Chemical Conversations: Olefins Outlook

Transcript

James: Good morning, good afternoon. I'm James Elliott, and you are listening to "Chemical Conversations" by Argus Media. Today, I'm joined by Argus olefins experts, Sarah Rae and Craig Barry. We’re going to be discussing the latest developments in the olefins market. Sarah, Craig, hello, welcome to the podcast.  

First question, Sarah, where do we see demand going into the end of this year for the olefins? 

Sarah: We’ve seen in 2023 a drop-off in demand, particularly in the European market. But I think on a global basis, we've seen poor demand through the backend of '22, and into the beginning of '23. There are very slight signs of a small improvement in demand coming into the second half of the year. People have run down their stocks, particularly on the ethylene and ethylene-derivative chain, to the extent where we're having to come back to the market.  

Propylene's slightly different, and I think propylene is still suffering from a couple of things. One would be the post-COVID issue, propylene's got a higher exposure to durable goods. It's got a higher exposure to those things that people don't have to buy and bought a lot of during sitting-at-home on the work-from-home policy. But also items, which, from the cost of living crisis, people, don't feel they can afford to buy currently and are not confident of their financial positions going forward. And even though I think in most of the regions, the employment levels have held up pretty well, in China, we are seeing indications of unemployment, particularly in the youth sector, and a much more nervous market. So I think going into the second half of the year for propylene, we're concerned that that pickup in demand is not really coming through. And even into next year, it could still be poor. So a slightly improving picture for ethylene, and I think still quite a difficult picture for propylene from my perspective. Craig, what are your thoughts from a U.S. perspective? 

Craig: Hi, Sarah. I tend to agree with most everything you said. I think the U.S. economy has been doing a little bit better. The U.S. has enjoyed a fairly competitive cost position relative to Europe and Asia. So they've been running harder, especially on the ethylene chain. We've seen higher operating rates, but a lot of that is translated into inventory-building, especially in the second quarter. So, the market is really cautious heading into the second half of the year because I think a lot of that inventory bill was anticipation that we would see a demand recovery across the globe that hasn't materialized yet. My expectations are that we're going to see the market manage that by slowing down coming into the second half of the year. I expect the second half of the year to be flat to the first half of the year. So, we really won't see much of a pickup relative to 2022. The big question people are starting to ask right now is are we going to see this in 2024. Is it going to be early in 2024? Is it going to get pushed back into the second half of 2024? I think more interesting now is that we're seeing a lot of economists revise their GDP outlooks. We're actually seeing 2023 higher than they were forecasting at the beginning of this year. So they've upped their GDP outlook, and this is, even on a global basis, higher in 2023. But I think the thing that's caught a lot of market participants by surprise is that they're now revising down 2024. So, that's causing some worry, some concern that we may see some improvement in 2024, but it's probably not going to be to the level that we were thinking earlier this year. So 2024 could be slightly better, it could be even flat compared to 2023. 

Sarah: But the benefit for ethylene, isn't it, is that we've had a lot of capacity additions over the last number of years, but for next year there's a relatively low level of new capacity coming on. So, at least from that perspective for ethylene, it feels like the market should start to rebalance through next year? 

Craig: Yeah, and we're seeing signs of that, especially here in the U.S., all the new plants that were scheduled, or projected to come up, lots of those are working through final startup issues, and the market is seen to be absorbing, or adjusting to those. But on the other hand, propylene, has had a new PDH startup here in the last month or two. And, maybe, I'll say a PDH and a half because we had a small business startup as well. And, even with some operational issues that we've been experiencing with PDHs over the last three or four weeks, we really haven't seen any sort of price response. 

So I think that reflects what you're saying, Sarah, which is that propylene is really in a different situation. We're just not seeing the demand growth because a lot of that goes into the durable goods market. And, people are still working off of not just inventories, but people bought a lot of that stuff during COVID and it's just not the demand in the market for as many durable goods as there are for consumer goods that are more reflective of the ethylene value chain. 

