Petrochemical earnings slow amid headwinds

10:13 AM | December 4, 2019 | Francinia Protti-Alvarez

Petrochemical industry earnings in 2019 reflect a slower pace of global growth, and Asian markets have felt the brunt of it because of a surge in capacity, technologies such as crude oil–to–chemicals that are increasing the scale of builds, faster project-delivery times for China.

"The global economic slowdown translates to reduced chemical demand growth as trade and industrial output decline. Strong headwinds will soften the outlook for ethylene and propylene, and a surge in build-cycle in para-xylene has already translated to significant oversupply," said Mark Eramo, senior vice president/oil, midstream, downstream, chemicals at IHS Markit's 7th Annual Asia Chemical Conference, held recently in Singapore.

The world's real GDP growth will slow from 3.2% in 2018 to 2.6% in 2019 and 2.5% in 2020, according to IHS Markit data. The US is beating the trend for now, but in Europe, exports and capital investments are slowing down sharply due to political risks. Similarly, in China, economic growth will continue to slow as economic stimulus offsets restraints from deleveraging US trade restrictions.

"For any future chemical investments, assessing risks and opportunities will require understanding the increasingly complex framework in which supply-demand fundamentals, energy scenarios, and geopolitical conditions interplay," said Eramo. "Issues such as sustainability and the environment also weigh more heavily in long-term planning and investment."

Recent waves of petrochemical capacity expansion are hurting petrochemical earnings, at least for some value chains. Petrochemical companies based in APAC are adding more than 60% of new supply globally and China is leading the pack, accounting for more than 50% of the new capacity. North America and the Middle East follow behind. Base chemical capacity is increasing, with the worldwide annual total at more than 600 million metric tons (MMt) as of 2019, according to IHS Markit data.

"Sustained higher crude oil pricing and stable natural gas prices have resulted in a sustainable advantage for cracking ethane and propane feedstocks versus naphtha. In this energy scenario, ethane cracking has the edge in light-olefins production, as North America gas-based chemical investments illustrate," Eramo noted.

Despite the slowing of the world economy, base chemical demand increased to more than 500 MMt worldwide in 2019, he said.

Because chemical demand is still growing, many international and national oil companies (IOC/NOCs) are increasing their focus on petrochemicals as a growth vehicle for the future. For IOC/NOCs, the switch in focus is a matter of survival as refined-product demand growth decreases. For gasoline, demand should plateau before eventually declining, resulting in additional naphtha availability. Chemical production provides a means to monetize these molecules. Higher fluid-catalytic cracking and deep-catalytic cracking conversion rates also present IOCs and NOCs with opportunities of scale, Eramo added.

Learn more about the trends shaping the petrochemical industry at the World Petrochemical Conference in New Orleans, Louisiana, 24-27 March 2020.