Polymer markets face two major challenges in coming months. The most immediate is the arrival of the major US shale gas-based ethylene and polyethylene expansions. The longer-term, but equally critical challenge, comes from growing public concern over plastic waste, particularly in the ocean.
The EU has set out its vision for a new plastics economy, where:
“All plastic packaging is reusable or recyclable in a cost-effective manner by 2030”.
Similarly, China has launched a ‘War on Pollution’, which has already led to all imports of plastic waste being banned.
Together, these developments mean there is unlikely to be a “business as usual” option for producers or consumers. A paradigm shift is under way which will change business models.
Some companies will focus on being low-cost suppliers, integrated back to the well-head or refinery. Others will become more service-led, with their revenue and profits based on exploiting the value provided by the polymer (virgin or recycled), rather than just the value of the virgin polymer itself.
The next 18 months are therefore likely to see major change, catalysed by the arrival of the new US production, as I discuss in a new analysis for ICIS Chemical Business.
The second chart indicates the potential impact of these new capacities by comparison with actual production since 2000, with 2019 volume forecast on basis of the planned capacity increases. But can this new PE volume really be sold? It certainly won’t all find a home in the US, as ExxonMobil Chemicals’ then President, Stephen Pryor, told ICIS in January 2014:
“The domestic market is what it is and therefore, part of these products, I would argue, most of these products, will have to be exported”.
And unfortunately for producers, President Trump’s new trade policies are unlikely to help them in the main potential growth market, China. As John Richardson and I noted a year ago, China’s $6tn Belt and Road Initiative:
“Creates the potential for China to lead a new free trade area including countries in Asia, Middle East, Africa and potentially Europe – just as the US appears to be withdrawing from its historical role of free trade leadership”.
The task is also made more difficult by the inventory-build that took place from June onwards as Brent oil prices rose 60% to peak at $71/bbl. As usual, buyers responded by building inventory ahead of price increases for their own raw materials. Now they are starting to destock again, slowing absolute levels of demand growth all around the world, just at the moment when the new capacity comes online.
SUSTAINABILITY CONCERNS ARE DRIVING MOVES TOWARDS A CIRCULAR ECONOMY
At the same time, the impact of the sustainability agenda and the drive towards the circular economy is becoming ever-stronger. The initial catalyst for this demand was the World Economic Forum’s 2016 report on ‘The New Plastics Economy’, which warned that on current trends, the oceans would contain more plastics than fish (by weight) by 2050 – a clearly unacceptable outcome.
Last year’s BBC documentary Blue Planet 2, narrated by the legendary Sir David Attenborough, then catalysed public concern over the impact of single use plastic in packaging and other applications. Even Queen Elizabeth has since announced that she is banning the use of plastic straws and bottles across the royal estates, as part of a move to cut back on the use of plastics “at all levels”.
Single use plastic applications in packaging are likely to be an early target for the move to recycling and the circular economy. This will have a major impact on demand, given that they currently account for more than half of PE demand:
- Two-thirds of all low density and linear low density PE is used in flexible packaging – a total of 33 million tonnes worldwide
- Nearly a quarter of high density PE is used in packaging film and sheets, and a fifth is used in injection moulding applications such as cups and crates – a total of 18 million tonnes worldwide
Virtually all of this production is potentially recyclable. Producers and consumers who want to embrace a more service-based business model therefore have a great opportunity to take a lead in creating the necessary infrastructure, in conjunction with regulators and the brand owners who actually sell the product to the end-consumer.
Please click here to read the full analysis in ICIS Chemical Business.
The post Goodbye to “business as usual” model for plastics appeared first on Chemicals & The Economy.
300,000 homes and half a million cars have been destroyed by Hurricane Harvey. And in terms of business, it is often forgotten that Houston is home to more Fortune 500 companies than any other metro area than New York. The damage will take years to repair, as families have to regroup and re-establish their lives – as I describe in my new feature article for ICIS Chemical Business, and in the above video interview with ICB Deputy Editor, Will Beacham.
