Trade wars, Dieselgate and recession risk are having a major impact on the European auto industry, as I describe in my new video interview with ICIS Chemical Business deputy editor, Will Beacham.
One key pressure point is created by the downturn in China’s auto industry. As the chart shows, it has been a fabulous growth market in recent years due to China’s stimulus policies, with sales growing nearly five-fold from 550k/month in 2008 to a peak of 2.5m/month last year. And German car exports did incredibly well as a result, due to their strong reputation amongst consumers.
But the start of the US/China trade war last year – plus the $2tn taken out of China’s speculative shadow banking sector over the past 2 years by the government’s deleveraging campaign – means sales have been in decline for almost a year. 2018 saw the first downturn in the market since 1992, and since then the pace of decline has been accelerating with May volumes down 17%.
European car sales have also been falling since September as the second chart confirms. And unfortunately, the industry is confronted by a near-perfect storm of problems, which make it likely that the current downward trend will continue and probably accelerate.
The most immediate issue is the slowdown in the EU economy, with consumers becoming nervous about making high-ticket car purchases. Added to this, of course, are concerns over Brexit – which led sales in the UK (the 2nd largest market) to hit a 6-year low in the normally buoyant sales month of March, 14.5% below the 2017 level.
And then, of course, there are concerns over China’s slowdown, particularly for Germany’s export-oriented manufacturers such as BMW, Audi, Mercedes and Porsche – plus rising concerns over the potential for a European trade war with the USA.
But the real concern arises from the continuing fall-out from Dieselgate, which led diesel’s share of the EU market to fall by 18% in 2018 versus 2017 to 5.59m. Diesel cars accounted for only 35% of EU auto sales, the lowest level since 2001. And in turn this is wrecking the industry’s plans for meeting the new EU rules on CO2 emissions, which VW estimates has already cost it around €30bn, at a time when all the carmakers are also having to invest heavily in EV technology.
As the European Environment Agency (EEA) noted last month:
“For the first year since 2009, petrol cars constituted the majority of new registrations in 2017 (53 %). New diesel cars, which were on average around 300kg heavier than new petrol cars, emitted on average 117.9g CO2/km, which is 3.7g CO2/km less than the average petrol car. The average fuel efficiency of new petrol cars has been constant in 2016 and 2017, whereas the fuel-efficiency of new diesel cars has worsened compared to 2016 (116.8 g CO2/km). If similar petrol and diesel segments are compared, new conventional petrol cars emitted 10%-40% more than new conventional diesel cars.”
Manufacturers have no easy options. They can, of course, aim to accelerate Electric Vehicle (EV) sales in order to gain “super-credits” towards the new limits. But EVs are currently less than 2% of the EU market, so the scope for a major ramp-up in volume is very limited, and their profit margins are much lower due to the battery cost. UBS therefore suggest that automakers earnings per share will be badly hit, with PSA down 25%, VW down 13%, Renault down 10%, Daimler down 9% and BMW down 7%.
The saga highlights how the diesel makers’ decision to cheat on reported emission levels in order to maximise short-term profit has led to major long-term damage for many manufacturers. FCA’s need to enter a “pooling arrangement“ with Tesla to reduce its potential fines, and to exit sales of its most heavily polluting models, highlights the scale of the problems.
In turn, as I discuss, this is all very bad news for major suppliers to the auto industry such as the petrochemical sector. Please click here if you would like to see the full interview.
Europe’s plastics industry is under major threat from the growing legislative and consumer backlash against plastic packaging.
As with the global industry, its licence to operate is increasingly challenged by images of plastic rubbish polluting the world’s oceans, alongside photos of baby fish dying because their parents mistakenly fed them plastic instead of food.
EU legislation on plastic packaging is already in place to respond to this concern and promote the arrival of the circular economy. The industry therefore now needs to urgently reinvent itself by developing solutions to tackle these problems and help reduce carbon footprint.
History, luckily, is on its side. There was a similar turning point in the 1960s, when it implemented the far-sighted decision to switch from coal to oil-based feedstocks. As a result, it transformed itself into a world-leading source of the products that have now become embedded in our daily lives. And it maintained this lead for more than fifty years, until finally China’s growth allowed Asia to overtake it.
But over the past twenty years, however, it has stagnated as China became the manufacturing capital of the world since joining the World Trade Organisation in 2001. Its newest steam cracker, a core technology for the production of chemicals and plastics, started up more than twenty years ago in 1994. And over the past decade, the North American industry has seen a $200bn renaissance due to the arrival of low-cost shale based feedstocks.
