By Peter Huang, Ren Zichen, Hu Shiming, Xia Shiqing, China National Chemical Information Center Consulting Department
Structural characteristics of petrochemical markets in major global regions
1. The North American chemical market will enter a strong development cycle
According to statistics from the American Chemical Society, benefiting from its strong domestic and export demand from the European market, the U.S. chemical industry surged by 3.9% in 2022, which was the highest in the past decade. It is projected that the industry will continue to grow by 2.7% in 2023.
In the past five-year cycle, the United States has formed a strategic layout represented by the integration and spin-off of DuPont and Dow Chemical, which marked the transformation of American chemical companies from diversified development to specialized and concentrated development. The concentrated development matrix will clarify the division into energy, refining, basic chemicals, special materials, specialty chemicals and fine chemicals. Leading enterprises will concentrate on either resource monopoly, large-scale production with low-cost strategies, or strong R&D and technology and strong channel strategy.
In the next five years, the further complementation of cost advantages and chemical technology advantages of North America's shale gas energy is expected to consolidate its leading position once again in basic chemicals and specialty chemicals and materials globally, and form a certain influence on the global market. First, from the raw material side, there are nearly 8 million tons of new ethane cracking capacity to produce ethylene to come on stream in North America by 2028. At the same time, the competitiveness of ethane prices and high yield of ethylene will enhance the cost competitiveness of basic chemical materials. In addition to the domestic market, the South American and European markets will become North America’s main export of basic chemical products, and will also have a certain impact on the Asia-Pacific market.
In terms of innovation, major U.S. chemical companies, represented by DuPont, Eastman, PPG, Axalta, and Celanese, will pay more attention to the in-depth research and development in core proprietary fields and aim to establish leadership in their respective tracks in North American and even globally. With the implementation of domestic production encouragement policies in the United States, there will be a return of manufacturing in the next five years, which will directly drive the demand for chemical products and provide a further boost to the chemical product application development market. The scale of U.S. manufacturing investment increased by nearly 250% in 2022 compared to pre-pandemic levels in 2019, reaching US$189.3 billion.
Regarding the sustainable development of new energy and chemical cycles, although the Biden administration has returned to the Paris Agreement, the administration may still not pursue radical strategy in energy transition or dominate the global carbon market due to the relatively abundant fossil resources and the current relatively high inflationary market. Nonetheless, chemical companies will continue to pay attention and increase investment in research and development of degradable technology, chemical recycling technology (such as polymerization to monomers), and energy storage technology.
2. In the European chemical market, there are multiple pressures, including hindered energy transformation, weakened cost competitiveness, and competition in innovation. In the future, going global and pursuing green innovative development will be the two main themes of European chemical companies.
The Russia-Ukraine conflict has had a direct impact on the European chemical industry in many aspects. First, although crude oil and natural gas prices fell and recovered at the end of 2022, it still had a strategic impact on Europe's energy transition. Due to the interruption of the Nord Stream pipeline, Europe had no choice but to turn to liquefied natural gas (LNG) supplies from the United States and the Middle East, which not only increased cost, but also had a direct impact on the EU's goal of 2020 to achieve a large-scale replacement of natural gas with hydrogen by 2030 because most Middle East gas supply companies seek long-term supply agreements for 20 years. To address this, southern European countries, led by France, are considering building long-distance pipeline networks and receiving facilities that can transport both natural gas and hydrogen, which will increase the cost of energy supply.
Secondly, energy prices operated at a high level in 2022, leading to a trade deficit in Europe's petrochemical industry for the first time in 30 years. It only got repaired at the end of 2022, reaching a basic balance between imports and exports). The costs of basic products such as ethylene and propylene were even higher than those of Northeast Asian companies in Japan and South Korea, which will weaken European upstream basic chemical companies’ global cost competitiveness and profit margins in the future. As a result, the expansion rate of production capacity of European basic chemical companies will slow down significantly, and companies begin to explore the possibility of transferring their business to North America, South Asia, and China.
