Weak demographics to prolong effects of chem overcapacity

HOUSTON (ICIS)–Weak growth in the world’s population will slow economic growth, tighten labor markets and likely prolong the global glut in polyolefins, according to ICIS analysts.

For polyethylene (PE), around 135 billion lb (61 million tonnes) of additional PE capacity should start up from 2019-2028, versus demand growth of 87 billion lb during the same period, said Harrison Jacoby, ICIS director of PE. He made his comments at ICIS networking briefings in Houston and New York.

The typical world-class PE plant produces 1 billion lb/year, Jacoby said. That represents an excess of 48 PE plants.

The demand gap is similarly stark for polypropylene (PP).

About 50 million tonnes of additional PP capacity should start up from 2019-2028, versus demand growth of 30 million tonnes, said Ramesh Iyer, director of polymers Americas at ICIS.

The typical global scale plant produces 1 billion lb/year, he said. That represents an excess of about 45 global plants.

IT COULD TAKE YEARS TO GROW OUT OF THE GLUT
Without plant shutdowns, it could take several years for the world to grow out of its current supply glut.

Demographers expect the world’s population will peak sooner and at a lower level than estimates from five to 10 years ago, said Kevin Swift, ICIS senior economist for global chemicals.

In about 20 countries, populations are declining, he said. Some countries in Latin America are tracking the demographic trends of Europe at a lag.

In China, the biggest market for PE and PP, weak demographics are compounding the effects of youth unemployment, low consumer confidence and the bust in the property market, Swift said.

He expects actual economic growth in China to be stagnant. Other economists typically subtract three to five points from official Chinese GDP statistics

“The economy is growing slowly, if it all,” he said.

In the US, Swift warned that labor markets will likely remain tight because of slower population growth. He noted that for every two Baby Boomer workers who are retiring, one member of the Generation Z cohort will join the labor market.

Population growth will be concentrated in countries in the Africa, the Middle East and southeast Asia regions, Swift said.

LOWER INFLATION RAISES PROSPECTS OF RATE CUTS
In the US, Swift noted some signs of improvement. One measure of inflation, the producer price index (PPI), came in below expectations. Another measure, the consumer price index (CPI) came in at expectations.

Both readings greatly increase the likelihood that the Federal Reserve will start lowering its benchmark interest rate at its next meeting in mid-September.

The expectations of a rate cut have already started to lower mortgage rates on home loans, which should boost sales by making housing more affordable.

Ultimately, that will trickle down to demand for plastics and chemicals used in house construction and in home furniture and appliances.

Longer term, members of the millennial demographic cohort are reaching their prime age to buy homes, Swift said. That, combined with lower rates, should provide a tremendous tailwind for the housing market for the rest of the decade before reversing itself.

LIKELY PLANT SHUTDOWNS
Any growth in the US will not alleviate what will likely be the need to rationalize polyolefin capacity. The magnitude of the global supply glut is too large.

Some producers have already started to rationalize higher cost PE and PP capacity, and Jacoby and Iyer expect the trend to continue.

In the US, PE plants will remain competitive because of their feedstock advantage, Jacoby said.

Focus article by Al Greenwood

Thumbnail shows the construction of a chemical plant.