By John Richardson
THE old petrochemicals business model was so fantastically successful during the Economic Supercycle that it is perfectly understandable why companies and industry analysts are reluctant to even consider that it may no longer work. Why on earth abandon an approach that delivered great returns for companies and investors?
But the model – of building ever-larger plants just about anywhere in the world, provided feedstock is cheap enough – is facing challenges on multiple fronts. And to put it bluntly, I think the model is quite simply broken. It no longer works.
Let’s work through just one historic example of where the old model as already gone wrong:
- The advent of the US shale gas revolution, high oil prices, a booming China and very cheap financing made major investments in US polyethylene (PE) capacity seem like a “no brainer”. It was easier to say yes than no, as if you had said no to your investors they might have even penalised you for not following the consensus.
- What the consensus didn’t see was the collapse in oil prices, and the downturn in China’s economy – both of which were linked. This combination meant that a.) The margins over naphtha-based producers have been diminished, and b.) The ability of China, the world’s most-important market, to absorb the US-driven global surpluses from late 2017 onwards disappeared.
- And the failure to take into account political risk resulted in many people dismissing the possibility of Donald Trump winning the US presidential election. This should have been a scenario hard-boiled into your 2017 business plans. If you had understood that mainstream political policies were not working as a result of the retirement of the Babyboomers, then you would have factored in the possibility of a Mr Trump win. Now, of course, his success has created the prospect of new trade barriers that block US PE exports.
The danger in these kind of situations is that Denial sets in. Instead of accepting that the world has changed, the consensus regroups and builds a new argument around today’s events that still reaches the same conclusion. It seems easiest to continue to maintain the previous consensus than confront the reality of a dramatically altered economic landscape.
Instead, we have to go back to basics and start by throwing out the old consensus view was that he couldn’t possibly win the Republican nomination or win the election. This was wrong, just as the oil price was never going to stay above $100/bbl forever and China would continue to grow at double digit rates forever.
We cannot move forward until this Denial stops. Only then can we start to address the real challenges and opportunities of today’s New Normal world. Then you can start to develop a new demand-led business model that is not based on the false assumption that all you need to worry about is feedstock cost and building big and everything else will take care of itself.