Feedstock Push Hits the Demand Wall

Transcription

1 Feedstock Push Hits the Demand Wall John Richardson ICIS GPCA Dubai, November 2018 David Hughes International echem 1

2 Feedstock Push hits the Demand Wall Feedstock push will support integrated players Demand patterns are changing as the demographics change The circular economy will massively impact our markets Globalisation is already coming to an end 2

3 When technologies come together, transformations happen extremely fast New York, 1900 New York,

4 The Energy Transformation will up-end the oil markets Renewable wind / solar are now the cheapest forms of energy in the world Coal and then gas will be the losers in this transition Falling battery costs will support and accelerate the move Source: Lazard Levelized cost of Energy 4

5 The Energy Transformation will up-end the oil markets Cars are now near the EV tipping point China is driving the transformation, now Autonomous vehicles will follow shortly as Uber / Lyft / Careem move rapidly into key cities Source: Prof Ray Wills, Univ. West Australia 5

6 Shale boom will continue into the future 6

7 Chemicals capacity growth driven by external factors Self sufficiency & return to naphtha adds 25 M te ethylene by 2030 Shale feedstock push adds 6.5 M te in wave Chemicals used as diversification and hedge against oil sales Chemicals used as route to economic growth inside BRI 7

8 No breathing space before Wave Two crackers in US Company Capacity (kt/year) Downstream (kt/year) Location Start-up Status Total/Borealis/NOVA 1,000 Borstar PE (625) + existing PE (400) Port Arthur, Texas End 2020 Cracker under construction, FID pending for PE Shell 1,500 HDPE/LLDPE (2x 550), HDPE (500) Monaca, Pennsylvania Early 2020s Under construction SABIC/ ExxonMobil 1,800 PE (2 units), MEG Corpus Christi, Texas H Under construction PTTGC/Daelim 1,000 HDPE (700), MEG (500), EO (100) Belmont County, Ohio 2021 Evaluation Formosa Petrochemicals 1,200 LLDPE (400), HDPE (400), EG (900) St James Parish, Louisiana 2022 Permitting, Evaluation ICIS Supply & Demand Database 8

9 What s the outlook for demand? 9

10 Rich Western consumers are disappearing as they age International echem analysis 10

11 Since last year, plastic waste has now moved to the top of the agenda 11

12 Brands are now driving the circular economy agenda Company Targeted All packaging Plastics All packaging Plastics All packaging All packaging Initiative/commitment 100% of packaging will be recyclable, compostable or biodegradable, increase recycled materials in its plastic packaging by 2025 We are planning that all bottles will be made from 100% recycled plastic and trial non-plastic, biodegradable materials by 2020 Use 100% recycled plastic in 65% of the entire annual bottle volume by 2020, aiming to go up to 100% for all our consumer goods packaging by % of plastic packaging will be fully reusable, recyclable or compostable by 2025 Aiming to make all its consumer packaging 100% recyclable by 2025 and to have 50% recycled content in its packaging by 2030, ultimately help collect and recycle 100% of the packaging it cells M&S announced that all its plastic packaging in the UK will not only be 100% recyclable, but also 'widely recycled' in the UK by 2022 All packaging Double recycled resin in plastic packaging (2020 vs. 2010), reduce packaging by 20%, ensure 90% of packaging is recyclable 12

13 A line in the sand newplasticseconomy.org Elimination of problematic or unnecessary plastic packaging through redesign, innovation, and new delivery models is a priority Reuse models are applied where relevant, reducing the need for single-use packaging All plastic packaging is 100% reusable, recyclable, or compostable All plastic packaging is reused, recycled, or composted in practice The use of plastic is fully decoupled from the consumption of finite resources All plastic packaging is free of hazardous chemicals, and the health, safety, and rights of all people involved are respected. 13

14 000 tones '0000 tonnes Where recycling is technically easy, expect big rise in production from recycled material Global HDPE recycled production grows to 7% by Global HDPE recycled production at 33.5%* in Production Ex VIRGIN RESIN Production Ex RECYCLE Production Ex VIRGIN RESIN Production Ex RECYCLE ICIS Supply & Demand Database *50% of today s average global recycling rate for aluminium, steel and glass 14

15 '000 tonnes Disappearing demand where recycling does not happen LLDPE: 118m tonnes of lost cumulative global demand Base case: Growth averages 4.6% per annumm Growth averages 1% 55% of LLDPE consumption is into single-use applications ICIS Supply & Demand Database 15

