We had another excellent Conference in Berlin last week on the challenges and opportunities facing the global aromatics industry. These developments are starting to impact most industries as we arrive in the New Normal of lower growth, deflation and growing protectionism.
Our speakers included senior executives from ExxonMobil, Shell, Dow Chemical and BASF, as well as the International Energy Agency and BMW’s Institute for Future Mobility. And it was clear from the discussion that many companies are seeing a radical shift take place in business models:
- The historical model has seen the aromatics industry in the West being forced to “bid away” molecules from the gasoline business, in order to supply its own customers in downstream industries
- Over the past decade, this model has led to begun to fail. Instead the primacy of gasoline demand has led to increased volatility and supply shortages
- As the chart shows, the delta between benzene and naphtha has been well above historical levels, reaching $500/t at times
It turn, of course, it has made it difficult for producers to focus on their customers’ needs and helped to promote a transfer of downstream business to Asia.
As a result, as the second chart shows, benzene demand has increasingly been captured by Asian (ex-Japan) producers (orange line), whose focus has been more on social factors such as employment creation.
Their global market share had already reached 20% by 2000, due to the growing trend towards off-shoring derivative production. The region has since built major aromatics capacity to supply this demand. It is now the dominant global player, with nearly half of all benzene production today.
The disadvantages of the Western business model were often unnoticed in the Boomer-led SuperCycle, as overall demand was soaring. But they are becoming more and more apparent today, as industries focus on reshoring production back to the West.
At the same time, declining gasoline demand in the West has left refineries with surplus gasoline streams. As Shell Chemicals CEO, Graham van’t Hoff, highlighted last month, this creates a new dynamic for aromatics production:
“What does this mean for chemicals? An efficient refiner would switch his attention to aromatics and discover growth and margins from petrochemicals”.
Clearly these are still early days. But as discussions at our conference showed, times are changing. A paradigm shift is now becoming quite possible:
- Refiners have an opportunity to boost volume and margin by switching gasoline streams to aromatics production
- Consumers can take advantage of this increased availability to improve their cost position and supply chain resilience by reshoring downstream production
I suspect it will not be long before one or two ‘early adopter’ companies set off down this path, and begin to seize this opportunity provided by the New Normal.
WEEKLY MARKET ROUND-UP
The weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:
Benzene Europe, down 32%. “The outlook for demand across key downstream sectors is overwhelmingly bearish as end users look to clear inventory ahead of year-end”
Naphtha Europe, down 26%. “Refinery outages in Venezuela and Brazil have sparked an unexpected rise in demand for European gasoline, and in turn demand for naphtha as a gasoline blendstock”
Brent crude oil, down 25%
PTA China, down 24%. ”End users remained mainly at the sidelines, citing difficulties in passing down such additional costs to their customers”
¥:$, down 16%
HDPE US export, flat. “As the odds grow for a US PE price cut, producers may weaken in order to clear inventories with the year-end in mind”
S&P 500 stock market index, up 6%