous year. And despite a 25% increase in local capacity in 2021 over 2020, 2021 imports were still at 1.6m tonnes.
Then came the Evergrande Moment which coincided with the other events detailed above. As you can see from the chart margins have been negative for most of the period since then – the longest and deepest period of negative margins since our assessments began in 2014.
The above chart is a mirror image of what we see in many other petrochemicals. In 1992, when the Chemicals Supercycle began, China accounted for 22% of the global population but just 2% of global styrene demand. By the end of this year, China is forecast to be responsible for 46% global styrene demand from only 18% of the world’s population.
This obviously means that the world is way, way too dependent on China‘s demand for styrene. This overdependence is occurring as China’s demand-growth declines. China’s demand growth averaged 7% per annum in 1992-2021. ICIS forecasts this to fall to 3% in 2022-2030, but I believe that minus growth possible.
In 1992, China’s styrene capacity was just 2% of the global total. In 2024, ICIS expects this to have reached 43% and 53% by 2030.
Not surprisingly, therefore, China looks set to become a net exporter in 2024. The January-July 2204 data when annualised indicates that China could this year be in a net export position of 330,000 tonnes compared with net imports of 430,000 tonnes in 2023.
The scale of the disruption to global merchant styrene markets from this shift is highlighted by these statistics: In 1992-2021, again during the Chemicals Supercycle, China was responsible for 71% of global styrene net imports among the regions that imported more than they exported, followed by Europe at 14%, South & Central America at 9% and Asia and Pacific at 6%.
What would need to happen for a return to the Old Normal
This is today’s killer chart. As I’ve done with polyethylene (PE) and polypropylene (PP), I took our base case estimate of global styrene operating rates from 2024 until 2030 and imagined what would be necessary to return our 75% global average back to 88% – capacity utilisation between 1992-2023.
Here is how this was calculated: I kept production, which on a global basis is almost the same as demand, unchanged from our base case; I then progressively lowered capacity growth until production divided by capacity led to an averaged 2024-2030 operating rate of 88%.
Using this approach, global capacity would have to fall by an average of some 174,000 tonnes a year to get us back to 88%. This compares with our base-case assumption of capacity growth of 811,000 tonnes each year. This would mean that throughout the seven-year forecast period, global capacity would need to contract by 1.2m tonnes/year rather than grow by 5.7m tonnes/year.
As I said, I kept production, which is close to demand, unchanged from our base. But given that China accounts for more than 40% of global demand – and because I believe China’s demand growth could contract rather than grow at the 3% per year we predict up until 2030 – my estimate of necessary capacity closures could be an underestimate.
But there can be not return to the Old Normal
While exercises like this are important to understand the scale of today’s challenges, I don’t believe they will get us very far if we use them as the only yardstick, if we sit back and wait for markets to correct themselves through capacity closures.
In my view, there can be no return to the Old Normal. Instead, see above a reminder of the ten forces that I believe are reshaping the chemicals landscape.