APIC ’24: Chemical plant closures to accelerate amid unprecedented oversupply

SEOUL (ICIS)–Announcements of chemical plant closures are expected to gain momentum throughout 2024 as the industry now realizes that demand will not improve measurably anytime soon to offset languishing margins, a senior industry analyst said on Thursday.

Speaking at the Asia Petrochemical Industry Conference (APIC) in Seoul, South Korea, ICIS vice president of chemical analytics Alex Lidback said that “margins for most products are suffering”.

Lidback that demand is still growing for base chemicals overall but noted that the growth is slowing.

“It’s very difficult to grow your way out of this [excess capacity],” he said.

Global base chemical demand growth

Lidback attributed the current market woes to excess capacity additions in recent years, particularly in China, resulting in persistent excess capacity in base chemicals such as ethylene, propylene, ethylene glycol, paraxylene (PX), and styrene.

“The over-capacity is unprecedented – unless there are extensive shutdowns, the market will not rebalance most products anytime soon,” Lidback said.

“Major capacity shutdowns will take place when companies decide not to maintain existing assets and delay FIDs [final investment decisions].”

This glut of supply has severely eroded profit margins, pushing many producers into the red.

“If you go back to previous down cycles, China helped grow out of this excess capacity,” Lidback noted.

The situation is different this time around, as China is no longer able to absorb the excess capacity, adding that the imports of base chemicals have declined by 12 million tonnes from 2020 to 2023, he said.

China’s imports

“Growing out of this excess capacity state will take too long, China will not be the savior,” Lidback said.

The industry will need to make some difficult decisions to rebalance the market, including permanent plant closures, project delays, and even cancellations.

“So, what we think is gonna happen over the next few years is starting this year is we’re gonna start to see the announcements of permanent closures.”

While low-cost assets in the Middle East and North America are secure, higher-cost producers in other regions are vulnerable, the ICIS analyst said.

Several factors have delayed necessary decisions, including the financial stability of many companies entering the downturn, the integration of some chemical firms with refining operations that benefited from favorable crack spreads, and the lingering hope of a strong demand rebound.

“A lot of companies entered this down cycle in a pretty good financial state, which allowed them to ride the wave a little bit further through these tough margins,” Lidback said.

However, the anticipated demand recovery has not materialized.

Lidback recalled the optimism that followed a strong first half of 2022, but noted that the second half was “terrible,” and that the hoped-for improvement in 2023 had not occurred.

“The hope was that the first half of 2023 would be slow, but the second half of 2023 would be a very strong demand year. Obviously, that didn’t just transpire, and we haven’t seen really any major improvement in 2024.”

Lidback also pointed to the high cost of capital as a factor that is making it more difficult for companies to invest in new projects.

“It’s a lot harder with these types of interest rates in reverse sitting around 7%. And I’ll tell you that for FIDs, you go to a [management] board right now and ask for a project – that’s going to be really difficult.”

Focus article by Nurluqman Suratman