Listen as olefins expert Craig Barry talks to Amanda Richardson about the outlook for olefins
Whether we’ve reached the bottom of the market
How the market will absorb recent and upcoming capacity additions
The impact of decarbonization in circularity initiatives on the market
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Amanda: Hi, I'm Amanda Richardson with the Argus Chemical Sector and you're listening to our latest edition of "Chemical Conversations," which is featuring olefins expert Craig Barry. We're going to be discussing what's going on in the olefins market.
My first question is really around the downturn that we've been seeing this year, do you think that the market has reached the bottom?
Craig: Early indications quarter '22 was likely the market bottom. Today, the industry continues to manage operating rates to balance, and moderately improve demand. As I look across the different regions our operating rates in both Asia and Europe have stabilized since the beginning of the year.
In North America, though, we're actually seeing ethylene production increase versus the fourth quarter slightly. But more importantly the industry made significant reductions in ethylene and propylene inventories during the first quarter. And talking to some of the largest producers, they're indicating they plan to gradually increase the rates in the second half of the year. So we more likely reached the bottom here in the fourth quarter of 2022.
Craig: The story is a little bit different for ethylene versus propylene. And that's due to the timing of capacity additions, but also the strength of the various consumer versus durable good markets. Ethylene capacity was planned earlier this decade, and COVID delayed some of the ethylene project startups, while the sharp recovery from COVID allowed new ethylene capacity to be more easily absorbed. And consumer demand overall remains reasonably healthy. And we're starting to see demand in consumers gain momentum in China. Operating rates should increase over the next two years. And we have them actually peeking near 90% in 2027 timeframe.
On the other hand Asia is adding significant propylene capacity over the next few years, as the market really attempts to regain growth. And durable good demand remains very sluggish. So, the rate of propylene capacity versus demand growth is really, really misaligned. And the market will be challenged to absorb all the new capacity. So, I expect rates and margins to remain under pressure going forward.
Amanda: What about the impact of decarbonization in circularity initiatives on the market?
Craig: Good question. We get a lot of inquiries about these two big topics. A lot of activity...people remain committed to these initiatives, but no real meaningful impact on these initiatives really until the end of the decade. There are some first movers, I believe, that are to create competitive advantage in this space. You're seeing producers reorganize their businesses to take advantage of their low-carbon solutions, leveraging their technology and scale, even as potential profit centers. And you're hearing large producers like ExxonMobil, Dow Chemical, and even INEOS over in Europe are looking to leverage hydrogen as a zero-carbon fuel. But we're expecting a lot of these things not really to happen until the end of the decade. And it's likely that others will follow as the infrastructure and production of hydrogen increases going forward.
Now, on the circularity front, activity from mechanical recycling is accelerating. But I think one point people need to really understand is that it'll take time to scale up in any real meaningful way when you compare recycling to current virgin production. Producers and their key stakeholders remain very committed to these initiatives. And it'll be very interesting to see how far Western producers get ahead of Chinese producers, in my mind, in the development of sustainable or recyclable packaging solutions. And this could provide Western producers a little bit of a competitive advantage going forward, but I don't really expect the Chinese producers to be too far behind.
Amanda: Thanks so much for sharing all that with us today, giving us a glimpse into the olefins market. To find out more information about Argus's olefins outlook and our ethylene and propylene analytic services, visit www.argusmedia.com/chemicals.