After a few good years, outperforming broader markets in the past decade, the chemicals industry currently faces significant challenges moving forward. Feedstock cost competitiveness and new markets, two of the more significant market drivers, have a positive outlook. However, other drivers are negative, such as the current direction of interest rates, or neutral, such as limited GDP growth, the rise of inflation, and growing pressure from state of decarbonization, sustainability, and circularity. This post is a recap of a presentation at the ADI Forum in 2023, so you won’t want to miss the 2024 ADI Forum for all the insights you will gain there, including an overview of 2023 and an outlook for 2024.
The threat of recession weighs heavily on economic and chemical industry forecasts. Some negative indicators include automobile sales, which will likely end at 15.7 million units in 2023 versus 13.4 million units in 2022, which was the worst in a decade, but still down from 17 million in 2019, and housing starts, which began falling in the fourth quarter of 2022 after significant growth in the past couple of years, with limited growth expected in 2023. Additionally, U.S. chemical exports and the trade surplus began declining in Q4 2022 and is now below 2019 levels. However, some of this slower growth may be offset with infrastructure projects, such as those coming from the Infrastructure Investment and Jobs Act (IIJA). (Figure 1)
Figure 1: GDP Growth Rates
Across the board, rising inflation is hurting chemical companies, while the Ukraine-Russian war has impacted energy prices. The rise in energy prices drives inflation higher, raising prices for metals, freight, resin, energy, packaging, and paper, among other things. Due to inflation, many chemical companies have reported hits to earnings, although some now plan to raise prices. Capital budgets for new projects are also being revised upward to keep up with inflation.
Concern exists that rising interest rates could pose a major risk in slowing demand growth in key markets served by chemical companies, such as housing, infrastructure, and automotive, potentially impacting consumer markets as disposable income falls from possible higher borrowing costs. Feedstock costs may also rise as upstream oil & gas drilling growth, fueled by low interest rates, falls. Also, capital spending may slow at a time when it was ramping up to meet decarbonization and ESG goals.
Energy and feedstock costs, coupled with uncertain demand, will impact industry utilization rates. In the last year U.S. natural gas prices rose largely due to the crisis in Europe, but they have recently fallen and are likely to stay low. Additionally, industrial gas demand-price elasticity has increased since 2010, mainly because of higher gas penetration. Further, the ability to switch away from natural gas as a feedstock is far more limited today than it was in the past. Natural gas prices in Europe had a very difficult year and have fallen but will likely continue to be subject to significant volatility.
In 2022, methyl methacrylate(MMA) and melamine, along with nitrogen-derived products, were among the most affected in Europe by the high gas prices, and the consequent deep production cuts as they are heavily exposed to natural gas for production and feedstock. Ammonia was also no longer economical to produce so its production was reduced by nearly 50%, and urea production was cut by almost 30% since natural gas accounts for nearly 80% of production costs. Sites with flexibility were opting to switch from natural gas to other sources of energy, such as LPG.
Benzene capacity in Germany and Netherlands is a significant percentage of European capacity, and very reliant on Russian natural gas. There is a similar picture for olefins although there are other countries with a significant percentage of their capacity at risk. Naphtha is a large part of the European steam cracker feed slate, but other, lighter feedstocks are not insignificant. Feedstock constraints with negative and lighter feeds were driving up ethylene imports and pricing in Europe in 2022. Given the energy and feedstock challenges, coupled with uncertain demand, ethylene capacity utilization is expected to fall.
Megatrends such as energy transition, electrification, and hydrogen will expand markets for plastics and polymers. Other megatrends include expanding markets such as batteries, solar, infrastructure, and wireless, will help the chemical industry create new markets. Meanwhile, rising electric vehicle sales have driven demand for cathode active materials, which is growing 22% annually and is expected to reach 7,200 kt by 2030. The surge in demand for EVs is driving the demand for base metals, which is particularly true for nickel, cobalt, and lithium since they are essential components of electric batteries. The implications of this growth in demand are far-reaching and have made these metals increasingly valuable resources. In addition, the need for increased investments in CAM capacity has caused a large influx of capital into the industry.
Solar photovoltaic installations need polymers and are expanding demand for EVA and POE materials. Electrolyzers have a complex supply chain and key segments are highly constrained, such as raw materials like precious metals, and post-life processing, as recycling and metals recovery. The current 5G infrastructure roll-out will drive demand for materials benefiting liquid crystal polymers and polyimides the most.
Meanwhile, markets continue to demand differentiated products even in commoditized segments. Virtually all chemical segments had a difficult year in 2022, with the exceptions of mining, oilfield, and fertilizers. Many segments increased their returns significantly over the past few years, versus over the last decade. Emerging markets and China had the most growth over the past five years, while other markets saw little change. Producers in mature markets, such as PVC, are also trying to differentiate their products for specialty, niche applications. Differentiated commodity grades for specific applications can yield reasonable price premiums in certain markets. Moving forward, we anticipate some specialty chemical markets to do well, creating significant opportunities.
Global chemical industry capex growth will slow given risks with demand and supply. Capital investment has started flowing cautiously to markets where recycled material adoption has been strong. Assuming packaging demand (polyethylene (PE) and polypropylene (PP)) in Europe complies to avoid plastic packaging tax and contains 30% recycled content, the actual waste plastic feed supply for PE and PP in Europe would fall shorty by 83%. Thus, a collective effort from government, corporations, companies, and consumers is needed to fulfil unmet waste plastic feedstock demand. (Figure 2) However, waste plastic feedstock collection is challenged, and investments are needed across the value chain.
Figure 2: Waste plastic feedstock demand and supply
Finally, chemicals is a hard-to-abate sector whose high emission intensities suggest high carbon reduction costs. Alternative feedstocks will require a massive jump in carbon prices to cover the capex and returns seen today. This is a driving interest in conversion of carbon dioxide into products such as ethanol, ethylene, polymers, and methane. To these ends, companies such as BASF are investing heavily in a wide range of approaches including white biotechnology.
ADI Chemical Market Resources is a prestigious, boutique consulting firm specializing in chemicals, petrochemicals, polymers, and plastics since 1990. We bring deep, first-rate expertise in a broad range of markets including feedstocks, electrification, and hydrogen, where we support Fortune 500, mid-sized and early-stage companies, and investors with consulting services, research reports, and data and analytics, with the goal of delivering actionable outcomes to help our clients achieve tangible results.
We also host the ADI Forum, formerly known as FlexPO+, one of Houston’s distinguished industry conferences, to bring c-suite executives in oil & gas, energy transition, and chemicals together for meaningful dialogue and strategic insights across the value chains.
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