Two major challenges face petrochemical and polymer producers and consumers in 2018:
- The likely disruption created by the arrival of the ethylene/polyethylene expansions in the US
- The growth of the circular economy and the need to dramatically increase recycling capacity
My new interview with Will Beacham, deputy editor of ICIS Chemical Business, focuses on both these key issues and suggests they will create Winners and Losers.
The new US product will likely change the global market. Its ethane feedstock is essentially a distressed product, which has to be removed to enable the shale gas to be sold. It is also clear that this 40% expansion of USA polyethylene capacity, around 6 million tonnes, cannot be sold into the US domestic market, which is already very mature:
- US net exports have actually been in decline in recent years, so it will also be a challenge to export the volumes
- President Trump’s apparent wish to start a trade war with China will make that market difficult to access
- It is likely, therefore, that a significant volume will end up arriving in Europe, causing a price war
We have seen price wars before, and the “Winners” are usually the integrated producers, who can roll through margins from the well-head or the refinery into ethylene and polyethylene sales.
The economics of this are relatively simple. In the US, producers will have to absorb lower margins on the small percentage of shale gas that is used as ethane feed into the cracker. Similarly in Europe, refinery-integrated producers will have to absorb lower margins on the small percentage of oil that is used as naphtha feed into the cracker.
As the chart shows, this development will be good news for ethylene consumers. As Huntsman CEO, Peter Huntsman noted a year ago:
“There is a wave of ethylene that is going to be hitting the North American markets quite substantially over the next couple of years. I’d rather be a spot buyer than a contract buyer. I can’t imagine with all of the ethylene that is going to be coming to the market that it’s not going to be a buying opportunity.”
In turn, of course, this will pressure other plastics via inter-polymer competition
Non-integrated producers clearly face more difficult times. And like the integrated producers, they share the challenge being posed by the rise of sustainability concerns, particularly over the 8 million tonnes of plastic that currently finds its way into the oceans every year.
This issue has been building for years, and clearly consumers are now starting to demand action from brand owners and governments.
In turn, this opens up major new opportunities for companies who are prepared to realign their business models with the New Plastics Economy concepts set out by the Ellen MacArthur Foundation and the World Economic Forum.
The New Plastics Economy is a collaborative initiative involving leading participants from across the global plastic packaging value chain, as the second chart illustrates. It has already prompted action from the European Union, which has now set out its EU Strategy for Plastics in the Circular Economy. This aims to:
“Transform the way plastics and plastics products are designed, produced, used and recycled. By 2030, all plastics packaging should be recyclable. The Strategy also highlights the need for specific measures, possibly a legislative instrument, to reduce the impact of single-use plastics, particularly in our seas and oceans.”
Clearly this represents a paradigm shift for the industry, both producers and consumers.
It may seem easier to do nothing, and to hope the whole problem will go ahead. But the coincidence of the arrival of all the new US shale gas capacity makes this an unlikely outcome. Companies who do nothing are likely instead to become Losers in this rapidly changing environment.
But as I discuss in the interview, companies who are prepared to rethink their business models, and to adapt to changing consumer needs, have a potentially very bright future ahead of them. Please click here to view it.
The post 2018 will see Winners and Losers appear in plastics markets appeared first on Chemicals & The Economy.
The Stone Age didn’t end because we ran out of stones. Similarly, coal is being left in the ground because we no longer need it any more. And the same is happening to oil, as Saudi Arabia recognised last year in its Vision 2030:
“Within 20 years, we will be an economy that doesn’t depend mainly on oil“.
And so now the debate is moving on, to products such as plastics that are made from oil.
The move began several years ago with the growing concern over plastic bags. Consumers decided they no longer wanted to live in a world filled with waste bags. Now, in a landmark new Study*, the debate is evolving to focus on the question of ‘What happens to plastic after we have used it?’ As the chart shows:
The world has produced 8.3bn tonnes of plastic over the past 60 years
Almost all of it, 91% in fact, has since been thrown away, never to be used again
But it hasn’t simply disappeared, as plastic takes around 400 years to degrade
Instead, the Study finds, 79% is filling up landfills or littering the environment and “at some point, much of it ends up in the oceans, the final sink”
Nobody is claiming that this waste was created deliberately. Nobody is claiming that plastics aren’t incredibly useful – they are, and they have saved millions of lives via their use in food packaging and other critical applications. The problem is simply, ‘What happens next?’ As one of the Study authors warns:
“We weren’t aware of the implications for plastic ending up in our environment until it was already there. Now we have a situation where we have to come from behind to catch up.”
