Paradigm shifts start slowly at first, and it is easy to miss them. But then one day, they suddenly become obvious, and it becomes a scramble to catch up. That’s what happened on the waste plastic issue last week, when China decided to take action. As official news agency, Xinhua, reported:
- “The policy measures proposed in this opinion basically cover the entire process and various links of plastic product production, circulation, use, recycling, and disposal, reflecting a system of full life cycle management
- “Policy adjustments target both traditional areas and emerging areas such as e-commerce, express delivery, and takeaway
- “(They focus on) plastic products that are currently in large use, relatively prominent, and strongly reflected in society, and take the lead in prohibiting or restricting production, sales, and use in some areas and regions
- “It is important to point out that implementation will inevitably affect the production of some industries and the convenience of residents’ lives”
My former company, ICI, invented polyethylene (PE) back in 1933. PE is now the largest single polymer with volume close to 100m tonnes. More than half of this goes into single-use applications. Yet in a major failure of the imagination, very few of us in the industry ever thought until recently about the waste this caused. As the BBC reported after China’s decision:
“China has for years been struggling to deal with the rubbish its 1.4 billion citizens generate. The country’s largest rubbish dump – the size of around 100 football fields – is already full, 25 years ahead of schedule.”
And we are all still ignoring the economic waste involved. Crude oil costs $60/bbl, and it costs lots more dollars to refine it/ship it/process it. And then we simply throw away the single- use plastic bags and packaging that we bring home from the shop or unwrap from the internet delivery.
Plus, of course, there is the marine waste problem, so vividly brought to life in the photo from Sir David Attenborough’s ‘Blue Planet 2 television series.
THE PLASTICS INDUSTRY MUST NOW TAKE UP THE CHALLENGE
China uses around 1/3rd of all the PE produced today. So its decisions are a game-changer for the entire global industry.
Nobody wants to do away with plastics themselves. They are unique materials – lightweight, resilient, usually non-reactive and waterproof. They have much lower carbon intensity than competing materials such as metals, and they play an incredibly valuable role in our daily lives. Food packaging, for example, is proven to reduce food losses, wastage and health risks from contamination.
But the business model for producing plastics is broken, and needs to be challenged:
- Does it really make sense to keep producing more oil and gas, with all the CO2 emissions this involves, and then throw away the end product?
- If not, why aren’t we investing the necessary dollars to set up Resource Centres (as pictured) around our cities and towns, to recycle this waste plastic back into usable products?
- And at the same time, why aren’t we developing robust contingency plans for optimising the legacy issues from the old business model
As I noted here a year ago, There’s a great future for the European plastics industry in recycled plastic, this opportunity is not just about China. Last month, new EU Commission President Ursula von der Leyen launched the EU’s Green Deal, noting:
“I am convinced that the old growth-model that is based on fossil-fuels and pollution is out of date, and it is out of touch with our planet. The European Green Deal is our new growth strategy – it is a strategy for growth that gives more back than it takes away. And we want to really make things different. We want to be the frontrunners in climate friendly industries, in clean technologies, in green financing.”
The key issue is summed up by new BP CEO, Bernard Looney. He warned at the weekend that the oil industry has to start:
“Going beyond small, ineffectual bets on low carbon investments.”
The plastics industry similarly has to step up from today’s relatively “small, ineffectual bets”. Otherwise it will run out of time to meet the 2025 recycling deadlines being set by an increasing numbers of brand owners and governments.
All paradigm shifts create Winners and Losers. Losers will focus on recession risks and the potential impact of the corona virus. But Winners will know they need to do more than focus on these risks, if they want to generate long-term revenue and profit growth.
They will be the ones who start investing realistic sums of money, today, to turn the concept of the circular economy into reality.
Planning for future demand in petrochemicals and polymers used to be relatively easy during the BabyBoomer SuperCycle. The team would consult the latest IMF forecast for global and regional growth, and then debate the right ratio to use to calculate product demand.
For polyethylene (PE), the ratio was generally just above GDP at around 1.1x, on the basis that relatively more plastic was likely to be needed as the economy grew.
So when the US shale gas opportunity came along, producers were very confident that it would provide them with major cost advantage over most other Regions. And they were under major pressure to use the ethane that might be produced from the new natural gas production, as it is explosive when mixed with air in concentrations between 3% – 12.4%.
Essentially this meant the ethane was a distressed product, and had to be used in ethylene production, as there are no other major applications.
Since those early days, the US polyethylene expansions have been “an accident waiting to happen”, as I first argued when the plans were still being finalised in March 2014:
“US ethylene producers need to work out where all the new ethylene production is going to be sold before embarking on the planned frenzy of cracker construction”.
