INSIGHT – OUTLOOK ’23: Global chemical operating rates plunge to 2008/9 levels, braced for storms ahead

LONDON (ICIS)–The global chemical industry has cut operating rates to levels not seen since the 2008/9 financial crisis and the outbreak of the coronavirus pandemic in early 2020, with shrinking demand, over-capacity and spiralling energy costs clouding the outlook for next year.

Sky-high inflation and rising interest rates are hurting consumer demand around the world, but each region also has its own unique set of challenges which will concern chemical industry leaders as they draw up plans for 2023.

GLOBAL CHEMICAL TRENDS SHOW DEMAND SHOCK
The energy crisis and spiralling cost of living have created a demand shock which has left value chains overstocked and chemical companies unable to pass on rising upstream costs. The weekly global ICIS Petrochemical index (IPEX) shows that chemical prices are now falling much more quickly than upstream Brent crude oil. This suggests that margins are being squeezed for chemical producers around the world.

Collapsing demand and overcapacity have forced chemical companies around the world to cut operating rates. ICIS chief economist Kevin Swift said the latest ICIS data shows that rates have fallen below 2020 pandemic levels and are heading towards levels during the 2008/9 financial crisis when the world economy suffered a severe demand shock.

The global economy is now under intense pressure. In its latest World Economic Outlook, the International Monetary Fund (IMF) forecast, “One-third of the world economy will likely contract this year or next amid shrinking real incomes and rising prices.”

This will hurt industrial production around the world and the outlook for 2023 is bearish. At the beginning of 2022, growth of 4.1% year on year was expected, but actual growth will be 2.3%, according to Oxford Economics.

EUROPE’S EXISTENTIAL CRISIS
Thanks to the war in Ukraine, Europe – and especially industry powerhouse Germany – has lost access to the cheap Russian oil and gas which have helped secure its competitive position for decades.

Natural gas prices came off the record highs of earlier this year but remain far above the historical average and other regions.

Gas is used as a feedstock and utility for heat and steam, leaving some chemical groups far more exposed to rising costs than others.

As the cost of living crisis has sucked money out of consumers’ pockets, producers have been unable to pass on rising costs, putting downward pressure on margins. The effect on the region’s chemical industry has been devastating with almost half of available capacity now offline, according to the latest ICIS figures.

Across Europe, 25.1m tonnes/year of fertilizer and petrochemical capacity is now offline, the latest ICIS data shows.

The recent moderation in gas prices has allowed some production to restart, particularly fertilizer plants which are very exposed through natural gas as a feedstock. They can be more easily switched on and off than complex petrochemical operations.

FEARS FOR THIS WINTER
Europe entered the winter with gas storage tanks full and the mild weather allowed this to continue. With the onset of colder weather, consumer demand has increased and storage is now emptying out.

The prospect of compulsory gas rationing this winter – if voluntary measures and demand destruction caused by high prices are insufficient – remains. In Germany, which was heavily dependent on Russian gas, storage is now depleting so fast that tanks could be empty by March, according to analysis by ICIS energy experts.

NEXT WINTER COULD BE WORSE
Next winter, however, could be even more challenging for European gas supply. This year, Europe still had access to Russian gas during the summer refill period, but that supply will be absent next year. Although the region is adding liquefied natural gas (LNG) capacity as quickly as possible, it may not be enough to compensate for the lack of Russian volumes.

Energy-intensive petrochemicals in Europe could reach the “point of no return”, warned Brenntag CEO, Christian Kohlpaintner in November.

CHINA’S WOES IMPACT GLOBAL CHEMICALS
In the aftermath of the 2008/9 financial crisis, China unleashed a massive wave of stimulus packages which led to a construction boom that helped to pull the global economy back into growth.

That boom led to a property bubble which is now bursting as China’s government under President Xi tries to lead its economy onto a more sustainable growth route.

His plans are being thwarted by the pandemic, where moves to wind down the country’s zero-COVID policy threatens a severe wave of coronavirus-related deaths.

Lockdowns and the construction sector’s woes have slowed the country’s economy and demand for chemicals. With export markets in Europe and the US also suffering, there has been low or even negative demand growth in some chemical markets.

In polymers, for example, 2022 demand growth for most grades of polyethylene (PE) and polypropylene (PP) will either be negative or at best 1%, based on the Jan-Oct data.

With huge volumes of new capacity also coming onstream in China across many value chains – prices, margins and spreads have all fallen – and some to their lowest levels since ICIS records began.

Analysis by John Richardson, ICIS senior consultant for Asia, shows that spreads for China LLDPE producers are lower than at any point since 1993.

The outlook for China next year is not rosy. Some estimates suggest that the Chinese economy may not see a benefit from its relaxed zero-COVID rules until 2024.

US FACES EXPORT PROBLEM
In the US, waves of new ethane cracker and downstream chemical capacities have come onstream in the last 2-3 years, with much more scheduled this year – all based on cheap shale gas.

Most of this is destined for the export markets, which may not be receptive to these new volumes because of depressed macroeconomic conditions and overcapacity.

Speaking on a recent ICIS Think Tank podcast, Brian Pruett, senior vice president and partner at CDI, part of ICIS, said the first wave of US PE expansions boosted capacity by 40%. A second wave onstream in 2021-2023 is pressuring the market further.

These new capacities means that the US must export 45-48% of its PE to sustain operating rates. He forecast tough conditions for US PE by Q3 2023.

With the US economy forecast to stagnate in 2023 and its export markets lacklustre, most US chemical value chains will come under pressure.

Insight article by Will Beacham