There are a few time-tested principles you take for granted when dealing with chemical data:
- Crude oil price movements will be a direct or indirect indicator of chemical price deltas.
- Upstream price rises, compared with upstream price falls, are more likely to cause downstream prices to change (in other words, suppliers tend to pass on price increases more readily than price decreases)
- General-purpose polymer demand rises in tandem with population growth
The pandemic has made us literally rethink that last one.
The coronavirus pandemic has upended major swaths of the global economy thanks to safer-at-home or quarantine orders that have stifled purchasing and production activity.
Few industries have been hurt more than transportation, and while there is no doubt that aviation in particular has fared terribly in the various lockdowns, it is only a $828bn industry compared globally with the nearly $4.0tr automobile sector.
That $4.0tr sector is going through one of its most challenging times ever. Auto plant shutdowns have occurred across the globe, including in North America, where automakers have been attempting to bring plants back online in May. But even before assembly lines were idled, the industry was facing a slowdown in demand due in part to evolving consumer viewpoints on car ownership.
The pandemic has only made the auto demand picture worse in the short term, and it is taking overall polypropylene (PP) demand with it.
As shown here, PP demand has a significant tie to the auto industry, with 35% of polymers used in automobiles globally being the propylene derivative.
With the coronavirus pandemic idling auto production and keeping car buyers from travelling much due to safer-at-home orders from authorities, it is quite understandable that ICIS experts have updated our Supply & Demand Database forecast for North America to a 2.8% year-on-year decrease in PP production and a 1.1% year-on-year drop in total consumption in 2020.
ICIS analysts do see a robust bounce back in 2021 with a 5.7% year-on-year increase in PP production and a 6.2% jump in total consumption.
Not even the best of prognosticators could have forecasted that at the beginning of this year, and thus it has made 2020 business plans for PP producers and buyers moot at this point. An argument could be made that the ICIS base case listed above could be undershooting the amount of demand destruction coming from the automobile sector as consumers get more comfortable working from home and as businesses rethink needs surrounding centralised offices and workspaces, which could lead to a sustained reduction in driving miles following the pandemic, with fewer commuters.
Similarly, an argument can be made that the ICIS base case undershoots the demand recovery to come, as drivers take the view that the automobile can be a virus-free safe zone that allows them to venture forth without worry. Also, there is a burgeoning discussion surrounding eschewing urban living for more rural, socially distanced lifestyles, which would lead to trading in walking or public transportation for driving.
Regardless, today’s uncertainty demands scenario planning beyond the base case. No, you likely won’t get any of them exactly right, but with each scenario outlined, you get a bit closer to the reality you will eventually face.
Disclaimer: The views in this blogpost should in no shape or form be taken as actual forecasts and are my personal views only.