16 '000 tonnes/year Operating rates Circular Economy threatens cracker operating rates % 90% 88% 86% 84% 82% 80% Current cracker plans seem to ignore the demand reduction from Circular Economy Margins on nonintegrated crackers will be squeezed and will see no relief Global ethylene capacity Operating rates under LLDPE base case Operating rates under LLDPE downside ICIS Supply & Demand Database 16

17 Regionalisation & Trade Wars 17

18 China has been the engine Since 2007, world growth has been fully dependent on China In both the west and China, QE is now coming to an end International echem analysis 18

19 China has changed & growth is no longer the priority CIVILISED Equal opportunity, one law for all STABLE Adopted from Robert Lawrence Kuhn SUCCESSFUL STRONG Economy Government Defence HARMONIOUS Goodwill between classes & ethnic groups BEAUTIFUL Clean Air, Water & Land CREATIVE 19

20 Protectionism and trade wars are here to stay The current trade wars are symptoms of the end of the baby boom in the west The easy growth of the past is no longer needed, so people see no value and only threats in globalization America continues to worry about the threat from Chinese technology America views China s manufacturing dominance as a national security threat 20

21 Four themes will drive our future Feedstock push will support integrated players Demand patterns are changing as the demographics change The circular economy will massively impact our markets Globalisation is already coming to an end 21

22 US-China trade war the context 22

23 tonnes Why China is so important NORTH AMERICA SOUTH & CENTRAL AMERICA EUROPE FORMER USSR AFRICA MIDDLE EAST NORTH EAST ASIA EX-CHINA CHINA ASIA AND PACIFIC ICIS Supply & Demand Database Global polyethylene consumption Since 2008 China has become the biggest consumer as well as biggest growth market. Result of postcrisis stimulus and wealth growth Will remain at around 30% of global consumption largest of all countries and regions 23

24 US is demanding China scrap its economic growth model. when it is in a race against time to move up the manufacturing value chain as its populations ages Meanwhile, it still faces the challenge of 500m of its population who live on less than $5.50 a day So it cannot possibly agree to stop state subsides for manufacturing US also closing the door on technology transfers 24

25 The threat of a new Cold War Largely overlooked key moment last November when, for the first time, the US National Security Strategy identified China as a geopolitical threat Mike Pence: China now spends as much on its military as the rest of Asia combined. Beijing has prioritised capabilities to erode America s military advantages. But they will fail. Democrat support for Trump s China policies 25

26 Trade war and other macro challenges 26

27 China debt reduction was already dampening growth Speculative shadow lending down by $698nn year-on-year in January- October 2018 Total social financing, which is lending via the shadow and state-owned banks, $246bn lower Financial easing measures taken to help with credit shortages But on a net basis, credit will be lower in 2018 than last year 27

28 China doubles down on biggest-ever clean-up Super ministry created to toughen plant inspections More money for the clean-up Tied to economic restructuring But winter air standards lowered to support growth and avoid repeat of last year s natural gas shortages 28

29 US new capacity: major market disruptions if trade war continues 29

30 000 tonnes Overreliance on China as US PE surpluses rise US would need 36% share of remaining market based on its net exports 16% US market share 2019 PE global net imports without China 2019 PE global net imports with China All grades of HDPE and 93% of grades of LLDPE US exports to China affected by duties But evidence traders are avoiding all cargoes US needs China more than China needs US e.g. only 5% of Chinese 2017 PE imports from US, but 11% of US exports ICIS Supply & Demand Database 30

31 ,000 tonnes Biggest impact on LLDPE Global net imports including China LLDPE in 2019 US would need 27% global market share US would need 53% Global net imports excluding China My forecast is for US total exports to reach 3.7m tonnes next year, up from 2.2m tonnes in 2017 Exports as a percentage of production at record high so far in 2018 US production to rise 12% in 2019 with local demand up just 2% ICIS Supply & Demand Database 31

32 '000 tonnes LLDPE especially vulnerable Net LLDPE imports in 2019 Scenario 1: If the US cannot export to China, but it still runs plants as hard as we expect Naphtha cracker operators forced to cut back operating rates possibly consolidate Scenario 2: Naphtha players win trade protection and US forced to cut back ICIS Supply & Demand Database 32

33 Big impact on ethylene glycols longer term Global net imports including China Global net imports excludling China Ethylene glycols in US would need 53% share of this market 9% US market share - 20,000 40,000 60,000 80, , ,000 China will account for 84% of global net imports between 2018 and 2025 US will swing from net imports of 4m tonnes in to net exports of 8.3m tonnes in (big surpluses after 2020) This is what could happen if US has no access to China! ICIS Supply & Demand Database 33

