Global petrochemicals market in a decade of unprecedented oversupply

James Wilson looks at the anticipated increased mergers and acquisitions activity, favouring regions like the U.S. and the Middle East with advantageous feedstocks and the implications of continued weak demand across Europe

The global petrochemicals market is currently in a difficult moment with oversupply driving utilisation rates and margins for chemicals producers to hit record lows.

The fact that the industry is in a downcycle is no surprise: the scale of the current capacity build out has been clear for years.

What is unique about the situation today is that impacts of capacity expansions have been compounded by weaker than expected demand growth, and there is another wave of capacity additions due online within the next five years.

Chemicals demand proved to be surprisingly robust in the immediate wake of the coronavirus pandemic, however since then demand growth has fallen significantly short of pre-pandemic expectations.

Soaring energy prices and inflation, caused by the Russia-Ukraine war, have acted to further hamper demand.

Global ethylene demand in 2024 will be more than 6% lower than pre-pandemic projections. This has caused reduced operating rates and margins in all regions, even for those feedstock advantaged producers in the US and Middle East who have seen their cost of production advantages increase.

China – the world’s largest importer of chemicals – has been responsible for around 75% of olefin and aromatics capacity additions between 2020-2024. Combined with a weak economy, this has resulted in imports of ethylene derivatives to China decreasing by around 20% in the first nine months of 2023 compared to the same period in 2020.

The biggest impact, in both relative and absolute terms, has fallen on other Asian producers.  Asia cracking margins have been negative since late 2021, with a record number of plants being idled for extended periods.  Asia exports into China have dropped by more than one-third.

Notably, Middle Eastern exports into China have also shown steady declines since 2021, dropping by almost 30%.

Iranian export volumes have almost halved in 2023 compared to 2020. Perhaps more surprisingly, total exports from Saudi Arabia are also down by more than 20%.

Polyethylene (PE) exports have decreased by a little over 30% and ethylene glycol exports are down by nearly 15%. Overall Saudi ethylene derivative exports into China are down by around one-quarter.

In marked contrast, US exports have significantly increased over this period. North American export volumes to China have more than doubled in the first nine months of 2023 compared to the same period in 2020.

While the Middle East has seen exports of crude, naphtha and liquefied petroleum gas (LPG) increase, this has not offset the loss of market share for chemicals. And even here there is competition from the US, which overtook the UAE as the largest LPG exporter into China from 2020.

How to grow market share in an oversupplied global market will be of key importance to Middle Eastern producers in the coming years.

Middle Eastern exports to Europe have also decreased in the past two years as a result of fierce competition with US.

While exports to Africa have increased and may present a long-term opportunity, the market is expected to remain relatively small when compared to Europe and Asia.

A number of Gulf countries are planning large scale investments in chemicals in the second half of this decade. These investments are a mix of projects intended to guarantee offtake for oil and refined products in a post-peak oil world, and a move to bring chemicals production onshore to allow for more value-added exports. Significant sums are being spent on crude-oil-to-chemical complexes.

These investments will be of great concern to high-cost European and Asian producers, who do not have any serious reasons to expect a favourable operating environment to materialise in the foreseeable future.

Insight by James Wilson

James Wilson is Senior Petrochemical Analyst at ICIS.