Unfortunately, the pressures from Wall Street to exploit the apparent opportunity were too great. One by one, companies gave in to peer pressure and announced expansion plans, as shown in the ICIS graphic – and were rewarded by sharp increases in their share price. As one CEO said to me at the time:
“You may be right, but every time I mention shale on an earnings call, the share price goes up $5.”
Our major Study, ‘Demand – the New Direction for Profit’, jointly produced with ICIS, took the analysis a stage further in March 2016, warning that:
“The supply-led business model – build capacity and wait for demand to catch up – will no longer work in today’s low- or-no-growth marketplace.”
And it really did seem obvious then that the key assumptions behind the expansions were wrong:
- Oil prices were no longer above $100/bbl and so US gas-based producers didn’t have a major cost advantage
- Global growth hadn’t returned to SuperCycle levels; China was starting to move towards self-sufficiency and would not longer need need vast import volumes
- Globalisation was being replaced by protectionism, and plants could no longer be sited half-way across the world from their markets
But companies went ahead anyway, due to the pressure from upstream gas producers to dispose of the product, and the enthusiastic support provided by investors.
The terrible hurricanes in 2017 postponed the moment of reckoning, as plants were delayed for months due to the damage. But then, construction picked up again and most of the new capacity is now in place – and linked to new polyethylene capacity.
Polyethylene is the largest volume polymer, and the expansions are adding 40% (6.5 million tonnes) to US capacity between 2017 – 2019. Other Regions are of course also expanding – particularly China, as it seeks to become more self-sufficient as a result of President Trump’s trade war. The ICIS price charts therefore show a depressing picture:
- Asian HDPE CFR prices have fallen from $1350/t to $900/t over the past year
- US HDPE prices have fallen from 64c/lb to 53c/lb over the same period
- And European HDPE prices have started to tumble, down from $1150/t in June to $950/t today
The reason is not hard to find, as the charts from Trade Data Monitor confirm. Total H1 ethylene exports in the shape of PE, PVC, styrene, EDC, ethylene and other derivatives almost doubled to 4 million tonnes. And suddenly, Europe has become the main importer, with volume up from 420kt in 2018 to 1.05MT. Most of the volume is in PE, which doubled to 3MT on a global basis.
And there is still more volume to come, with ExxonMobil now starting its new 650kt plant and LyondellBasell starting its new 500kt plant in Q4. That’s more than 1MT of new PE output which will have to be exported into an already over-supplied market.
In addition, it is clear that public opinion and the new EU Circular Economy directive are already starting to have a major impact on demand for single use plastics. Unfortunately, over 50% of PE output goes into this application, along with nearly a third of polypropylene.
Volume is already disappearing as consumers make the shift to more sustainable forms of packaging. It is clear that recycled material now has the potential to replace virgin product as the feedstock of choice in the future.
In turn, these paradigm shifts are creating Winners and Losers. Next year is likely to prove very difficult for US PE exporters, as they face up to the fact that export demand has not grown as expected, and they do not have a major cost advantage.
As the picture of Fido the dog illustrates, polymer producers are the ‘flea on the tail of the oil/gas markets’:
- Producers integrated into US natural gas production, or EU refineries, will be able to ‘roll through’ margins to the wellhead and refinery as prices go lower
- But non-integrated European players have much less protection. Their margins will get squeezed, at the same time as demand patterns shift away from the use of virgin product
Now is therefore the time for these producers to start accelerating moves to using recycled feedstock for their production. In another 12-18 months, if prices and margins keep on falling at current rates, it may well be too late.
In my interview for Real Vision earlier this month, (where the world’s most successful investors share their thoughts on the markets and the biggest investment themes), I look at what data from the global chemical industry is telling us about the outlook for the global economy and suggest it could be set for a downturn.
“We look at the world and the world economy through the lens of the chemical industry. Why do we do that? Because the chemical industry is the third largest industry in the world after energy and agriculture. It gets into every corner of the world. Everything in the room which you’ll be watching this interview is going to have chemicals in it. And the great thing is, we have very good, almost real time data on what’s happening.
“Our friends at the American Chemistry Council have data going back on production and capacity utilization since 1987. So 30 years of data, and we get that within 6 to 8 weeks of the end of the month. So whereas, if you look at IMF data, you’re just looking at history, we’re looking at this is what’s actually going on as of today.
“We look, obviously, upstream, as we would call it, at the oil and feedstocks markets, so we understand what’s happening in that area. But we also– because the chemical industry is in the middle of the value chain, you have to be like Janus. You have to look up and down at the same time, otherwise one of these big boys catches you out.
“And so we look downstream. And we particularly look at autos, at housing, and electronics, because those are the big three applications. And of course, they’re pretty big for investors as well. So we see the relative balance between what’s happening upstream, what’s happening downstream, where is demand going, and then we see what’s happening in the middle of that chain, because that’s where we’re getting our data from.