James: What are your thoughts on the demand situation in China through to the end of the year? Will the stimulus measures, which are coming, help boost demand? And, what would be the implications for the global markets if we do see a pick-up in Chinese offtake? 

Sarah: Well, China's key to the whole petrochemicals market. It's something like 30% of total consumption and total production, if not more, on some of the products. So what happens in China we feel everywhere. I think it's difficult to see a real bounce in demand. I know the Chinese government is still suggesting a GDP growth this year of, I think, over 5%, 5.6% is a number in my head. But I don't think we really see that. And it feels pretty flat in terms of demand. There's higher youth unemployment, we're seeing people acting in a cautious way, saving money. 

The personal savings levels in China have gone up, and as yet, China hasn't done as much as it probably needs to, to address the reliance on the real estate sector. So people seeing the value of their assets going down or certainly stagnating rather than escalating as they have done for the last X number of years. I think we see China moving sideways and trying to stop a shrinking situation. 

The other thing about China is their population profile is changing - it’s ageing and has actually got smaller in the last year compared to the year before. Older people buy less things. A lot of the products that we are involved with are linked to population growth and to a growing middle class. And a lot of that happens in the younger sector when you're first getting together and setting up home and having kids. I'd say, a concerning picture out in China. Craig, how do you see it? 

Craig: Yeah, and what I would add too, and I'll take somewhat of a shorter-term view, if you look at the petrochemical industry, usually the higher demand, seasonal demand quarters are usually second and third quarter. And those are already baked in. So I wouldn't expect a significant pick-up in demand in China because North America, our big spending and demand season is usually as we get into the holiday season. So China would've had to buy raw materials, produce those products, and get those on container ships headed to the U.S. 

Here we are near September 1st, and we haven't seen a meaningful pick-up in China. So I don't expect we'll see that in the fourth quarter because those two strong quarters of demand that are typically seasonal high-demand seasons, which is second and third quarter, we just haven't seen that yet. So, anyone looking for China to see a meaningful pick-up in the remaining parts of 2023 is probably going to be disappointed. China's going to try to work through some things, some reforms, and put things in place, but I think that's more for the long-term and more heading into next year and 2025. 

Sarah: I agree with that. 

James: That's China. What are the other risk factors that could change the picture? 

Craig: Cost is a big one. We're starting to see, if you go back, let's start with OPEC. I think they really have hung in together with their cuts. Saudi Arabia was originally going to revisit their cuts in September. They've extended those into October. So you're seeing a lot of forecasters moving their crude forecast higher. We saw a significant jump-up in crude here in the near-term. I think it was from July to August, we saw crude go up $10. We could see another leg-up going into next year. 

Another point, continuing on that theme of cost, the Australia LNG industry is looking at a potential strike sometime, I think it's September 7th their actual deadline. That would obviously raise the cost for natural gas to consumers and power generation, and also for industrial users of gas. So, that would be a negative headwind for demand. And that would be more than likely a short-term headwind on cost. But, we're headed into the heating seasons going into fourth quarter, so you really don't want to see supply for LNG possibly being curtailed. That's a risk we could see. 

The other one, which I is not maybe as material as what we saw coming out of COVID, is we're still hearing a lot of things about the Panama Canal, right. With the drought conditions and just ships being unable to move through there. I think that one's probably not going to be as big an impact as it was in the past, but it's just something else to keep your eye on. 

Sarah: Craig, I think you're right to highlight the issues around potential headwinds with higher costs. We're certainly seeing a higher forecast on the crude front, although it's artificially controlled because it's controlled by supply. The Argus view is actually there's enough oil out there if the guys extract it, but if they're not going to extract it, then yeah, that's definitely one. 

The LNG really highlights Europe's vulnerability now to these longer supply chains for its energy. Having shifted away from Russian supply, Europe's now very dependent on international supply routes, be it from Australia, or North Africa, or the U.S., and the U.S. can't really step up to completely close any gaps from Australia that might open up through a strike. Coming into the heating season, that's a concern. Longer term as well, from a European perspective, particularly if the downturn lasts for an extended period, will all of the producers be able to weather the storm? That's a concern longer term. 

