Elisabeth Kübler Ross’ Paradigm of Loss model and Petrochemicals over-capacity
Reinvention is becoming a critical issue for the chemical industry, particularly in Europe.
Global capacity has vastly increased in recent years. Central bank stimulus policies destroyed markets’ key role – of price discovery. Now, the bill for their mistake is coming due.
As always, the chemical industry is one of the earliest to face the consequences:
- Since 2009, companies have been told that central banks can guarantee demand growth
- Today, however, it has become obvious that they can’t
- Instead, the world faces record levels of over-capacity
Essentially it is experiencing Elizabeth Kübler-Ross’ ‘Paradigm of Loss’ as the chart shows.
This began with Denial, and moved through Anger and Bargaining. It has now reached Depression and an Acceptance that major change is now inevitable.
CHINA IS THE EPICENTRE OF THE CRISIS
Northeast Asia integrated variable cost naphtha-based PE* margins
One simple fact highlights the key issue, as John Richardson of ICIS notes:
“Polyethylene (PE) margins averaged $451/t between January 2014 – December 2021. Since then they have averaged just $2/t.”
And now, the industry has to start the painful process of adapting to today’s New Normal world.
CENTRAL BANKS PROMISED CONSTANT DEMAND GROWTH
Since 2003, Western central banks have created $25tn of debt; China has created $50tn
Essentially, an immovable force is now hitting an immovable object in the global economy:
- Central banks have provided vast amounts of virtually free cash since 2009
- Western banks have printed $25tn and China $50tn as the chart shows
- This seemed like “free money” when interest rates were near-zero
- So companies went ahead and expanded their production capacity
Now, all this capacity is built and ready to operate. There is just one problem: the demand for all this new output doesn’t exist, now the stimulus programmes have ended.
INCREASING LIFE EXPECTANCY CREATED AN ENTIRELY NEW GENERATION – THE PERENNIALS 55+
WORLD POPULATION SEGMENTS
MILLIONS, 1950 – 2023 (F)
It is, after all, people that create demand – not central banks. The banks were blind to the major changes impacting the global population:
- Today’s population is still expanding – but this is no longer mainly due to the arrival of new babies
- Instead it is due to rising life expectancy, as fertility rates have fallen below replacement levels
- As a result, the Perennials 55+ are now the main source of population growth, as the chart shows
This paradigm shift has dramatically changed demand patterns, for the simple reason that the Perennials are a replacement economy. They already own most of what they need. And their incomes decline as they move into retirement.
THE NEED FOR RE-INVENTION IS BECOMING URGENT
Last week, companies at EPCA, the European Petrochemical Association’s annual meeting in Berlin were realising they faced an existential crisis in terms of overcapacity, as the chart shows:
- Overcapacity is continuing to increase as planned expansions are still coming online
- Protectionism is rising as countries and regions start to protect core industries, such as autos
Restructuring is also now starting to take place, with early closures being announced. But overcapacity is continuing to increase:
- The Super-Majors are continuing to expand output to protect their core businesses
- China wants to become self-sufficient; the Middle East wants to replace gasoline demand lost to EVs (Electric Vehicles)
This leaves chemical companies with a need to focus on Reinvention.
This is a massive opportunity as the Perennials are a major new market, and woefully under served.
The key is to rethink business strategy and become demand-led. And the good news is that companies are now starting to explore this option.
It means they will become more service-oriented rather than product focused. And they can also look forward to healthy margins when they are successful.