“As the chart shows, our data matches pretty well to IMF data. It shows changes in capacity utilization, which is our core measurement. If if you go back and plot that against history from the IMF, there is very, very good correlation. So what we’re seeing at the moment– and really, we’ve been seeing this since we did the last interview in November— is a pretty continuous downturn.
“One would have hoped, when we talked in November, we were talking about the idea that things have definitely cooled off. Some of that was partly due to the oil price coming down. Some of that was due to end of year destocking. Some of that was due to worries about trade policy. Lots of different things, but you would normally expect the first quarter to be fairly strong.
“The reason for this is that the first quarter– this year, particularly– was completely free of holidays. Easter was late, so there was nothing to interrupt you there. There was the usual Lunar New Year in China, but that always happens, so there’s nothing unusual about that.
And normally what happens is, that in the beginning of the new year, people restock. They’ve got their stock down in December for year end purposes, year end tax purposes, now they restock again. And of course, they build stock because the construction season is coming along in the spring and people tend to buy more cars in that period, and electronics, and so on.
“So everything in the first quarter was very positive. And one wouldn’t normally be surprised to start seeing stock outs in the industry, particularly after a quiet period in the fourth quarter. And unfortunately, we haven’t seen any of that. We’ve seen– and this is worth thinking about for a moment– we’ve seen a 25% rise in the oil price because of the OPEC Russia deal, but until very recently we haven’t seen the normal stock build that goes along with that.”
As we note in this month’s pH Report, however, this picture is now finally changing as concern mounts over oil market developments – where unplanned outages in Venezuela and elsewhere are adding to the existing cutbacks by the OPEC+ countries. Apparent demand is therefore now increasing as buyers build precautionary inventory against the risk of supply disruption and the accompanying threat of higher prices.
In turn, this is helping to support a return of the divergence between developments in the real economy and financial markets, as the rise in apparent demand can easily be mistaken for real demand. The divergence is also being supported by commentary from western central banks. This month’s IMF meeting finally confirmed the slowdown that has been flagged by the chemical industry since October, but also claimed that easier central bank policies were already removing the threat of a recession.
We naturally want to hope that the IMF is right. But history instead suggests that periods of inventory-build are quickly reversed once oil market concerns abate.
Please click here if you would like to see the full interview.
I was interviewed on Friday about the likely impact of President Trump’s trade wars on the global chemical industry by Will Beacham, deputy editor of ICIS Chemical Business. His interview is below.
The introduction on Friday of trade tariffs by China and the US is the first step in a trade war that could turn into a global polyethylene (PE) price war as the wave of new US production is sent to new markets, likely Europe.
Paul Hodges, chairman at London-based International eChem, said that around 6m tonnes/year of new US PE capacity has to find a home and, with China largely out of reach, the obvious destination would be Europe, where the surplus production will put downward pressure on prices there and around the world.
“The main hit from a trade war is going to be the US PE expansions – clearly it is being targeted so the opportunity to export to China is sharply reduced,” said Hodges. “But this won’t just be a US problem because they will still want to move their product – it has got to come to Europe as there is no surplus demand in Asia, the Middle East or Latin America.”
He added that this first wave of tariffs were a wake-up call to those who thought globalisation was going to continue as it did in the past. “We have reached a tipping point where we have to expect that trade wars are more rather than less likely”, he said.
“If you assume the US production will come onstream, then where will those 6m tonnes of product go? It can’t go to China, it can’t go to Latin America as that is too small a market, the Middle East is in surplus, Africa is too small – so Europe is the only place,” said Hodges.
US PE producers that are integrated up to the wellhead need to extract ethane in order to monetise their gas production:
- These producers will continue to export happily at whatever price because essentially the ethane is a distressed product and has to be sold
- However, non-integrated players’ margins could come under pressure.
In Europe, there is a parallel to the US, said Hodges, as regional production is generally tied into refineries.
Naphtha is a relatively small part of the product flow from a refinery, so prices can go down quite a long way before you start to think about cutting back on refinery operating rates.
“The risk for the second half of this year and 2019 is that you have two heavyweights in the boxing ring – one integrated back to the gas wellhead in the US and the other refinery-integrated in Europe – and people get squeezed in between,” he added.
EUROPE VALUE CHAINS
Hodges pointed out that if cracker operating rates decline in Europe it will hit all the other product streams such as propylene, butadiene (BD) and pygas. There are tremendous knock-on risks across all the value chains, not just ethylene.
“This won’t happen this year, but if it continues and gets worse over the next 12-18 months, do you start to look at cracker shutdowns in Europe? What will the implications be for people relying on those crackers for feedstocks?” said Hodges. “It’s a hornet’s nest of unintended consequences: people don’t send a ship load of PE to Europe expecting it to shut down a PP plant.”
