13:02 PM | April 13, 2020 | Robert Westervelt
The impact of the coronavirus disease 2019 (COVID-19) and the collapse in oil prices are forcing a near-term pivot to survival tactics for industry, according to Mark Eramo, IHS Markit global vice president, oil markets, downstream, and chemicals (OMDC). And there are major trends shaping industry in the decade ahead that must continue to be addressed against this difficult backdrop, including energy transition, sustainability, and the ever-growing influence of China.
“The cycle is back, and it will no doubt be a deep [drop] versus what we were saying even six months ago, before the [COVID-19] impact on the global economy,” Eramo said in a presentation for the IHS Markit World Petrochemical Conference 2020 Online. Base chemical and plastics earnings had a strong run from 2013 through 2018, with cash earnings peaking above $200 billion in 2018, according to IHS Markit estimates. “We started to see earnings come off in 2019; they will continue to fall in 2020,” Eramo said. “The 2020 level could be much lower depending on the severity of the recession.” Cash earnings in 2021 and 2022 could bottom out at half of 2018 peak levels before recovery in 2023–2025, according to current IHS Markit forecasts.
“Commitments to address climate change are advancing rapidly and chemical makers need strategies to address the shifting landscape,” Eramo said. Demand for transportation fuels will wane leading to a pivot to a lower-carbon-fuels world through biofuels, petrochemical expansions, and other alternatives.
Integrated producers will “shift assets toward a larger petrochemical footprint as a steady growth vehicle into the future,” Eramo said. Typical chemical yields at refineries were below 15% before the 1990s and some assets now have yields in a range of 25–40% with improvements in forward integration. Newer assets, including crude-to-chemical (CTC) assets in China, have chemical yields of 40–50%, and “if this technology is successful, we could see upwards of 80%.”
Investment is very expensive at $20 billion plus, and the scale will impact supply dynamics. “The yield of petrochemicals coming from these assets threatens the industry from a build cycle and economies-of-scale perspective,” Eramo said. The largest worldscale cracker today produces around 2 million metric tons (MMT)/year of ethylene. A CTC unit processing 400,000 b/d of crude oil could produce 4.8 MMT/year of ethylene. “We don’t predict a lot of these get built, but if this technology does develop it’s certainly something to be watching in terms of how the build cycle could be impacted.”
Producers are increasingly focused on the need to demonstrate sustainability within their operations, planning, and investments. “The emphasis on providing a sustainable approach to the consumption of natural resources along with sound environmental stewardship as well as being responsive to societal demands for a healthy and clean environment to live, are new and emerging dynamics being viewed as ‘must-do’s,” Eramo said. Circularity, for example, has become foremost to anybody involved in the plastic value chain, with an emphasis on both mechanical and chemical recycling,” Eramo adds.
China’s drive toward self-sufficiency, integration, technology development, and its capital cost and capital execution advantage over other regions continue to remake global trade flows. Roughly 52% of global base chemical capacity additions were built in China over the past 20 years, according to IHS Markit estimates.
Worldscale assets in China can be build in 2–3 years at lower costs compared to similar projects in other regions that take 4–5 years to complete. “It’s resulted in an acceleration of China’s domestic building as well as international companies seeking to participate in that expansion,” Eramo said.
China remains a large net importer of base chemicals, but the gap is narrowing. In propylene, for example, China is on a path to meet 93% of its domestic consumption requirements in the next few years, up from below 80% in 2019. In ethylene, China will increase self-sufficiency from below 60% to 71% over the same period. “It’s been a rapid and relentless expansion and it’s having an impact across various value chains,” Eramo said. “China is making more of their own basic chemicals and trade flows will be impacted. It’s critically important to continue to watch the balance of trade around different derivative markets.”
Some projects in China may be delayed as a result of COVID-19 but Eramo said that is temporary. “I don’t know that this changes the dynamic of China’s steady build toward 300 MMt/year [of basic chemicals] by the end of the decade.”
These challenges will have to be addressed over the backdrop of weak industry demand and margins. “Our view would be that in 2020, you may see a kind of [demand] dip that you saw in 2008, but the recovery may not be so fast this cycle,” Eramo said. “It may be a more U-shaped recovery that may take a little bit longer.”
Supply additions in 2019 and 2020 were already outpacing demand growth before COVID-19 impacts. “Average demand growth from 2010 to 2019 has been 20 MMT,” Eramo said. The current crisis may bring some delays and cancellations “but if you collapse demand significantly below 20 MMT/year, you’re faced with dealing with a surplus capacity situation for some time.”
Margins will approach the bottom of the cycle and some regions could face “shutdown economics depending on how bad the recessionary dynamics become,” Eramo said. Higher-cost European and Asian assets would have faced scrutiny, but the collapse in crude prices has changed feedstock dynamics. “With low crude oil pricing, the European assets become very competitive,” Eramo said. “It’s not quite clear how this might play out, but we’ll certainly see lower utilization or temporary shutdowns while we wait to see how the market balances out.”
Further live WPC 2020 online forums will take place 15–17 April.