34 US-China trade war: Long-term implications 34

35 China is accelerating BRI because of the US China thought it had more time to make this multi-generational project work But risk of losing US export markets has made the project more urgent It has also created major geopolitical and economic opportunity for China to replace the US In its largest definition, the Belt and Road Initiative would include 78 countries, 4.4 billion people and about 40% of global GDP the World Bank 35

36 It is all about demographics ICIS Chemical Business Numbers denote median ages it s all about demographics! 36

37 Two new trading blocs US petchems face major risk One centred on China and its trading and geopolitical partners. This could comprise most of the developing world and most consumption and growth The other trading bloc centred on the US and its partners percentage shares of PE, PP, styrene and ethylene glycols consumption Middle East 5% NE Asia Ex china 8% North America 13% S&C America 4% Africa 3% Former USSR 2% China 36% Europe 14% ICIS Supply & Demand Database Asia P 15% 37

38 Sustainability and other risks to Chinese growth 38

39 China s booming urban clusters in 2010, Yangtze River Delta, Pearl River Delta and Beijing-Tianjin-Hebei cluster identified for smart urbanisation In 2014, became Greater Bay Area covering nine cities around in southern Guangdong, plus Hong Kong and Macau. GDP greater than that of Spain - 45% of China s total GDP by 2025 Generates more than 50% of China s patent applications Bloomberg picture, September 2018: Hong Kong surpasses New York in number of super rich (number of people worth at least $30m) 39

40 Why should China be any different and, in fact, it could lead the way: 1. The rich, apart from sustainability concerns, don t want to waste time in traffic jams 2. China government funding for autonomous driving and ridehailing 3. Focus on improving air quality 4. The time poor, cash rich and the washing machine South China Morning Post: Baidu autonomous cars funded by Its Nasdaq-listed Apollo Fund 40

41 Quantifying downside for PP Base case: China s per capita PP consumption rising from 19.9 kilograms in 2018 to 32.3 kilograms in This would result in PP demand growing from 27.6m tonnes in 2018 to 45.4m tonnes in Downside scenario: Only reaches 28.3 kilograms in 2030 with 19m tonnes of lost demand 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, Base case in '000 tonnes Downside in '000 tonnes Base case per capita consumption in kilograms Downside per capita consumption in kilograms ICIS Supply & Demand Database 41

42 Beijing Shanghai Tianjin Jiangsu Zhejiang Fujian Inner Mongolia Guangdong Shandong Chongqing Hubei Shaanxi Jilin Liaoning Ningxia Hunan Hainan Hebei Henan Jiangxi Xinjiang Sichuan Qinghai Anhui Heilongjiang Guangxi Shanxi Tibet Guizhou Yunnan Gansu Kilograms Potential for inland wealth growth to accelerate PE per capita consumption by province and other administrative regions in 2017 Benefit of urbanisation: Beijing per capita consumption at 46 kilograms last year up from 16 kilograms in 2000 Meanwhile, Gansu, poorest region in China, rose to 10 kilograms from 1.5 kilograms Boost from further more urbanisation and wealth growth Booming internet sales a further factor? Jing Daily, IMF and ICIS Supply & Demand Database 42

43 '000 tonnes What if per capita consumption growth disappoints? Sustainability issues drive less is more focus on plastic packaging as recycling replaces virgin resins Residents in poorer inland cities lack access to sufficient health care and education Unless China escapes middle income trap faces major pension, healthcare shortfalls 2030 consumption 10.6m tonnes lower China PE consumption in 2030 Scenario 1: Average PE per capita consumption at 34.9 Kgs (up from 21.5 kgs in 2018) Scenario 2: Average PE per capita consumption at 28.9 Kgs ICIS Supply & Demand Database 43

44 Our concluding thoughts 44

45 Just two of many scenarios Scenario 1 - China/US reach deal and sustainability small effect Trump/XI reach a compromise. OR Trump leaves office and US/China trade war ends Petchem world remains fully globalised US production and export growth continue Producers in other regions continue today s strong capacity growth Demand big enough to easily absorb new capacities Pushback against plastic waste has small effect on demand Scenario 2 - China/US fail to resolve differences and sustainability has major effect Trade war escalates New world of China + friends versus US + friends US unable to export to China and so floods Europe and developing world ex-china with excess supply US and other projects are cancelled Global investment also slows on demand loss from plastic rubbish crisis 45

46 Winning in the new world requires focus Feedstock push will support integrated players Demand patterns are changing as the demographics change The circular economy will massively impact our markets Globalisation is already coming to an end 46

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