The good news is that potential solutions are being developed. As the video shows, Recycling Technologies, for example (where I am a director), is now trialling technology that will recycle end-of-life plastic into virgin plastic, wax and oils. Other companies are also hard at work on different solutions. And more and more effort is focused on finding ways of removing plastic from the sea, as I noted last year:
“95% of plastic packaging material value is currently lost after just a short first-use cycle
By 2050, there will be more plastics in the ocean than fish by weight, if current policies continue
Clearly, this state of affairs cannot be allowed to continue.”
SUSTAINABILITY IS REPLACING GLOBALISATION AS A KEY DRIVER FOR THE ECONOMY
But there is another side to this debate that is just about to move into the headlines. That is the simple question of “How do we stop putting more and more plastic into the environment?” Cleaning up the current mess is clearly critically important. But the world is also starting to realise that it needs to stop creating the problem in the first place.
As always, there are a number of potential solutions potentially available:
The arrival of 3D printing dramatically reduces the volume of plastic needed to make a finished product. It operates on a very efficient “additive basis”, only using the volume that is needed, and producing very little waste
Digitalisation offers the opportunity to avoid the use of plastics – with music, for example, most people today listen via streaming services and no longer buy CDs made of plastic
The ‘sharing economy’ also reduces demand for plastic – new business models such as car-sharing, ride hailing and autonomous cars enable people to be mobile without needing to own a car
The key issue is that the world is moving to adopt the principles of the circular economy as the Ellen MacArthur Foundation notes:
“Underpinned by a transition to renewable energy sources, the circular model builds economic, natural and social capital.”
This paradigm shift clearly creates major challenges for those countries and companies wedded to producing ever-increasing volumes of plastic. OPEC has an unpleasant shock ahead of it, for example, as its demand forecasts are based on a belief that:
“Over one-third of the total demand increase between 2015 and 2040 comes from the road transportation sector (6.2 mb/d). Strong growth is also foreseen in the petrochemicals sector (3.4 mb/d)”
They are forgetting the basic principle that, “What cannot continue forever, won’t continue“. After all, it took just 25 years for cars to replace horses a century ago. More recently, countries such as China and India went straight to mobile phones, and didn’t bother with landlines. And as I noted last year, underlying demand patterns are also now changing as a result of today’s ageing populations:
In the BabyBoomer-led SuperCycle, the growing population of young people needed globalisation in order to supply their needs. And they were not too worried about possible side-effects, due to the confidence of youth
But today’s globally ageing populations do not require vast new quantities of everything to be produced. And being older, they are naturally more suspicious of change, and tend to see more downside than upside
Of course, change is always difficult because it creates winners and losers. That is why “business as usual” is such a popular strategy. It is therefore critically important that companies begin to prepare today to be among the winners in the world of the circular economy. As we all know:
There is no such thing as a mature industry, only mature firms. And industries inhabited by mature firms often present great opportunities for the innovative”.
As the 3rd chart shows, the winners in the field of plastics will be those companies and countries that focus on using their skills and expertise to develop service-based businesses. These will aim at providing sustainable solutions for people’s needs in the fields of mobility, packaging and other essential areas. The losers will be those who bury their heads in the sand, and hope that nothing will ever change.
* The detailed paper is in Science Advances, ‘Production, use, and fate of all plastics ever made‘
The average smartphone now has “more computing power than the computers used during the Apollo era to put the first men on the moon.“ The question facing all of us, is “How will this power be used to disrupt our current business?
We can already see some of the early impacts from the transformation taking place:
□ Most people today buy music via streaming services such as iTunes, rather than buying CDs
□ Businesses such as Amazon, Alibaba and eBay are busy disrupting the retail business model
□ Google and Facebook are starting to dominate the advertising market
□ A whole range of new business models are being developed by companies in financial technology (fintech)
□ There are countless other examples such Uber, Airbnb and the development of the “sharing economy”
And this is only the start. Reliance chairman, Mukesh Ambani – India’s richest man – has just spent Rs 1,50,000 crore ($2.25bn) on the launch of the Jio network in India. As he told The Times of India yesterday:
“I believe 50 years from now when you write history, one technology that would have changed human civilization is going to be the mobile internet. In 2011 it was hazy. In 2002, it was even hazier. But today, I have no doubts, the world has no doubts, that mobile internet is a life-changing, world-changing technology of this century. Yes, it will evolve into many different things. But as a core technology it is a huge opportunity. And only the people who take some risks will reap rewards.”
As the chart above highlights, from an excellent new book titled Digital Vortex from Cisco and IMD Business school:
““Digital disruption” sounds like another business buzzword – until it happens to your company. Out of nowhere, startups and other tech-savvy disruptors attack. Customers flee and revenues stall. In months instead of years, you’ve gone from market leader to also-ran.”
The key issue is the need to make the connection between our own behaviour in our personal lives, and what this means for our businesses.
