IHS: Chemical industry to face slowing demand

With the pandemic in full swing, demand for chemical products in 2020 is dwindling. Companies switch to short-term planning horizons. Recovery to pre-crisis demand levels is going to take time.

IHS Markit notes that as the world passes the height of the coronavirus pandemic, companies that used to plan a decade ahead have now switched to a 50-day horizon. Over that short term, businesses strive to achieve two things – keep afloat and help the healthcare system fight the virus.

The pandemic has caused tectonic shifts in the global chemicals market. The shadow of disruption looms over the global supply chains as stocks gradually run dry, and the industry is facing headwinds in the form of trade wars and logistical restrictions in many parts of the world.

Experts forecast a U-shaped recovery, which is not the worst scenario

Demand for motor fuels collapsed amid the rapid decline of all types of passenger transportation, as many countries (including Russia) significantly restricted both national and international travel. The fall in demand for petroleum products may accelerate the trend towards integration of oil refining and petrochemicals. This development will naturally hedge oil refining businesses against fluctuations in demand for fuel, find a guaranteed buyer for a part of their output, and allow them to diversify cash flows while reining in volatility.

Market locked in battle for survival

Despite hitting the high-water mark of USD 220 bn in 2018, chemical industry earnings were on the decline the very next year – a trend that is set to continue in 2020, IHS forecasts. The inevitable global recession in 2020 will deliver a blow to chemical products demand, and it is unclear how long it will take for it to recover to at least pre-crisis levels. One thing is for certain – the recovery will not be overnight. In addition, a drop in demand for durable consumer goods can have a knock-on effect on the basic chemicals market.

Experts forecast a U-shaped recovery, which is not the worst scenario: it means the economy will drag along the bottom of the recession before gradually picking up and getting back to prior levels.

The crisis coincided with excess petrochemical capacities.

On the supply side, overbuild in petrochemicals was already evident in 2019 as companies were putting on stream new capacities they had planned for when the margins were high and the cycle was in the expansion stage. That oversupply is going to persist until 2021. Given the crisis and consequently lower earnings, companies are indefinitely mothballing or even shutting down some projects. They are also temporarily decreasing operating rates to maintain a supply and demand balance. With earnings currently at the cycle’s lowest point, many businesses are at risk of becoming unprofitable or even suspending operations.

Then there is China’s course towards self-sufficiency in olefins. Between 2000 and 2019, the country was aggressively building up chemical production capacity

Chinese market

The spread of the virus began in China’s Wuhan in December 2019, but already in May most of the Middle Kingdom lifted the quarantine and returned to business as usual. Still, the global economic recession is stymieing the local demand recovery, making the country’s businesses postpone certain investment projects.

Then there is China’s course towards self-sufficiency in olefins. Between 2000 and 2019, the country was aggressively building up chemical production capacity. As a result, by 2025 China’s internal supply will cover 93% and 71% of domestic demand for propylene and ethylene respectively, which means the country will be importing less derivatives of these olefins.

In the mid-term, the pandemic may prove detrimental to China’s relations with the rest of the world as countries struggle to meet the demand for consumer goods that had previously been supplied by the PRC. Because of that, the IHS analysts think it possible that governments are going to start weaning their countries off China dependency.

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