Third, European chemical companies represented by BASF have experienced a slowdown in product innovation and new product launches over the past decade, while the company's focus has been on sustainable development and Zhanjiang integration project in China. Until these integrated projects and sustainable development strategies generate direct benefits, the lack of new high-value-added products may affect the financial performance of European chemical companies. Fourth, looking at the longer term, if European chemical industry in the next ten years put their core competitiveness in new energy and green chemicals, with the industrialization of hydrogen energy and the emergence of economic benefits of green chemicals, Europe will get back up and once again become a powerful region in chemical industry around 2030.
3. Japanese and Korean companies in the Asian chemical market will face the impact of Chinese companies and seek new technological commanding heights in the competition.
Japan and South Korea, as countries with poor oil and gas resources, have maintained about 4% and 3% of the global share respectively in chemical output value in the past decade. They have taken two different development paths. Japanese companies have focused on continuous innovation, and maintained the development path and industrial chain of American chemical companies. Companies represented by Asahi Kasei, Asahi Glass, Daikin Industries, Teijin Limited, Toray Industries, and Mitsui Chemicals, have gradually formed a chemical industry cluster, with specialty chemicals as the pillar industry. They have occupied technological commanding heights in special membranes, special fibers, and electronic modified materials globally. Korean chemical companies have ranked second in the world in terms of technological innovation. Companies represented by LG Chem, SK Holdings, Hyosung, and Samsung Chemical have established global competitive advantages in chemical fiber, engineering plastics and modified materials. At the same time, two countries have taken full advantage of the global expansion of their own terminal electronics and semiconductor industries, expanded the production of electronic chemicals and semiconductor materials globally and established a certain monopoly position.
In the next five years, China's chemicals are expected to experience rapid expansion in production capacity and technological progress, which will have a significant impact on many chemical products in Japan and South Korea. The impact on South Korea is mainly concentrated on basic materials such as PX, PC, and ABS, while the impact on Japan will cover MDI, elastomer and fluorosilicone materials.
Characteristics of the future development of China’s petrochemical industry
The next 2 to 3 years will be crucial period for China's petrochemical industry adjustment. In the past, China’s petrochemical products were in short supply, but mainstream products have become oversupplied at present. Therefore, developing high-end products and new materials becomes inevitable and the industry will present five major characteristics.
1. Chinese chemical companies will compete head-on with counterparts in Europe, Japan, and South Korea on a global scale
Due to the transfer of industrial chains in the history, China's chemical product structure currently highly overlaps with European companies in many industrial chains. For example, the polyurethane industry chain represented by MDI, engineering plastics represented by PC, and human and animal nutrition industry chain represented by vitamins and methionine, China and Europe have a combined production capacity of more than 70% of the world's production capacity, and the current product price difference between China and Europe is at a historically high level. In the next 2 to 3 years, Chinese companies are expected to increase their share of exports to Europe or capture Europe's original export market.
2. Cost competition remains the main theme of the development of China’s chemical industry
Large chemical companies are extending and integrating their industrial chains. One type is the large-scale private refining and chemical companies represented by Zhejiang Petrochemical Co., Ltd., Hengli Group Co., Ltd., and Shenghong Holding Group Co., Ltd. Those companies have gradually formed an integrated production mode with low-cost advantage, launching an impact towards the aromatics industry chain of Sinopec and PetroChina. These private enterprises originally developed from the terminal textile industry to the upstream raw materials. As the enterprises became larger and stronger, they gradually expanded horizontally to the production of basic chemicals throughout the entire chain such as ethylene, propylene, PX, oil refining, chemical fiber, and rubber. With the continuous expansion of production capacity, ethylene, propylene and PX will have a new production capacity of 20 million t/a respectively by 2025 (take 2021 as base), and the self-sufficiency rate will reach 90%, 116% and 118% respectively. The increased production capacity has shifted the market from a general under-supply to an oversupply situation for bulk products, which will have a certain impact on both the domestic market and the Asia-Pacific market and form a competitive relationship with companies in the United States and the Middle East that have sufficient supplies of raw materials. The other type is traditional midstream chemical companies like Wanhua Chemical Group Co., Ltd. which have mastered core competitiveness in the midstream product series. They integrated the production layout in the raw material end, and developed their own innovative and low-cost development path.