The hurricanes are also likely to have a longer-term impact on the chemicals industry. Regulatory concerns may well be increased, given the prominent reporting of the potential for toxic run-off from the two dozen Superfund sites in the area. There will also be increased pressure on the industry to rethink its basic business model and increase the priority given to sustainability.
Even before the hurricanes, consumer concern was mounting over the impact of plastic waste on the oceans and the environment. Now, the devastation they have caused will likely turbo-charge the move towards renewables and the circular economy. Fear is a strong motivator, and millions will take another look at climate change.
This development will, of course, create opportunities as well as challenges for farsighted companies. It is never easy to move away from a “business as usual” mind-set. But the increased need to adopt key elements of the circular economy agenda creates an opportunity to develop major new sources of revenue and profit for the future.
In a decade’s time, therefore, we will not simply remember today’s devastation. We will likely also recognise that it marked the moment when sustainability stopped being simply an item in the Annual Report, and instead opened the door to a new era for the industry and those who work and invest in it.
Please click here to download the feature article for ICIS Chemical Business, and click here to view the video interview.
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‘
We are living in an ever more uncertain world, where “business as usual” is becoming the least likely option for the future. Companies and investors need to adapt quickly to this new normal environment, if they want to maintain revenue and profit growth. One example comes from the American company 3M, which has become legendary for its ability to identify new trends. Their latest insight continues this tradition, as CEO Inge Thulin has explained:
“Our strategy has changed. If you go back several years, there was a strategy of producing at huge facilities at certain places around the world, and shipping it to other countries. But now we have a strategy of localisation and regionalisation.”
As Thulin suggests, there is plenty of evidence that global supply chains have reached their sell-by date. Political pressures are just one example of the challenges they now face, with America’s President Trump leading the way in starting to redraw the global trade map:
He has already withdrawn from the Trans-Pacific Partnership, aimed at linking the US and 11 Pacific nations
He is also intending to renegotiate the North American Free Trade Agreement with Mexico and Canada
This month, he announced his intention to withdraw from COP-21, the Paris Climate Change Agreement
Similar disruption to previous trade patterns is also underway in Europe, where the UK’s Brexit vote to leave the European Union (EU) means that at least 759 treaties will have to be renegotiated – covering not only trade, but also key areas for business such as air traffic rights and financial services. This process will not be easy in the UK’s febrile political atmosphere, given the Conservative Party’s failure to win an outright majority in this month’s election.
The move away from globalisation towards more local supply chains also highlights the growing importance of sustainability as a key driver for the future. Globalisation was a critically important dynamic during the Baby Boomer–led economic SuperCycle, when demand was rising on a constant basis. But this demographic dividend is now being replaced by a demographic and demand deficit.
Today’s globally ageing population means that economic growth is set to decline in many countries:
Older people already own most of what they need, and their incomes decline as they move into retirement
The younger generation are also owning less “stuff”, as streaming services such as Netflix and Spotify confirm
Digitalisation is playing a key role in enabling this aspect of the paradigm shift, and it seems likely that major markets such as autos will now be prime candidate for disruption. We cannot yet know whether car-sharing, or autonomous vehicles, or another yet-to-be-invented business model will eventually dominate the mobility market of the future. But we can be reasonably sure that major disruption lies ahead.
I discuss these issues in more detail in the above video interview with Will Beacham, deputy editor of ICIS Chemical Business, and in a new article for the magazine. Please click here to download a free copy.
The financial crisis began a decade ago, yet production of the key “building block products” for the European petrochemical industry has still not recovered to its pre-Crisis peak, as the chart shows (based on new APPE data):
Combined production of ethylene, propylene and butadiene (olefins) peaked at 39.7 million tonnes in 2007
A decade later, 2016 olefin volume was 4% lower at 38.1MT, and lower than in the 2004 – 2007 subprime period
Olefins are used in a very wide variety of applications including plastics, detergents, textiles and paints across the European economy. The data therefore highlights the slow and halting timeline of the recovery – despite all the trillions of money-printing by the European and other central banks, and all the government stimulus programmes.
