Under the influence of consumer demand, technology, raw material prices, and geopolitics, the industrial chemical industry is under a constant cycle of change. Perhaps more than any other sector, petrochemicals are enduring a time of special transformation. The emergence of shale gas resources, the growing desire for a circular economy, the demonising of plastic, fluctuating oil prices, and increased use of bio-plastics and renewable chemical feedstocks are all threatening to impact the petrochemical industry.
A petrochemical plant in the UAE
Yet all of these potential challenges have come after a period of healthy growth. As a recent report by industry consultants at McKinsey & Company states, “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.”
Called ‘Petrochemicals 2030: Reinventing the Way to Win in a Changing Industry’, the study continues to explain how much of this growth (and profit) came from. It notes that, “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.”
But what now for the future? Can we expect to see further decades of growth? Will value creation and low gas prices keep the dollars rolling in?
This article outlines three key trends that will influence the petrochemical industry over the next 15 years, and what can chemical companies do to ensure a smooth transition?
1. Reduced Demand.
Chemical producers should expect a period of contraction for demand. As efficiencies are made across the chemical industry, stricter regulations on plastic disposal (particularly packaging), lower consumer demand for single use plastic items, and a maturing of Asian markets, the petrochemical industry should expect a 10% drop in production by 2050.
A Californian plastic recycling plant
As the McKinsey analysis observes, “The GDP growth rate of the important Chinese market has slowed and may slow further. In 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.”
The report also adds that, “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.”
2. Increased Recycling
Improvements in waste collection, technological breakthroughs, and industry scaling will all play a part in increasing the amount of material that is recycled. Increased public awareness and the resulting political impetus will also put downward pressure on demand for petrochemicals.
In the UK, for example, the government is discussing an overhaul of recycling schemes, including; increasing plastic bag taxes (one was already introduced last year ), adding a ‘single use plastic’ tax, and a compulsory deposit program on plastic, glass, and aluminium bottles and cans. All of which has received widespread support, even from the plastics industry.
As petrochemicals consultant Jasper van de Staaij, explained to the industry journal Petrochemicals Europe, “As plastic waste becomes an environmental and public health focus and carbon abatement is required to achieve climate targets, governments are more likely to intervene.”
Although Van de Staaij acknowledges the expenses involved in reducing waste, stating that, “Any new regulatory obligations have the potential to create additional compliance costs for industry.”
He also believes that this development will have a positive impact on the chemicals industry. Noting how, “A regulatory framework that takes account of these [low carbon and circular economy] developments can only be beneficial for the chemical industry as it prepares for them. This holds especially if the regulation helps in the commercialization of new technologies and developing new cooperation standards and supply chains. For example: low-carbon production routes in the presence of carbon prices; development of biodegradable plastics; design-for-recycling in plastics production and industry wide quality standards that help the commercialization of plastic recycling technologies.”
3. Renewables and Feedstock Changes
It is predicted that most chemical suppliers will increasingly diversify their feedstock mixes. This is due to modifications in upstream production, consumer demand, and price.
As Van de Staaij, explains, “We expect that by 2050, the supply mix for petrochemicals will comprise a portfolio of hydrocarbon sources. It will combine fossil which is the large majority today, with recycling – utilizing recycling options along the value chain i.e. mechanical, chemical and thermal recycling, as well as renewables. However, since using renewable feedstock for the production of chemicals is from a business-case perspective more expensive, its increase will mainly be driven by customer pull in specific applications or regulation.”
He also notes that, “renewable feedstocks, such as bio-ethanol or bio-ethylene, are projected to increase from base rate of 0.5% globally (2015) to 4% by 2050.”
What does the future hold for petrochemicals?
The petrochemical industry is on the edge of a period of great change. Asian economic expansion and increasing demand for consumer goods is levelling off, to be replaced by a growth in service industries. Meanwhile, more mature economies in Europe and North America are heading towards renewable feedstocks, lower carbon emissions, and the goal of a circular economy. All of these events will lower the need for petrochemicals.
Furthermore, historic regional advantages, such as US shale gas and Middle East oil will begin to be removed through technological advances, or as other energy sources go on line. As McKinsey notes, “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.”
No single company can avoid the approaching challenges. Instead, petrochemical suppliers will need to adapt if they are to survive. They must find new raw material sources by embracing, not resisting the circular economy. They must make savings by investing in digitalisation and big data analytics. They must prepare themselves for a world of reduced demand, increased recycling, and alternative chemical feedstocks.