This decline matters as chemicals and plastics are central to the European economy, and a key enabler for a vast range of products from autos through to personal care. The industry directly employs 1.5 million people, and a much larger number indirectly in downstream manufacturing and service roles.
Plastics are also key to tackling a number of the challenges facing our society, as the EU has highlighted in its new Circular Economy strategy:
“Light and innovative materials in cars or planes save fuel and cut CO2 emissions. High-performance insulation materials help us save on energy bills. In packaging, plastics help ensure food safety and reduce food waste.”
But at the same time, the legislation highlights the urgent need to rethink the production, use and consumption of plastics in order to avoid the environmental damage currently being created.
The problem is that reuse and recycling of end-of-use plastics remains very low by comparison with other materials such as paper, glass or metals:
- The Commission estimates that more than 2/3rds of plastics waste currently goes into landfill or incineration
- As a result, 95% of the value of plastic packaging material, between €70bn – €105bn annually, is lost after a very short first-use cycle
- It also estimates that recycling all global plastic waste could save the equivalent of 3.5bn barrels of oil each year, and help curb CO2 emissions
The European plastics industry is therefore now at a crossroads, as continuing with a business as usual strategy makes little sense. After all, the new EU legislation requires all plastics packaging to be reusable or cost-effectively recyclable by 2030. And the Ellen MacArthur Foundation is successfully encouraging the world’s major brand owners and retailers to make similar commitments with an even tighter deadline of 2025.
This paradigm shift gives the European plastics industry the opportunity to stage its own renaissance. It urgently needs to start the technical development programmes that will allow it to adopt the circular economy agenda, and start substituting recycled feedstock for oil.
China, after all, is already moving down this track, with Hainan planning to ban the production, sale and use of the 120kt single-use plastics currently used each year in the province by 2025. And the government is starting to build dozens of local “comprehensive resource utilisation” centres to boost recycling, whilst at the same time restricting the use of single-use plastics by courier and food delivery firms.
Obviously there will be costs involved. But in principle the industry’s assets are ageing and often below world-scale. The scale of the write-offs required is therefore manageable. And by beginning the transition today via the use of chemical and mechanical recycling technologies, these costs could be amortised over a longer timeframe.
The industry has a remarkable record of generating revenue and profit growth from innovation. Reinvention to become a more service-based industry, focused initially on making a major contribution to reducing marine pollution, would enable it to regain its global leadership in an area where long-term growth is assured.
And who knows, if Hollywood were ever to issue a remake of 1967’s The Graduate, maybe Mr McGuire’s famous advice to a young Dustin Hoffman would become “There’s a great future in recycled plastics”.
Four serious challenges are on the horizon for the global petrochemical industry as I describe in my latest analysis for ICIS Chemical Business and in a podcast interview with Will Beacham of ICIS.
The first is the growing risk of recession, with key markets such as autos, electronics and housing all showing signs of major weakness. Central banks are already talking up the potential for further stimulus, less than a year after they had tried to claim victory for their post-Crisis policies.
Second is oil market volatility, where prices raced up in the first half of last year, only to then collapse from $85/bbl to $50/bbl by Christmas, before rallying again this year. The issue is that major structural change is now underway, with US and Russian production increasing at Saudi Arabia’s expense.
Third, there is the unsettling impact of geo-politics and trade wars. The US-China trade war has set alarm bells ringing around the world, whilst the Brexit arguments between the UK and European Union are another sign that the age of globalisation is behind us, with potentially major implications for today’s supply chains.
And then there is the industry’s own, very specific challenge, shown in the chart. Based on innovative trade data analysis by Trade Data Monitor, it highlights the dramatic impact of the new US shale gas-based cracker investments on global trade in petrochemicals.
The idea is to capture the full effect of the new ethylene production across the key derivatives – polyethylene, PVC, styrene, EDC, vinyl acetate, ethyl benzene, ethylene glycol – based on their ethylene content. Even with next year’s planned new US ethylene terminal, the derivatives will still be the cheapest and easiest way to export the new ethylene molecules.
The cracker start-ups were inevitably delayed by the hurricanes in 2017. But if one compares 2018 with 2016 (to avoid the distortions these caused), there was still a net increase of 1.7 million tonnes in US ethylene-equivalent trade flows.
This was more than 40% of the total production increase over the period, as reported by the American Chemistry Council. And 2019 will see further major increases in volume with 4.25 million tonnes of new ethylene capacity due to start-up, alongside full-year output from last year’s start-ups.