Worryingly, new data from the American Chemistry Council suggests that a new downturn may be underway in W Europe, as the second chart shows:
Output had been growing steadily at around 3%/year from 2014 to early-2016
But then it began to slide. It was just 0.5% in May, and only recovered to 2% in January – normally one of the seasonally strongest months in the year
This report is confirmed by Q1 results from BASF, the world’s largest chemical company. It cautioned that volumes were only slightly up compared to Q1 2016, despite “a sharp increase in prices for raw materials” due to the rise in oil prices. This is particularly worrying as demand was artificially inflated in Q1, due to many companies building inventory as the oil price rose following November’s OPEC/non-OPEC deal.
The issue is that oil prices are a critical factor along the entire value chain. Even retailers follow the oil price very closely, and every purchasing department aims to second-guess its direction, whether upwards or downwards. They buy ahead when they believe prices are rising, and leave purchases as late as possible when prices are falling.
This behaviour has a counter-intuitive impact on the market. Instead of demand reducing when prices rise, it actually appears to be increasing as companies build inventory. Thus producers are lulled into a false sense of security as price increases appear to have no impact on demand. But when oil prices are thought to have stabilised, volume then starts to reduce as buyers reduce their inventory to more normal levels.
The impact over a full cycle is, of course, neutral. But on the way up, apparent demand can often increase by around 10% and then fall by a similar amount on the downside, accentuating the basic economic cycle.
The European economy already faces a number of major headwinds due to the rise of the Populists and the UK’s Brexit decision to leave the European Union. Now the APPE and ACC data suggests that overall demand has actually been slowing for the past 9 months. And it is likely that underlying demand today is now slowing even more as companies along the value chain destock again as the oil price weakens.
Prudent CEOs and investors will no doubt already be preparing for a potentially difficult time in H2 this year.
Last week’s summit meeting between US President Donald Trump and China’s President Xi Jinping was initially overshadowed by Friday’s news of US missile strikes on Syria. But from the details since released, it is clear the summit will likely have far-reaching impact on the global economy. As US Commerce Secretary Wilbur Ross revealed afterwards, the 2 leaders agreed to implement:
“A 100-day plan with way-stations of accomplishment. We made very clear that our primary objectives are twofold:
One is to reduce the trade deficit quite noticeably between the United States and China
The second is to increase total trade between the two countries
Ominously, he added, “Words are easy, discussions are easy, endless meetings are easy. What’s hard is tangible results, and if we don’t get some tangible results within the first 100 days, I think we’ll have to re-examine whether it’s worthwhile continuing them.”
Ross has set a tough target to be met with 100 days (18 July), especially given the range of major issues involved.
This is why ICIS and International eChem have combined their expertise to produce a new Report, The War of Words, focused on the implications of any deal – or lack of any deal – on the global petrochemicals industry. The Report highlights how a “business-as-usual scenario” is the least likely outcome for the years ahead. As my co-author, John Richardson of ICIS highlights:
“Our aim is to provide a clear understanding of the tectonic shifts now under way in the world’s two largest economies, and to offer a detailed road map outlining the potential impact of these developments on business and investments.”
The Report provides companies and investors with the insight and analysis needed to prepare for almost inevitable change to today’s business models. It highlights how today’s globalised world – whereby raw materials are routinely shipped half-way around the world, and then returned as finished product – is most unlikely to survive for much longer.
The “War of Words” Report is the first in a quarterly series of “Uncertainty Studies“. It provides a clear understanding of the tectonic shifts now under way in the world’s two largest economies, and a detailed road map highlighting the likely impact of these developments on business and investments. It is essential support for decision-makers.
Please click here for subscription details, or contact me directly at firstname.lastname@example.org