There is no rule that says new companies will succeed at the expense of existing companies. It is all a question of mindset – does everyone in your company still assume that tomorrow will always be the same as yesterday? Or are they already developing the new business models that will be needed for future success?
As the chart also suggests, digital disruption is impacting businesses in different timescales:
□ Technology, media, retail and financial services been the first to be disrupted
□ Now it is the turn of telecoms, education, travel and manufacturing
□ Next will be healthcare, utilities, oil & gas and pharmaceuticals
The encouraging aspect of the coming transition is that we already know the broad outline of how it will develop.
In manufacturing, for example, the arrival of 3D printing is going to lead to a revolution in supply chains as production takes place close to the end-user. Big money is already being spent on turning this concept into reality – only this week, US firm GE paid $1.4bn for 2 European start-ups in the 3D printing for aerospace market.
Of course, not everything will change overnight – some people still read newspapers today, even though most now receive news online via channels such as Facebook. But if we take the plastics industry as an example, it is easy to see how manufacturing processes might change. 3D printing won’t just impact the supply chain:
□ Traditional manufacturing involves taking a block of polymer, or a sheet of film, and cutting it down to size
□ This process is very inefficient, as large amounts of waste are then often left on the factory floor
□ 3D printing is “additive” in nature, however, as it simply adds new layers of polymer to create the required shape
□ This reduces waste and, therefore, overall demand for the polymers themselves
Car repairs are an obvious opportunity. If you have an accident, and need a replacement part, your local garage will be able to download the design and print it for you, whilst you have a cup of coffee. There’ll be no need to wait for it to come from the manufacturer.
This model is already operating in the aircraft industry, as I highlighted last year.
Nobody at this stage can know just how digitalisation will impact individual businesses around the world. But today, we all have the chance to shape the future, rather than having it shaped for us by others. As Unilever CEO, Paul Polman, has said:
“Individuals change course, not technology. While they may adopt technology, it will still be people and leadership that set the course of our future.”
Plastics consumption in US autos is going down, not up. Steelmakers and glass manufacturers have recaptured ground lost in the years to 2009, and are capturing new sales as auto standards demand lighter-weight cars. And yet, if you had asked polymer suppliers about future demand in the US auto market a few years ago, they would have all been very optimistic:
- In 2009, President Obama mandated a major increase in the Corporate Average Fuel Economy (CAFE) standard from the current 25 miles/gallon to 35.5 mpg by 2016
- 2 years later, a further increase was announced, with the aim of reaching 54.5 mpg by 2025
These major improvements in fuel efficiency would inevitably require the manufacture of much lighter-weight cars. And in turn, it was widely assumed that plastics demand would be further boosted, adding to the impressive volume gains of the previous decade:
- Taking 2009 = 100, polycarbonate volume had doubled from 50 in 1996; polyethylene volume had risen from 68;
- PVC had risen from only 60, and polypropylene from only 61
As a result, the total percentage of plastics in the average car had risen from 8.4% to 9.7% between 2004 – 2009 – whilst the percentage of regular steel had fallen from 40.8% to 38%; glass’s share had fallen from 2.6% to 2.2%. It seemed success was assured.
The above chart, based on new American Chemistry Council research, highlights the major reversal that has since taken place. The metal and glass makers didn’t just roll over as expected. They fought back. They spent time with their auto manufacturer customers, understanding what they really needed to meet the new standards. And then they researched and developed new products to meet these needs, to a fast-track timescale:
- As a result, the percentage of high and medium strength steel rose from 13.3% in 2009 to 16.2% in 2014; iron rose from 5.2% to 6.8%, aluminium rose from 8.2% to 10%; and glass recovered to 2.4%.
- 2015′s percentages will be even higher, with the launch of the aluminium version of Ford’s flagship F-150 truck further boosting volume
- Meanwhile, of the polymers, only polypropylene has seen volume gains; polyurethane has held 2009 levels – and all the rest have lost volume
To say this is disappointing is an understatement. Even worse is the fact that the shift back to inorganic materials seems to be accelerating. As my blogging colleague John Richardson noted in an excellent analysis this week:
- Major research is underway in this area, with 60k possible compounds having already been screened for their potential properties – and another 40k are in the process of being tested
- Major work is also underway with 3D printing, following the example of the aerospace industry
Where is the plastics industry effort to counter these gains? Companies have had the cash to spend on employing more sales and technical staff, thanks to the windfall profits generated by oil’s temporary price rise versus natural gas. Why wasn’t it spent?
The good news is that it is not too late. The major impact from the new fuel economy standards is still to come. And technologies such as 3D printing are already becoming available to make the promise of new production methods into reality, as I noted last month.
But companies need to start today. The longer they delay, the more advantage they will concede to competitors from outside the industry, and the bigger the mountain they will have to climb.
