IHS Markit: Base chemicals to lose a full year of demand growth

12:30 PM | May 14, 2020 | Peck Hwee Sim

The collapse in demand from the coronavirus disease 2019 (COVID-19) pandemic will set back base chemicals growth by a full year, and will shrink the market in 2020, says Dewey Johnson, vice president/base chemicals at IHS Markit in a recent report and webinar for The Chemical Pulse. This will prolong oversupply in the industry—already a concern before demand sank—through 2022, Johnson says.

Base chemicals demand typically grows about 18 million metric tons/year but is expected to contract by 8 million metric tons, possibly more, this year, a 3–5% drop. Growth will return but on a lower level, so the lost demand will not be recovered, he says.

Demand for durable goods, such as cars and white goods, will be hurt most, as lockdowns disrupt production lines and delay consumer purchases. Demand into nondurable goods, however, will dodge the worst as many chemicals feed into these end-use segments, where demand has been steady. Health and hygiene concerns arising from the COVID-19 pandemic have boosted demand in particular from the medical sector, as well as from packaging due to the move to individual serving containers and deliveries from increased online purchases.

The overall growth trend line is expected to remain robust, driven by increasing plastics consumption from population growth and a rising middle class, Johnson says. The recovery is expected to be slow, from a U-shaped trough, however, with most economies likely taking two to three years to return to their pre-pandemic levels of output. Chemical demand is linked to consumer confidence, which will take time to return in the wake of the pandemic, Johnson says.

Oversupply will put chemical company earnings under pressure and keep new builds at bay, pushing the market back to balance in 2023, Johnson says.

On the upside, the stress is driving innovation in the industry, such as improvements in existing assets and increased delivery of value in the chain, he says. At the end of the day, companies with feedstock flexibility that can leverage the most effective raw materials, with low-cost multiregion assets, a diversified portfolio, and strong innovation will come out ahead in this period of high stress and low margins. Conversely, those with high-cost assets or highly leveraged assets, with less optionality in feedstocks, product, and portfolio will be under severe strain, Johnson adds.