James: Challenging demand situation, higher costs, what is the impact on the drive for sustainability from this? Sarah? 

Sarah: Europe has been leading the charge in terms of sustainability, although having said that, when you look around the world, there's lots and lots of projects because the brand owners want to be able to offer these products in all of the regions. We're seeing lots of producers integrating downstream into recycling companies to secure that route to market. And we're seeing lots and lots of projects to create a greener footprint in terms of feedstocks or routes to produce ethylene and propylene. 

In Europe, we've got a project for new ethylene capacity that's from ethanol. It's relatively small at the moment, but it's a sign of what's to come. But the issue for all of these projects is really the amount of money that the producers have to invest to bring them to market. And at the end of the day, is the consumer going to be willing to pay? So I think there's something like 17 million tons of pledges out there in terms of marketable product that producers have said, "We are going to produce this, and it's going to be available." 

The issue is marketable doesn't necessarily mean that they'll make it because it has to be bought by somebody, and consumers, at the end of the day, are the guys who are going to have to step up and pay some additional cost. I think from a European perspective there's a lot of pressure for the governments to step up and create some sort of carbon border. But as yet, that hasn't happened for petrochemicals, it's happened for and is on the list for things like steel and cement and other energy-intensive products. But petrochemicals didn't make it onto that final list in the last round of legislation from the EU. How about in the U.S., Craig? 

Craig: In the U.S. there's a lot of projects being discussed and developed. There's some headwinds but also some tailwinds. So it's a little bit of a mixed story, right. For project developers who are already further along in their projects, maybe looking to get financing, these higher interest rates that we're seeing today is a bigger challenge for some of those projects. As they were conceived and conceptualized they were probably anticipating a lower interest rate environment. So the project financing costs are dragged, and we're starting to see some project developers and owners discuss that as they report some of their earnings that some of the ESG projects are not meeting some of their financial targets. I don't think that is changing the commitment or direction of industry and policymakers to go forward with this. But in short term, people are going to have to adjust their expectations, maybe delay some of the projects. 

The Inflation Reduction Act that was passed last year by the Biden administration is being quoted a lot as being helpful for a lot of projects. The government's going to step in and provide a lot of incentives, tax breaks, and other things to help drive some of the projects and initiatives that are out there. Smaller, maybe not as well-financed, maybe not as many capabilities internally, the project developers may be at risk of either falling off or pushing out their projects. But big players like ExxonMobil and Dow Chemical, have all announced hydrogen or, in the case of Dow recently, an ethanol project as well. I think those are going to stay closer to schedule. 

Dow also mentioned, and some people may debate how green this is or sustainable, that they're going to build a small modular nuclear reactor at one of their sites here in Texas, and they're going to start construction in 2025. That's a big step, especially for the U.S., especially in our industry, to look to build a nuclear reactor to provide all the heat and electricity for a petrochemical complex. So that's a big marker for someone to do that. And staying with Dow, when you hear them talk about their net-zero carbon project in Canada, all indications are that that project's still a go and making progress. Dow will make a FID decision on that at the end of this year or early next year.  

So, some things are going forward, some things are being revisited. But I think overall, given the environment, not any real surprise. 

Sarah: I think you're right. You look at projects over in Europe, the INEOS Project 1 is moving forward, albeit with some headwinds against it. The Wilton SABIC project, which is going to become a completely ethane-based cracker, but with hydrogen as feed for energy, is an interesting one as well. That would be one of the greenest crackers globally. A huge amount of investment across the piece. 

James: Sarah, Craig, thanks for your insights. Thank you for listening to this edition of the Argus "Chemicals Conversation" podcast. To find out more information about the Argus Olefins Outlook service, visit www.argusmedia.com/chemicaloutlooks.  

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