Major change is underway in manufacturing and supply chains. China’s slowdown has exposed the myth that its demand would support ever-increasing production of commodities such as metals and oil. As the Financial Times reported yesterday:
“Back in the summer, Glencore’s combative chief executive Ivan Glasenberg led a chorus of mining executives in blaming speculative funds for driving down the price of metals, despite what they claimed was strong demand.
“Four months later there is still no end in sight for the price collapse, even as those same miners have cut production in an effort to tighten supply. Commodity indices are now trading down at the levels they were before the China-driven supercycle started in the early 2000s”
This, of course, is the Great Unwinding of policymaker stimulus in action. It raises major questions for any business seeking to adapt to the New Normal world, as we plan to cover in the 5 Critical Questions Study with ICIS.
As a result, companies need to look for new business models, which will allow them to innovate and grow their businesses, without taking on enormous financial and market risk. Instead, they need to be able to develop small-scale pilot projects, which can then be rapidly scaled up when successful:
- One answer to this for businesses operating batch processes is to move to continuous processing. ICIS Innovation Award-winner NiTech Solutions (where I am chairman) is one example of this trend in action, with major companies such as Bayer now undertaking detailed appraisal work
- Another key area is the rapidly developing world of 3D printing. This is sparking a supply-chain revolution, where automotive and aerospace manufacturers are moving towards a manufacturing model where spare parts are printed locally to order, rather than held centrally for years in warehouses
- Aircraft manufacturer Boeing already makes several hundred types of aircraft parts using 3-D printing, including air duct components, whilst miners such as Rio Tinto and Iluka are also know developing new technologies that will, for example, lower the cost of producing titanium dioxide and make it affordable for 3-D printing
One exciting feature of these developments is that the pace of change is accelerating, as this TED talk from Prof Joseph DeSimone highlights. He describes how 3D processes are now speeding up quite dramatically – with targets of being 25x – 100x faster that currently.
His talk also highlights how 3D processes are close to being able to use polyesters, polyurethanes and other common materials. This confirms yet again that companies who focus on building new business models to exploit these new technologies will likely be big winners in the New Normal world.
Where would the world’s auto industry, and its suppliers, have been without China in recent years? And how will they manage now China’s demand for new cars is slowing fast? These are the question troubling companies and investors as Q3 sales are analysed.
The chart above shows the recent history of sales in the Top 7 markets (responsible for ~80% of the global today) between January – September:
- Without China, sales in the other 6 countries would be up just 3.5% versus 2007, and flat versus last year
- US sales are up 5% versus 2007, but EU sales are down 6% and Japan sales down 4%
- China’s commodity boom boosted Brazil and Russia’s demand – now, sales are down 23% and 33% versus 2014
- India is the great exception – its sales have doubled since 2007, and are up 7% this year – but its volume is only one-seventh of China’s
The critical issue is that China’s sales are now slowing fast as the second chart shows:
- Its volume nearly trebled between 2008 – 2014, from 5m to 14m (January – September)
- But it has risen just 5% so far in 2015, and sales were actually lower in 3 of the last 4 months
- Inventories also remain at very high levels at 1.5 months of sales
Even more important is the shift underway from new to used car sales. As I noted in July, China’s new and used car markets were very small before stimulus arrived in 2009. Its arrival therefore caused new car sales to rocket.
6 years later, of course, the position has changed 180 degrees. There are more and more used cars available due to the number of cars sold during stimulus. And they last much longer, as they have been built with Western manufacturing standards. Growth in the used car market from now is therefore more or less guaranteed:
- Currently, the used car market is just half the size of the new car market
- In most other countries, at least 3 used cars are sold each year for every new car sold
- Now the bottleneck of poor availability has been removed, China’s market will follow normal trends
China’s dealer association also sees major growth taking place in the used car market. It now expects 10m to be sold this year, in line with my July forecast:
- These sales will inevitably cannibalise new car sales, as buyers buy reliable and cheaper used cars
- So China will have vast over-capacity as it plans to manufacture 30 million cars by 2020
- In turn, this will lead to a dramatic rise in exports, which the government expects to reach 3m in 2020
Companies never shut down new capacity, as we are seeing with Ford in India. They over-expanded local production expecting India’s domestic demand would soar, and are now planning instead to export half their capacity.
Nobody else can replace China’s lost demand growth. So its surplus capacity will end up fighting for market share in an already over-supplied global market. Car companies and their suppliers need to prepare for savage hits to prices and margins to take place over the next few years.
‘Adapt or die’ seems to be the looming issue. Companies need to move quickly into the used car market, and develop a more services-led business model that does not just rely on selling product.
One opportunity would be to follow the aircraft industry example, and start to supply garages with 3D printing facilities – and the necessary plastics to print spare parts. Boeing is already doing this for aircraft, with regulator approval – and the model should be equally successful for cars.