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.
The post Rising interest rates, volatile exchange rates, high oil prices and plastic waste challenge aromatics industry appeared first on Chemicals & The Economy.
US ethylene spot prices are tumbling as the major new shale gas expansions come on line, as the chart based on ICIS pricing data confirms:
- They began the year at $617/t, but have since more than halved to $270/t on Friday
- They are only around 10% higher than their all-time low of $240/t in September 1998
- WTI crude oil was then $15/bbl and ethane was $0.15c/gal
- On Friday, WTI closed at $70.5/bbl and ethane was $0.25c/gal
The collapse in margin has been sudden, but is hardly unexpected. It is, of course, true that downstream polyethylene plants associated with the crackers were delayed by the hurricanes. So ethylene prices may recover a little once they come online. But unfortunately, that is likely to simply transfer the problem downstream to the polymer markets.
The issue is shown in the second chart, based on Trade Data Monitor data:
- It shows annual US net exports of polyethylene since 2006
- They peaked in 2009 at 2.6 million tonnes as China’s stimulus programme began
- China’s import demand doubled that year to 1 million tonnes, but then fell back again
- Net exports have actually fallen since 2016 to 1.9 million tonnes last year
The problem, of course, was that companies and investors were fooled by the central bank stimulus programmes. They told everyone that demographics didn’t matter, and that they could always create demand via a mix of money-printing and tax cuts. But this was all wishful thinking, as we described here in the major 2016 Study, ‘Demand – the New Direction for Profit‘, and in articles dating back to March 2014.
Unfortunately, the problems have multiplied since then. President Trump’s seeming desire to launch a trade war with China has led to the threat of retaliation via a 25% tariff on US PE imports. And growing global concern over the damage caused by waste plastics means that recycled plastic is likely to become the growth feedstock for the future.
In addition, of course, today’s high oil price is almost certainly now causing demand destruction down the value chains – just as it has always done before at current price levels. People only have so much money to spend. If gasoline and heating costs rise, they have less to spend on the more discretionary items that drive polymer demand.
COMPANIES HAVE TO REPOSITION FAST TO BECOME WINNERS IN THIS NEW LANDSCAPE As I suggested with the above slide at last month’s ICIS World Polymers Conference, today’s growing over-capacity and political uncertainty will create Winners and Losers:
- Ethylene consumers are already gaining from today’s lower prices
- Middle East producers will gain at the US’s expense due to their close links with China
- Chinese producers will also do well due to the Belt & Road Initiative (BRI)
As John Richardson has discussed, China is in the middle of major new investment which will likely make it a net exporter of many polymers within a few years. And it has a ready market for these exports via the BRI, which has the potential to become the largest free trade area in the world. As a senior Chinese official confirmed to me recently:
“China’s aim in the C2/C3 value chains is to run a balanced to long position. And where China has a long position, the aim will be to export from the West along the Belt & Road links to converters / intermediate processors.”
The Losers will likely be the non-integrated producers who cannot roll-through margins from the well-head or refinery. They need to quickly find a new basis for competition.
Luckily for them, one does exist – namely the opportunity to develop a more service-led business model and work with the brand owners by switching to use recycled plastics as a feedstock. As I noted in March:
“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.”
Time, however, is not on their side. As US ethylene prices confirm, the market is already reacting to the reality of over-capacity. H2 will likely be difficult under almost any circumstances.
The industry made excellent profits in recent years. It is now time for forward thinking producers – integrated and non-integrated – to reinvest these, and quickly reinvent the business to build new revenue and profit streams for the future.
