Today’s dark clouds could have a silver lining for the US petchem and polymer industry.
The commodities “bubble” and China’s economic downturn have become front page news since my warning last September. Oil prices have now returned to $30/bbl and as I warned then, this will have very serious consequences for the US petrochemical industry.
Companies have so far committed $155 billion to new investments in petrochemical and polymer capacity, based on the twin myths that:
- Oil would always sell at a premium to its energy equivalent value versus natural gas
- China was becoming “middle class” by Western standards, and needed vast quantities of polymer imports to satisfy demand
But there was never any rational reason why oil should sell at a premium to natural gas. And official data shows that China’s average 2015 disposable incomes were just $5000 in the urban areas, and less than $2000 in rural areas – far below the US poverty line.
So what is to be done, now that these myths have been exposed? Hopefully, those plants planned for 2019 onwards will now be cancelled. Unfortunately, it is probably too late to stop construction of all the new plants that have been sanctioned, as some of the major investments are due to come online next year.
This means the industry now has to tackle the problem of what to do with this 40% increase in US ethylene capacity. US demand has been flat for a decade, so where will it all go, now that China’s demand growth has stalled?
There is only one option for companies. They will have to make major changes in their business models and develop new markets for their products. And they will have to do this immediately. Time is not on their side, with all the new capacity about to come online.
The good news is that opportunities do now exist for new sales to be made in large volumes. Even better is the fact that the US itself could be a key market for much of the new volumes about to be produced. Water and food crises are both in the top 5 listing in the new Global Risks report from the World Economic Forum. The need for new thinking is clear, as is the opportunity for the US plastics industry.
Think “out-of-the-box” for a moment about the key challenges facing the US? What comes to mind? Drought is probably one of the first ideas. The US General Accounting Office warns that 40 states will suffer droughts over the next 10 years. And the chart above from the US Drought Portal shows the major problem areas today.
What has over-capacity in ethylene production to do with all this, you might ask? Everything.
Ethylene is the raw material used for both polyethylene (PE) and for PVC – both of which have potentially major roles to play in both conserving existing water supplies, and in reducing the volume of water used in critical applications such as agriculture:
- The US currently loses around 30% of all the water produced by the utilities – PVC and PE pipes could have a major role in reducing these losses. A CIRES study suggests that 1 in 10 US watersheds are stressed, with demand for water outpacing supply.
- California’s agricultural sector, the largest in the US, has been hit by a 5-year drought – a more widespread use of PE-based drip-feed irrigation systems could have a major impact in helping farmers adjust to lower water availability.
And there are plenty of other opportunities. Water loss is not just a US problem, nor is the need for better irrigation systems.
Of course, this new business model will increase costs. Companies will have to recruit techno-commercial teams to go out into the market and talk to customers, to discover exactly what could be done. They will also have to recruit R&D teams to develop the new product grades that will likely be needed. But what is the alternative?
The collapse of oil prices and China’s economic downturn are unlikely to reverse in the near future. And the good news about low energy costs is that it will help to make plastics such as PE and PVC more affordable. So there is more chance of being able to develop the major new markets that will be needed to absorb all the new production, and of course, it is potentially good news for many ACS members, who may find their skills and expertise in strong demand once more.
Paul Hodges is chairman of International eChem (www.iec.eu.com), trusted advisers to the chemical industry and its investment community. He is a member of the World Economic Forum’s Industrial Council on chemicals, advanced materials and biotechnology, and presents the ACS ‘Chemistry & the Economy’ webinars.