More than $200 billion is expected to be invested in U.S. petrochemicals as the region becomes an energy exporter, and this unprecedented growth has created a new set of core challenges for the industry to contend with.
As the U.S. petrochemicals industry investment renaissance continues and both the supply and demand for U.S. plastic and resin products expands; the industry’s primary focus is shifting to export strategies, crude oil to chemical dynamics, and plastics recycling.
“Since 2010, we have seen over 300 planned chemical projects linked to shale gas, which some argue will generate almost 500,000 temporary and permanent jobs,” said Steve Zinger, Wood Mackenzie Chemicals Senior Vice President.
Zinger was speaking at the AFPM 2019 International Petrochemical Conference.
“In capital expenditure terms, this equates to over $200 billion – signaling a huge increase in optimism within the industry. Most of these chemical investments have utilized gas-based chemistries and feedstocks, such as methane, ethane, propane and butane,” Zinger said.
Meanwhile, U.S.-China trade tensions, an incomplete U.S. -Mexico-Canada trade agreement, environmental regulations, and reduced demand for transportation fuels combine to create a new set of challenges for the U.S. petrochemical industry.
The U.S. economic expansion is nearing the longest in history. At 10 years old, this is the second longest expansion since 1900.
Meanwhile, 2018 represented the sixth year of an extended upcycle in global petrochemical markets. The extended period of profitability caused another surge in investment globally increasing competition for U.S. goods.
Expansion phases last five years or so. As a result, some analysts are warning that a recession is just around the corner for the U.S. and are concerned about current and future investment.
The synchronized global expansion began to unravel at the start of 2019. Economic indicators are showing weakness and uncertainty in major economies China and Europe, but the U.S. remains the one positive among the major economies so far.
The second wave of ethylene and derivatives capacity is slated to start up in 2019 from new cracker projects on the U.S. Gulf Coast and will put pressure on export markets, producer margins, as well as the supply chain. Plenty more projects are in the pipeline as well.
Exports have already increased by 50%, and could nearly double again by 2022, owners have said.
As the second wave of production comes online, some market players are concerned about over supply in the U.S. markets.
The delay in Sasol’s 1.5 million tonne/year ethane cracker project in Lake Charles, Louisiana, raises the risk of overcapacity in
U.S. ethylene supply in the second half of 2019. The opening puts the Sasol start-up in the same timeframe as Formosa Plastics’ cracker in Point Comfort, Texas.
Initially, most of the U.S. volumes were planned to end up in China, as the country accounts for higher than 30% consumption of global polyethylene. However, due to the tariffs put in place during the China-U.S. trade war, U.S. producers are expediting their search for higher netbacks and increasingly moving the new resin supply into domestic markets, Europe, Latin America and Africa.
“China’s manufacturing industry has experienced growth over the past two decades. As such, China has become the largest producer and consumer of most chemicals, including olefins. Going forward, at least for the next decade, China will retain this dominant share of the petrochemicals industry,” Zinger said.
The U.S. chemical industry posted a $39 billion trade surplus in chemicals in 2018 as exports rose 10% to $143 billion and imports rose 7.8% to $105 billion, according to the American Chemistry Council (ACC).
Some sectors of competitively advantaged chemicals trade are expanding at a faster rate. Two-way trade between the U.S. and its foreign partners reached more than $248 billion in 2018, a 9.1% increase from 2017. Assuming no major trade disruptions, there will be a $69 billion trade surplus in chemicals by 2023. Access to export markets will be critical since export growth will drive industry gains over the next decade.
“Growth rates in U.S. chemistry over the next five years are expected to surpass average growth over the previous 20 years,” said Martha Moore, senior director of policy analysis and economics at the ACC. “Provided that access to export markets remains open to our producers, expanding global demand will be met by shale-advantaged chemistry sourced from the U.S.”
Against the backdrop of the downstream industry’s incredible growth, the market must address these core challenges amid a new consumer focus on sustainability. This perfect storm has resulted in a re-configuration of the status quo.
Refineries moving into the petrochemicals space is an important emerging theme. Research highlights this trend with a new wave of refining capacity in China expected to take place in 2020— driven by several mega crude-to-chemicals projects.
“On top of the Hengli and Zhejiang PC projects, at least three other proposed mega-refinery and chemical projects are being planned in the seven designated chemical bases in China by private companies. In contrast, refinery capacity additions by Sinopec and Petrochina are slowing down,” Zinger said.
Petrochemical feedstocks made up 13% of oil demand in 2018, with this figure expected to rise to almost 20% by 2035, according to Wood Mackenzie Chemicals.
“With the likely longer-term trend of declining oil demand into the all-important transportation sector, energy companies have re-evaluated their chemicals strategies. Companies like Shell, Total and BP had previously divested many of their specialty downstream chemical assets in order to focus more on their energy business and just a few core chemicals,” Zinger said.
“Now, we’re seeing these, and other significant oil players aggressively expand their current chemicals portfolio, form alliances with chemical companies or step into the chemicals space for the first time,” he added.
Another pressing trend is the growing number of initiatives around plastics recycling and plastic bans.
“These could reduce or cause peak petrochemical demand growth in the future, especially considering a significant number of aromatics and olefins are used within the plastics industry e.g. paraxylene for PET bottles and ethylene for polyethylene trash bags,” Zinger said.
These are the items that are targeted for increased levels of recycling and even, in some cases, replacement with non-plastics.
“Plastics producers will ultimately need to make their products more recyclable, support waste collection improvements – particularly in developing countries – and look for ways to become part of, or inject, recycling into their business or production processes,” Zinger said.
Amazon recently decided to move to lightweight flexible plastic mailers over its traditional cardboard boxes. As the market leader in the U.S. e-commerce sector, Amazon is in a particularly powerful position to shape decisions on packaging preferences.
“Despite these recycling initiatives and bans, the demand outlook for olefins is very robust due to increasing standards of living in developing countries. In fact, ethylene and propylene have been consistently growing at or above global GDP growth rates. As such, we expect long-term demand growth for olefins to continue to be strong for the foreseeable future,” Zinger said.
By Heather Doyle