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‘What is this block of waste plastic doing on an Arctic ice-floe’, thousand of miles from where it was manufactured? Even more worrying is the question, ‘what will happen to it next?’ As David Attenborough’s ‘Blue Planet II‘ programmes have shown, plastic can break down into micro-particles after it has been used. And these micro-particles can then enter the food chain and the water supply:
- Around 150 million tonnes of plastic “disappear” from the world’s waste stream each year according to the BBC
- The United Nations estimates each square mile of sea contains 46000 pieces of waste plastic
- In turn, this plastic breaks up into micro-plastics, which can be eaten by fish and birds, and absorbed by plankton
- And then, as well as harming wildlife, it may well enter the food chain
- Micro-plastics also enter the water supply, and have even been found in drinking water at Trump Tower in the US
Now governments are starting to take action, with last week’s UN meeting of environment ministers formally agreeing that “the flow of plastics into the ocean must be stopped”. As the official Conference statement noted:
“We have been so bad at looking after our planet that we have very little room to make more mistakes…. we are sending a powerful message that we will listen to the science, change the way we consume and produce, and tackle pollution in all its forms across the globe.”
As I noted back in July at the launch of a major Study on waste plastic:
“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.””
We also know how this story will end, because we have seen it played out many times over the past 75 years.
As the photo on the left shows from 1953, most major Western cities used to be covered in smog during the winter, with people routinely wearing masks to try and protect themselves. The same is still true today in China and many cities in the Emerging Markets, as the photo on the right confirms.
- The smog problem was caused by coal, and governments were forced by popular pressure to greatly reduce its use in the West. Too many people were dying, or developing major lung and other diseases
- Then there were similar environmental problems with lead in gasoline, and with pollution from cigarette smoke. Again, governments moved to ban the use of lead, and to ban or restrict smoking in public places
The simple fact is that as societies become richer, people become more demanding about the quality of their lives. It is no longer enough to tell them that they are lucky to be alive, and to have some food to eat and water to drink. We can see the same development in China today, where President Xi knows that he has to tackle pollution, if the Communist Party wants to stay in power. As I noted last week:
“Joint inspection teams from the Ministry of Environmental Protection, the party’s anti-graft watchdog and its personnel arm have already punished 18,000 polluting companies with fines of $132m, and disciplined 12,000 officials.”
October’s 5-yearly National People’s Congress stepped up the enforcement measures:
“For those areas that have suffered ecological damage, their leaders and cadres will be held responsible for life,” said Yang Weimin, the deputy director of the Communist Party’s Office of the Central Leading Group on Financial and Economic Affairs. “Our people will be able to see stars at night and hear birds chirp.”
Smart companies and investors in the plastics industry already know “business as usual” strategies are no longer viable. Instead, they are starting to map out the enormous opportunities that these changes will create.
The issue is simply that plastic waste is no longer just seen as being unsightly. It is now recognised as a major environmental hazard. As the 3rd chart shows, 480bn plastic bottles were sold in 2016 around the world, but only 7% were recycled. This waste is becoming unacceptable to public opinion. As a result, the UK government is now considering a tax or ban on all single use items.
Equally important is that the momentum for change has been building for a decade, as one can see from a look back over some of my posts on plastic bags:
Globalisation was the great trend of the past 30 years, and it changed the world very profoundly. Today, the focus is on sustainability and the development of the circular economy.
It is an exciting time for people who want to solve the problem of plastics pollution by thinking “out of the box”, and developing the more service-driven businesses of the future.
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Canada’s plastics industry has published important new research about the potential value of waste plastic.
At the moment, any plastic not recycled goes to landfill – which is both costly and negative for the environment. Now their new research shows that Canada’s waste plastics could instead:
• Produce 9mbd of oil equivalent hydrocarbons (worth $792m today) via the use of currently available pyrolysis technologies. This is enough to run 600 cars each year
• Alternatively, it could be separated from other wastes and burnt as fuel in power stations. This would supply electricity to 500k households each year
The research is a good example of the benefits of ‘doing more with less’, as one of the study’s authors, Prof Murray E Haight notes:
“Plastics, being hydrocarbons, have energy values substantially higher than coal and almost as high as natural gas and oil”
Anyone looking for a new business opportunity in Canada, or elsewhere, may have just found what they need.