Petrochemicals 2030: Reinventing the way to win in a changing industry
PART I
Location
has been the key to success in petrochemicals: playing in emerging markets and
accessing cheap feedstock. As the industry shifts, companies will have to work
harder on core capabilities and strategy.
Below the surface of
the record profits petrochemical companies have been reporting over the past
few years, the industry is in a period of profound transition. Until the fall
in oil prices, success in the industry had been based on stark regional
asymmetries. Companies in fast-growing emerging markets such as China have
thrived. So have companies in regions—in particular the Middle East and North
America—with advantaged gas feedstock that they have made into petrochemicals
and plastics and then exported to China and other growth markets. To put it
bluntly, for the geography-blessed petrochemical players, it has been hard to
go wrong.
Looking ahead to 2030,
slower demand growth in emerging economies and less abundant advantaged
feedstocks are likely to undermine these value-creation strategies. Companies
will likely have to take a more disciplined approach to capacity additions,
returns may be more modest, and all petrochemical players will need to work
much harder on core capabilities and strategy. This will include using digital
and advanced analytics to reach a new level of productivity, and attaining
higher capital productivity on the industry’s large-scale projects. Companies
must also work on reinventing the interface with oil refining as the gas-driven
era winds down. At the same time, they will need to manage the transition from
an essentially linear economy, where plastics-based products get used once
before disposal, to a circular economy.
A look back at what’s been creating value for the
industry
The global petrochemical
industry has experienced more than 15 years of strong volume growth: annual
ethylene production has risen from around 100 million metric tons in 2000 to
almost 150 million metric tons in 2016. In conjunction with this volume growth,
value creation has also risen at a 4 percent compound annual growth rate since
2005. Petrochemical company stocks have performed strongly compared with other chemical sectors and the overall market over the
period.
In the past three
years, petrochemical companies worldwide have been showing buoyant margins, as
healthy demand growth, particularly from Asia, has led to high operating rates,
especially in the ethylene and C2 derivatives chain and
propylene and C3 derivatives chain. This has enabled companies
to hold on to the higher margins stemming from lower oil prices, instead of the
industry’s more typical practice of passing falls in feedstock costs through to
customers.
To better understand
the industry’s possible development path, we can look back over the past decade
and a half at the more complex dynamics at play. There have been two main
drivers of value creation.
The petrochemical
industry has ridden high on emerging-market demand growth since the start of
the century, just like producers of metals and other commodities. On top of
this, many petrochemical companies have benefited from manufacturing using
low-cost gas feedstocks instead of oil-based feedstocks, putting them in a
highly cost-advantaged position. This has particularly been the case for
producers based in the Middle East and, more recently, in North America, based
on new shale-gas supply. This advantage was most pronounced during the period
of high crude oil prices that ended in 2014, and has predominantly benefitted
the C1 derivatives chain and C2 chain, and to a
lesser extent the C3 chain.
Over the same period,
however, the industry suffered margin erosion across many of its products,
cancelling out roughly half the value created. This margin erosion mainly
affected the C4 and aromatics chains, and was primarily a
result of overbuilding by newer industry participants in emerging markets.
We also need to
recognize just how small a part of the industry is represented by the companies
that have captured such a large share of the value up to 2014: it has mainly
been producers with access to low-cost gas, which account for around 20 percent
of the industry’s output, but were responsible for well over 80 percent of the
industry’s total value pool in the early part of this decade.
For petrochemical
producers that are not part of the advantaged gas-based cohort, the years up to
the fall in oil prices had been challenging. This group includes players in
Europe, Japan, Latin America, South Korea, and Taiwan. While they are enjoying
the rebound now, their earlier difficulties have been highlighted by
significant capacity closures in Japan and Western Europe in the early 2010s.
At the same time, a
structural shift in the industry has taken place: further consolidation in
mature markets and a rapid rise of emerging-market players. Four main families
of producers make up the global petrochemical industry: national oil companies
(NOCs) and other emerging-market players; international oil companies;
pure-play petrochemical producers; and diversified chemical companies with
large petrochemical-production assets. NOCs and other producers in emerging
markets have been the biggest investors in new capacity as they have been
aiming to meet demand growth in their home markets, and have grown at about
four times the rate of Western players. A number of these companies, such as
PetroChina, Reliance, SABIC, Sinopec, and Wanhua are now among the leading
companies by capacity in some petrochemical-industry segments—or will become so
in the near future.
In a nutshell, most of
the history of the petrochemical industry in the new millennium has been one of
regional asymmetry—where the key to success has simply come down to being in
the right place. Emerging-market-based companies have risen as leaders in the
industry, and companies in locations with access to cheap gas have earned the
majority of profits.
The old models for value creation are losing traction
New trends are emerging
in the industry that are changing the rules for success.
The advantaged-feedstock-opportunity window
is closing
Production based on
advantaged feedstocks has been a cornerstone of value creation in the industry,
but the potential for investments based on such feedstocks is likely to become
much more constrained after 2020.
The Middle East and
North America have been the two main sources of advantaged feedstocks in the
industry’s recent history, but in both locations, medium- and long-term
opportunities are becoming limited. In the Middle East, new petrochemical investments are increasingly based on
liquid feedstocks such as naphtha and gasoil, or mixed gas/liquid feedstock,
instead of exclusively on gas. In North America, the feedstock advantage is
expected to start to erode in the next decade as new ethylene cracking capacity
and export opportunities increase demand for ethane and propane, which could
drive prices up.
Clearly, there are new
possible sources of advantaged-price gas supply in the world, for example in
Iraq and Kazakhstan, and there is also the prospect that shale-gas production
could take off in countries such as Argentina. However, the size of these
opportunities, their degree of cost advantage, and their access to downstream
markets may be more modest than what has been provided by the Middle East and
North America in recent years.
Petrochemical growth will slow down as
economies mature
The GDP growth rate of
the important Chinese market has slowed and may slow further.1In parallel, per capita
chemical consumption in China appears to be at the point where it may start to
grow more slowly than the country’s GDP growth rate. This development is
associated with macroeconomic trends in China, which is moving from the
investment stage of development with spending on infrastructure, along with
expanded purchases of new houses, consumer durables, and autos, to an economy
more focused on services and upgrade-type purchases. The latter generate much
less additional demand for chemicals.
We estimate that the
last decade’s 3.6 percent growth rate for global petrochemicals demand may slow
to 2.0 percent to 3.0 percent through 2030. Growth may accelerate again as a
new group of economies—for example, India, Indonesia, Pakistan, and countries
in Africa—contribute more significantly to expanding demand, but this may take
another five to ten years.
Margin erosion in selected chains seems
likely to be a constant
The margin erosion
observed in certain chains of products is unlikely to be reversed. The greatest
erosion has been seen in chains based on aromatics, such as para-xylene
and purified terephthalic acid, phenol, and polyamide. Over the past decade,
participation in these markets has broadened beyond its historically limited
number of players, and the structure of these markets is unlikely to revert to
what it was. Even if demand growth and greater investment discipline among
producers could improve the situation, we do not expect the underlying trend to
reverse.
CONTINUES
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