The problem is two-fold. As discussed here in 2014 (ICB, US boom is a dangerous game, 24-30 March), it was never likely that central bank stimulus policies could actually return demand growth to the levels seen in the Boomer-led SuperCycle from 1983-2000:
“Shale gas thus provides a high-profile example of how today’s unprecedented demographic changes are creating major changes in business models. Low-cost supply is no longer a guarantee of future profitability.”
This was not a popular message at the time, when oil was still riding high at over $100/bbl and the economic impact of globally ageing populations and collapsing fertility rates were still not widely understood. But it has borne the test of time, and sums up the challenge now facing the industry.
Please click to download the full analysis and my podcast interview with Will Beacham.
“Once upon a time, Granny and Grandad used to go to a large shop on the motorway to buy their furniture. They used to stagger around carrying Billy bookshelves and Dombas wardrobes, before treating themselves to Swedish meatballs in the canteen. And then Grandad would spend the rest of the weekend trying to assemble the furniture, whilst Granny turned up the volume on her radio to drown out his swearing.
“What, Granny, you actually bought furniture? But why did you buy when you could just rent it, and change it when you wanted something different?”
That future isn’t very far away. In fact, if you live in Switzerland, you’ll be able to rent furniture from IKEA stores this month on a trial basis. As the boss of Inter IKEA told the Financial Times last week:
“We will work together with partners so you can actually lease your furniture. When that leasing period is over, you hand it back and you might lease something else. And instead of throwing those away, we refurbish them a little and we could sell them, prolonging the lifecycle of the products. The trial is the first in a series of tests that IKEA hopes could lead to “scalable subscription services” for different types of furniture.”
Of course, IKEA aren’t the first company to be moving in the direction of subscribing rather than selling. Not many people buy CDs or videos these days, after all, but instead subscribe to streaming services that enable them to download what they want, when they want it.
But what is new, as the chart from Prof Michael Wade of IMD shows, is that it illustrates a growing move by consumer product groups and manufacturers to follow this lead. And behind the move is an early effort to put the principles of the circular economy into practice, as IKEA describe:
“You could say leasing is another way of financing a kitchen. When this circular model is up and running, we have a much bigger interest in not just selling a product but seeing what happens with it and that the consumer takes care of it. He added that Ikea now designed kitchens so that it was possible to change the cupboard doors without needing to rip out the whole set-up. “It’s interesting if you as a consumer say ‘I can change and adapt and modernise my kitchen if that’s a subscription model’”.”
It also marks a further departure from the concept of globalisation, which has dominated business for a generation. Globalisation was essential for the world of the BabyBoomers, where the world’s population went from 2.5bn in 1950 to 6.1bn by 2000. There just wasn’t enough “stuff” to go round in the rich Western countries, and so companies were forced to develop global supply chains to satisfy demand.
But today, as the chart describes, smart companies like IKEA are starting to plan for a world where services rather than products will be the main driver for revenue and profit growth. Rather than building in obsolescence, so that the consumer was forced to make repeat purchases, the new business model is based on providing a solution that can evolve with the consumer’s needs.
It will also, necessarily, operate on a local scale. It will make no sense, for example, for IKEA to be continually shipping kitchen doors across the world, because the customer doesn’t want a pink colour any more.
The same principle is being applied by the Circular Plastics Alliance in Europe, which is focused on 5 key areas to turn 10 million tonnes/year of recycled plastics into new products within the next 6 years – Collection and sorting; Product design for recycling; Recycled plastic content in products; Monitoring systems; R&D and investments, including chemical recycling.
The days of Granny and Grandad choosing to actually “own” their furniture may well be coming to an end. And for companies, the challenge of developing new business models is no longer something they can put off till the future. Those that recognise the opportunity created by the growing demand for products that are more sustainable, affordable and sustainable will be the Winners in this New Normal world.
Fears are rising about the risks of recession, as I discuss in a new one-page summary of the key issues facing the aromatics industry, ‘What does the future hold for Aromatics?‘. Please click here to download it.
These issues will also be key topics at next month’s 17th World Aromatics and Derivatives Conference, jointly organised with ICIS, along with detailed coverage of the benzene and xylene value chains.
We have the usual strong line-up of speakers, and the Conference will also provide an excellent opportunity to exchange views with business partners and colleagues. For further details and to book your place, please click here.
I hope to see you in Amsterdam next month.