Hodges urged the industry to make contingency plans now to manage these future risks. European producers will have to think about how they protect feedstock supplies for value chains on a Europe-wide and country basis so that pipelines are not shut down.
“You’d have to focus on a number of core hubs and reinvest in those to give the infrastructure you need for the future. You need to do it now – while there is time to take action,” he said. “You might end up spending money you don’t need to spend, but that’s much better than waking up and realising you don’t have a feedstock supply,” he said.
According to ICIS data, the US is forecast to export a total of 1.37m tonnes of low density polyethylene (LDPE), high density polyethylene (HDPE) and low linear density polyethylene (LLDPE) to China (see LLDPE map above). Although HDPE is not included in the current tariffs, it could be added later, according to Hodges.
He added that a price war in PE would impact other polymers because of inter-polymer competition. It may only be 5-10% that is substituted, but to lose that amount of volume at the margin would be quite significant.
He described the trade war as a paradigm shift for the whole global industry as the era of globalisation switches to regional and nationalism. “I’m worried that a lot of people in this industry have grown up with globalisation and they assume that is how it is,” he said.
Trade policy and geopolitics are like a chess game with lots of moving pieces and the approach is that you give up something in order to gain more, he added. This has been a very successful approach by the US since the Second World War, when it implemented the Marshall Plan or ‘European Recovery Plan’. Almost the equivalent of $110bn in today’s money was invested to rebuild the continent.
“This boosted the European economy in order to make it a bigger import market for US exports. Trade expands opportunities and the overall economy. There may be some short-term successes going into a trade war but ultimately the US economy will lose,” Hodges conclude.
The post US-China tariffs could lead to global Polyethylene price war 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‘
Chemical markets are continuing to signal that the world faces major economic challenges in 2015. The chart above highlights developments since August, when I first forecast that oil prices would see major falls, and that the value of US$ would see ”a strong move upwards“:
- Benzene, always my favourite indicator for industrial output, has suffered worst, down 56% (green)
- Brent oil is down 53%, despite major buying by financial and physical players trying to ‘catch a falling knife’ (blue)
- Naphtha, the major raw material for gasoline and petrochemical production is also weak, down 50% (black)
- PTA. the raw material for polyester, confirms the weakness of China’s economy, and is down 44% (red)
- Next we see the recent rapid collapse of US export prices for polyethylene, now down 26% (orange)
- Then there is the weakness of the Japanese yen versus the US$, down 15% (brown)
- And finally, there is the US S&P 500 Index, which has managed a 2% gain over the period (purple)
It is not hard to develop a narrative to explain these extraordinary movements. Oil prices had been kept artificially high by the US Federal Reserve’s money-printing, which drove financial investors to buy oil futures as a ‘store of value’.
This effort had been supported by China’s vast stimulus, which created the illusion that the country had suddenly become middle class by Western standards overnight. But since the summer, the growing impact of President Xi’s ‘New Normal’ has exposed this myth.
Yet even today, the vast majority of commentators are still arguing that oil prices – for some yet to be discovered reason – will soon return to the $100/bbl level. This is very dangerous thinking, as it is delaying the necessary process of adapting to the real world of the New Normal.
The insights of double Nobel Prizewinner, Prof Daniel Kahneman can, however, explain what is happening:
- The first issue is the one of anchoring, where the human brain relates to a number – and then judges subsequent developments in relation to this. Kahneman has authored a fascinating YouTube video to demonstrate this process in action – it lasts just 1 minute 50 seconds, and is well worth the time spent
- The second is our natural desire to make snap judgements. Our ancestors had no time, if suddenly finding themselves alone in a cave with an angry bear, to sit and analyse the situation. Today’s Twitter phenomenon, and the widespread use of sound-bites, continues this tradition
So everything combines to create the illusion that $100/bbl is normal and natural, as it has been the price since 2011.
Yet if we move from fast and intuitive thinking (Kahneman’s “System 1″) to a slower and more analytical mode (his “System 2′), we would immediately realise as the above chart shows, that high oil prices are exceptional, not normal.
WEEKLY MARKET ROUND-UP
The weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:
Benzene Europe, down 58%. “sentiment in the European market remained sluggish amid ample availability”
Brent crude oil, down 53%
Naphtha Europe, down 50%. “market is tighter on certain grades following a pick-up in transatlantic and Asian demand, and good petrochemical utilisation in Europe”
PTA China, down 44%. ”operating rates were slowly lowered with the approach of the Lunar New Year holiday.”
¥:$, down 15%
HDPE US export, down 26%. “Domestic export prices kept falling during the week, in sync with dropping ethylene and energy market values.”
S&P 500 stock market index, up 2%