3. Large state-owned chemical companies are the main force in ensuring the security of the industrial chain and exploring hydrogen energy development models
State-owned enterprises represented by Three Barrels (CNPC, CNOOC, and Sinopec) prioritize the security of the energy and basic chemical industry chain and the national market, and do the right and adequate things. Those enterprises have a nationwide production base and unified sales system, which allows them to maintain a monopoly position in bulk products market including polypropylene (PP) and polyethylene (PE), and the products are gradually developing towards professional, specialized unique and new products. Additionally, in the field of hydrogen energy, companies represented by Sinopec are actively exploring joint ventures and cooperation models with foreign companies and laying out in cutting-edge technologies and terminal applications.
4. Large-scale private enterprises are devoting effort in laying out overseas market
Large private enterprises are focusing on consolidating their existing domestic layout and expanding overseas production and sales markets. Chinese enterprises have increased competitiveness but in the same time, they are facing uncertain risks such as trade blockades, tariffs, and carbon taxes from the United States, Europe, and Japan. Therefore, more chemical companies will make layout in Southeast Asia and use it as a base to export to Europe or North America, thereby reducing geopolitical risks. Furthermore, large private enterprises begin to change their original export model that relied entirely on overseas dealers. Instead, they speed up efforts to establish and develop their own sales networks in core markets and make useful attempts to expand overseas markets.
5. The "double carbon" goal accelerates the chemical enterprises towards large-scale and the production capacity will become more centralized
Under the "double carbon" goal, the cost pressure on enterprises has increased in the short term. It is expected that small and medium-sized chemical enterprises that lack innovation and have uncompetitive costs will gradually withdraw from the market before 2030, which will lead chemical enterprises to develop towards large-scale, and production capacity will be more concentrated.
A brief discussion on the possible impact of the Russia-Ukraine conflict on the future energy market
One outcome: there will likely be a structural change in the flow of energy trade such as crude oil and natural gas, if the Russia-Ukraine conflict lasts for a longer period. Energy exporting countries like North America and the Middle East may fill the energy gap in Europe, while Russia may seek to export to China, India and Southeast Asia. One of the biggest impacts on China is the large number of propane dehydrogenation (PDH) projects deployed in China. U.S. propane accounts for 65% of global trade volume. In addition to giving priority to the Japanese market, U.S. propane will mainly flow to the European market, which will likely lead to a decrease in export to China market, and it will be difficult to support China's propane import demand of approximately 35 million tons by 2025, and at the same time, due to the supply gap, propane prices will fluctuate at high levels in the future.
The other outcome: crude oil and natural gas prices will be inevitably impacted in the short term, if the Russia-Ukraine conflict ends in 2023. It is likely that crude oil prices will return to around US$60/barrel, which may trigger a new round of weak chemical industry cycle, and have a certain negative impact on the rapid advancement of new energy.
Forecast on chemical product price cycles
The author believes that in this round of chemical product cycle (2020-2025), it has entered a stable downward channel from the second quarter of 2022, and will basically complete the bottom construction by the third quarter of 2023. With crude oil prices basically stable, easing inflation in the United States and major European countries, and the stabilization and recovery of China's economy, fine chemicals, specialty chemicals and high value-added materials will be the first to rebound in late 2023, if China's consumer side is restored and more favorable policies are implemented. However, if crude oil prices remain around US$90/barrel as generally predicted, bulk basic chemicals and primary polymers will most likely continue to fluctuate at relatively low prices until the end of this cycle in 2024.
In the short term, the recovery of various regions around the world still has its own uncertainties. The recovery may be regional, with China and the United States acting as the engines of recovery. Domestic chemical companies can make full use of the time difference and recurrence between the recovery of the domestic consumer market and overseas companies, reorganize their global core competitiveness, strengthen, and consolidate cost competition strategies in the short term, and expand domestic production capacity and products to the global market.
In the medium term, as the global chemical industry undergoes a re-transfer in R&D and production, Chinese chemical companies should not only adhere to cost competitiveness but also increase their efforts in research and development of raw materials and application development of products, striving to achieve a quantitative change to qualitative change within the 2025 cycle and embracing a new round of chemical industry development cycle in 2025 with innovation as the main battlefield.