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My new analysis for iCIS Chemical Business highlights the paradigm shift now underway in the plastics industry.
A paradigm shift is underway in the plastics industry as public concern mounts over the impact of plastic waste on the oceans and the environment.
For 30 years, plastics producers have primarily focused upstream on securing cost-competitive feedstock supply. Now, almost overnight, they find themselves being forced by consumers, legislators and brand owners to refocus downstream on the sustainability agenda. It is a dramatic shift, and one which is likely to create Winners and Losers over a relatively short space of time.
The pace of change is startling. In January, 11 major brands, including Coca Cola, Unilever, Wal-Mart and Pepsi (and since joined by Nestlé) announced they were committed to working towards using “100% reusable, recyclable or compostable packaging by 2025“. Then in April, a UK government-led initiative saw 42 companies, responsible for over 80% of the plastics packaging sold in UK supermarkets, promise to “transform the plastic packaging system and keep plastic in the economy and out of the ocean”.
Tesco, the UK’s largest retailer, added to the pressure by beginning the move to a “closed loop system”. Clearly seeing the issue as a source of potential competitive advantage, they announced plans to remove all “hard to recycle” plastics – such as polystyrene, PVC and water-soluble bio-plastics – by the end of next year. Then last month, the EU Commission adopted new rules that will mean a minimum of 50% of all plastic packaging waste will be recycled by 2025. In addition, it has proposed drastic action, including bans, to reduce the use of the top 10 single-use plastic items found on EU beaches by 2021.
Understandably, many companies and CEOs have failed to keep up with these developments. Others have simply ignored them on the assumption they will prove to be all talk and no action. But nobody who attended the Circular Economy Forum at the recent ICIS World Polyolefins Conference could have come away believing that “business as usual” was a viable option for the future. As Borealis, Europe’s second largest polyolefin producer, explained, their vision is instead to “establish plastic waste as just another standard feedstock as the new normal” for the industry.
As the second chart shows, major plastics including polyethylene and polypropylene are now under major threat.
More than 50% of PE demand, and nearly a third of PP demand goes into single use packaging. Following the World Economic Forum’s ‘New Plastic Economy’ report in 2016, and Sir David Attenborough’s ‘Blue Planet 2’ series for the BBC, it is clear that this application is under major threat.
PARADIGM SHIFTS CREATE WINNERS AND LOSERS
The third chart highlights how business models are already starting to change. The current model was highly successful during the BabyBoomer-led economic supercycle, when demand grew on a constant basis. Companies could choose to compete via cost leadership or value-added strategies, or via a focus on premium products or service-orientation. But now the middle ground is starting to disappear: as demand growth is slowing and profits will be squeezed as competition intensifies. We are instead going back to the polarised model that existed before the 1980s:
- Upstream-integrated companies can choose to adopt a Feedstock Focus and roll-through their margins to the well-head (in the case of ethane) or refinery (in the case of naphtha) as margins come under pressure
- Those without this ability, however, need to instead adopt a Market Focus, as intensifying competition will squeeze non-integrated companies without the safety net of an upstream margin
- Market Focused companies have the opportunity to respond to brand-owner and legislative pressure by basing their feedstock needs on recycled plastic rather than naphtha, ethane and other virgin feedstocks
- They will need to develop new metrics to measure their progress as they start to build their capability to use recycled feedstocks and create long-term relationships with brand-owners and other stakeholders
Paradigm shifts generally produce winners and losers. In this case, the winners will be those plastics producers who adapt to the new opportunity created by the need to produce recycled plastic. This will clearly require investment in recycling facilities, but the sums involved are small compared to the cost of building new olefin crackers or refinery capacity. And in many countries, producers can even expect to be paid to take the recycled plastic as a feedstock, when the alternative is the cost of sending it to landfill.
The losers, of course, will be existing feedstock suppliers:
- Many oil majors have assumed that rising demand for petrochemicals will help to compensate for demand lost to electrification in the transport sector
- OPEC’s World Oil Outlook 2040 saw petrochemicals as providing “significant growth” for the future
- The International Energy Agency will also need to revisit its assumptions about future demand growth as the impact of the new paradigm becomes more apparent.
As National Geographic has reported, the world has produced around 8.3 billion tonnes of plastic over the past 60 years, and only 9 per cent of this has been recycled. This is a shocking waste of a valuable resource. The paradigm shift now underway is well overdue and should prove very profitable for those companies prepared to seize the opportunities it creates.
Please click here if you would like to download the article.
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