Petrochemical Excellence: Market Prospects for the Medium Term

The petrochemical industry has experienced disruption and volatility over the past three years.

FREMONT, CA: The global petrochemical industry has experienced a sustained expansion in recent years. The petrochemical value pool has grown at an annual compound rate of 8 percent since 2010. Utilizing advantageous feedstock in the Middle East and the United States has significantly affected this growth. Regional variations notwithstanding, the industry have also benefited from high-profit margins supported by resilient demand from packaging and consumer-goods companies and supply disruptions caused by the COVID-19 pandemic.

In the future years, however, substantial capacity expansions and sluggish demand growth may lead to a decline in industry value.

Companies in the petrochemical industry should ramp up their efforts to achieve peak performance in light of the market's current volatility and uncertainty. A company can realize its maximum potential by achieving excellence in its functions, such as operations, maintenance, supply chain, procurement, and talent management. Companies must outperform their competitors and capture new value pools with a comprehensive transformation.

The market prognosis in the medium term

In the past decade, the efficacy of the petrochemical industry was influenced by three factors. A constrained market led to higher margins in all regions; for instance, between 2012 and 2018, ethylene utilization rates increased by 4 percent. Additionally, ethylene capacity grew by 30 MTA annually, thanks to favorable feedstock, particularly in the Middle East and North America. Lastly, emerging market demand contributed more than 40 percent to the value pool's growth between 2010 and 2018.

Significant capacity expansions and decelerating demand growth in 2019 caused the industry value pool to contract. In 2020, the pandemic accelerated this decline even further. Petrochemical demand declined sharply in the construction and automotive industries following the pandemic. In contrast, packaging demand (particularly for food, sanitary products, medical applications, and online purchasing) remained robust. The latter is caused by accumulation, increased delivery services, and increased healthcare-related activity.

However, the majority of these tendencies were temporary. The blend of pent-up demand across all sectors and problems with global supply chains led to record margins when most of the world began to exit COVID-19 lockdowns in 2021 and early 2022. But margins are deteriorating again due to the recent economic downturn and the global introduction of new capacity.

Many trends are anticipated to impact petrochemical demand. Packaging, construction, and economic growth will drive demand for petrochemicals. The material flow from advanced recycling, which includes cracker and polymerization facilities, is also a significant industry driver.

When taken together, these considerations point to a slower-than-anticipated rate of annual petrochemical growth of around 3 percent over the next decade. Petrochemicals, however, are the fastest-growing segment of the hydrocarbon value chain and will persist in offering high growth and relatively high margins to integrated energy companies.

On the supply side, petrochemical capacity is anticipated to expand robustly over the next five years. Although the pandemic has slowed some capital projects, robust growth in the coming years is anticipated. It is expected that approximately 42 MTA of ethylene capacity will be added between 2022 and 2026, with China contributing approximately 19 MTA of confirmed capacity and North America contributing approximately 5 MTA.

The anticipated capacity additions will result in a growing disparity between supply and demand, as capacity growth is anticipated to exceed demand growth by 3 percent per year. The disparity may affect utilization and, ultimately, product profit margins. When the new capacity comes online, ethylene operating rates are anticipated to decline. Based on the historical relationship between margin and global operating rate, a decline in utilization may result in lower margins.

In the second half of this decade, ethylene utilization rates and product margins are anticipated to increase over the long term. The degree of development will be dictated by industry conduct and investment behavior. However, the current and near-term outlook for the industry could be more optimistic, highlighting the importance of long-term performance excellence.