What happens to your business, or your investments, if demand fails to return to the supply-driven Comfortable Middle Scenario forecast by consensus thinking? This is the question raised in our new Study, Demand – the New Driver for Profit (jointly produced by International eChem and ICIS). We suggest access to low cost feedstocks on their own is no longer enough to drive sales and profit growth.
Instead, we are going back to the world that existed before the BabyBoomer-led SuperCycle. 2 demand-led Scenarios challenge the supply-driven model:
- $25/bbl oil = Collapsing demand. Emerging markets submerge, and developed markets slow dramatically as stimulus-created debt has to be repaid
- $50/bbl oil = Comfortable middle. Stimulus policies prove to have worked, demand recovers, project cancellations and revived growth prospects create a balanced market
- $100/bbl oil = Continuing tension. Further central bank stimulus takes place as economic recovery stalls, and geopolitical risks rise, along with the potential for supply disruptions
These 2 Scenarios create major risk for your business. In polyethylene, for example, the Collapsing Demand scenario reduces demand by nearly 10 million tonnes by 2030, compared to the Comfortable Middle scenario, and by 14MT in the Continuing Tension scenario. Similar downgrades occur in other value chains – PP volumes reduce by 7MT and 11MT respectively; PTA volumes reduce by 10MT and 16MT.
A PARADIGM SHIFT IS UNDERWAY
Our core argument in the Study is that a paradigm shift taking place, where the markets are moving from being supply-driven to demand-led. Companies cannot any longer simply invest in new capacity on the assumption that demand will soon catch up. Clearly we cannot prove at this stage that our analysis is correct:
- Consensus thinking disagreed with our view from August 2014 that crude would return to $30/bbl – but it did
- It also disagreed with our view from 2013 that China would see a major slowdown due to President Xi Jinping’s New Normal policies – but it has
- Now, consensus thinking argues that everything will still be alright – oil will stabilise at $50/bbl, and China’s growth will just be a bit slower
What would happen if we were right again, this time with our paradigm shift argument?
We are delighted with the support that the Study has already received, and hope you will consider purchasing it. It focuses on the new opportunities for growth now opening up in critical areas for the future, such as in averting likely water and food crises. The polymer industry could generate major revenue and profit growth in these areas, if companies adopt new, demand-led, business models.
WEEKLY MARKET ROUND-UP
My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:
Brent crude oil, down 65%
Naphtha Europe, down 61%. “Petrochemical demand steady, cracker margins lower”
Benzene Europe, down 59%. “Oil and energy dynamics impact supply and pricing fundamentals on benzene.”
PTA China, down 44%. “Producers who had enquiries from both domestic and regional buyers.”
HDPE US export, down 36%. “Expectations of tighter supply going into the heavy turnaround season in the second quarter also prompted the hike in exports”
¥:$, down 11%
S&P 500 stock market index, up 2%