Two immediate major shockwaves are linked to economic activity and feedstock pricing. Patrick Kirby, Principal Analyst, EMEARC Olefins and Matthew Chadwick, Vice President, Global Head of Petrochemicals, look at the early implications.
Shockwave 1: a sudden freeze in economic activity
The lockdown measures in place around the world are unprecedented in modern history. The one playbook the industry has to go by is the 2008/2009 global economic crisis when chemical demand growth recovered rapidly following a sharp dip in global economic activity. That recovery was supported by global stimulus packages, particularly from China. To date, similar measures in this crisis have provided less momentum or reassurance.
Before the coronavirus outbreak, we had two underpinning base case views for petrochemical demand.
Longer term, we expect these trends to remain. However, the crisis will slow investment and shift focus towards cash reservation and capex discipline. The evolution of plastics circularity is also likely to slip down the pecking order. Meanwhile, a low oil price makes recycling economics tougher.
The impact will differ across chemical value chains and end-use segments. Packaging, sanitary and medical polymer applications are seeing a short-term lift. This is due to stockpiling, a boom in delivery services, and the high healthcare sector activity. Other major polymer-consuming sectors, including automotive and construction, have taken a hard hit.
Shockwave 2: volatile feedstock pricing following the oil price crash
Refined product prices have followed crude, amplified by the sharp drop in mobility and transportation fuel consumption. As a key connection to base olefins and aromatics manufacturers, refining industry trends can dramatically disrupt petrochemicals unit operations down multiple value chains.
In the medium term, new petrochemical capacity additions are likely to be lower – good news for an industry entering crisis. Existing projects under construction will be postponed by labour restrictions and decision-making on pre-FID projects will slip, perhaps indefinitely. Frustratingly, in the short term, labour restrictions are also delaying planned maintenance, meaning more supply will stay online. But this could be countered in the coming weeks by difficulties in recovering from unplanned interruptions.
How will the chemicals industry respond to the crisis?
Polymer consumption patterns are in disarray. Plunging oil prices are hitting feedstock pricing and profitability. The industry – like so many others – faces significant uncertainty. So, what’s the likely response?
Right now, the focus is mainly on the human aspects of the crisis, in addition to managing immediate operational disruption. But crisis management only extends so far. The industry must ask itself how to set up for success in a decade that looks very different to the last.
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