Petrochemicals
Bullish-(ish) markets
The tight supply and robust demand recently seen in the petrochemical industry are textbook fundamentals for a bullish market, but the theory becomes jittery in the current context of multiple uncertainties.
Geopolitics, the stabilization of supply chains still suffering from a pandemic hangover, and China’s economic rebound will all influence the industry’s outlook. Beyond current market fundamentals, the Singaporean industry is exposed to the exceptionally positive demographic fundamentals of Asia Pacific, the global epicentre of petrochemical demand. Nevertheless, the war in Ukraine, the pressure on raw materials availability and prices, as well as China’s economic recovery under a zero-Covid policy entail uncertainty for the Singaporean petrochemical industry. “The trajectory of oil and gas markets is unlikely to be a smooth one and will be dependent on what happens next globally,” commented Zhang Xi, managing director for Singapore and VP for Southeast Asia at Air Liquide.
Judging from an industrial gas demand perspective, Xi noted that the trend of strong recovery characteristic of the last quarters of 2021 was slowed down by the impact of the war in Ukraine: “Oil and gas markets are volatile, but investments have continued, driven either by customers resuming their development projects or the commencement of new plants,” concluded Xi.
Volatility is most pronounced upstream. Asian naphtha prices are currently trading at the greatest discount since 2008, according to Reuters, while earlier this year, prices rose to the highest since 2008. In the spring, Asian oil refiners were making record-high profits, with profit margins for Singaporean refineries tipping over US$20/barrel in April, wrote Reuters. Two months later, the same source reported the Asian naphtha market struggling to sustain margins. In just a few months, the fundamentals took a new turn, demand loosening due to the lockdown in China and supply chocking with imports from the Middle East and India. In May, Asia received 28% more naphtha imports from the Middle East, and 20% more from India, compared to a year before.
Regardless of the fluctuations since the beginning of the year, the price for naphtha, which is the main petrochemical feedstock in Singapore, reached the highest since 2014 in May this year, pressuring input costs for petrochemical producers. Even though the price has come down to US$682/t at the time of writing, supply restraints support the view that prices will stay high: Global refinery outputs are constrained by Europe shunning Russian refineries and by China slashing refinery production amid dried-out domestic demand.
At higher feedstock prices, the profitability of petrochemical producers is expected to drop in 2022 compared to 2021 when the top 100 global petrochemical companies experienced EBITDA average margins of 20%, 6% higher than pre-pandemic, according to McKinsey.
The financial gains achieved in 2021 should protect petrochemical players from potential headwinds. So far, the earnings reported by Singapore’s biggest players were higher in Q1 of 2022 compared to the last quarter of 2021, but summer revenue projections have been revised downward.
The bigger picture, however, is little affected by current market volatility. Research and Markets put the global petrochemical market at a 6.2% CAGR between 2022 and 2026, mentioning rising populations, high demand for plastics, and raw material availability as key growth drivers. Asia is by far the biggest market for petrochemicals, APAC accounting for some 4.3 billion people – 60% of the globe’s population. The most capacity additions are also announced here: By 2030, China has announced chemical capacity additions of 235.9 million t/y, and India coming next with 151.5 million t/y, according to Global Data. Singapore is at the heart of this Asian-centric growth, with China and Southeast Asia representing the biggest export destinations for Singaporean producers.
In China, the re-opening of Shanghai after two months of lockdown is expected to lead to a gradual pick-up in petrochemical demand. Singaporean-based petrochemical players watched closely the situation in Shanghai, but most express optimism that the knock-on economic effects of the lockdown will be short-lived: “Long-term, China remains a very large market presenting significant opportunities for our industry, not only as a consumption market but also as a manufacturing hub,” commented Allen Hu, VP for APAC at LyondellBasell, one of the world’s largest polyolefin producers.
However, the pandemic has not been easy on Singapore’s ASEAN neighbours. Paul Nai, managing director at Lubrizol Southeast Asia, thinks 2021 was worse than 2020 in this part of the world: “The Delta variant wreaked havoc in countries that had deflected those initial pandemic waves. Southeast Asian nations had to delay planned investments in higher-end manufacturing and pull back on their plans of quick recovery. As such, the much-anticipated recovery took place at a lower scale.”
Inflation, forecasted at 3.7% for ASEAN by the Asia Development Bank, is expected to hurt ASEAN economies by cutting into FDI inflows and real private consumption. Indonesia, Singapore, Laos and Thailand experienced the fastest increase in the inflation rate at the beginning of the year. While Singapore tightened its monetary policy by raising the interest rate to 0.64%, other central banks in the region have not yet responded with similar measures. Nevertheless, Nai thinks, ASEAN’s powerful demographics, including a growing segment of young middle-class sophisticated consumers, are paving a positive future forward for petrochemicals.
Aromatics
The aromatics market is poised for high growth both in the short and the long term. Applied as corrosion inhibitors in the O&G sector, aromatic hydrocarbons are in synch with the growth in the oil sector. As a result, the prices of aromatics like toluene have rallied in the past year. In the xylene chain of toluene, paraxylene (PX) was priced at US$550/t three years ago, and in 2022 it reached US$1,200/t, shared Venkatesh Raman, managing director for Asia at Chemium International, a trader with US roots. The biggest application for aromatics is paints and coatings, an industry itself driven by the construction and the automotive sectors – both of which have suffered significant losses due to the pandemic, but which have been bouncing back since 2021. The automotive sector is expected to drive significant revenue growth for aromatics, the use of different aromatic derivatives helping fuel efficiency and performance. Rubbers, for instance, which are derived from aromatics, are used to improve the tire’s adherence to the road, as well as to increase the lifespan of tires. The global aromatics market is believed to rise at a CAGR of 5.7% by 2030, reaching a total value of US$382.4 billion, according to Reports and Data.
“Southeast Asia is a key manufacturing hub for different industries, and investment is clearly coming back, not only in the chemical and petrochemical sectors, but also in energy, electronics, and food and beverage. Domestic consumption in countries like Vietnam, Indonesia, and Malaysia, all with growing middle classes, is on the rise.”
Allan Yong, Senior VP and Market Head, Ecolab Southeast Asia
Methanol
“Methanol seems to survive regardless of the noise that happens on the outside,” said Mark Berggren, founder and managing director of Methanol Market Services Asia (MMSA).
If we take a look at the graph chart of methanol prices over the last 10 years, we see multiple V-shaped plunges and rises. The last “V” was formed between 2018 and 2021, the price dropping sharply in 2020 and recovering in 2021 (see chart). Even though ample supply from Saudi Arabia, Qatar and Oman is weighing on methanol prices, the high price of both natural gas and coal, the two feedstocks of methanol, are strong upsize advantages for the commodity. Methanol’s relation to coal, in particular, is significant to the performance of methanol markets: A marginal but necessary supply of methanol comes from Chinese coal, which has been subjected to tighter regulations as China aims to become carbon neutral by 2060: “When energy prices go up, as they have done lately, the price of coal is once again not pressured to come down. China’s transition away from coal has kept supply in check and upheld prices high. Indeed, the rise in energy prices has made olefin prices rise, which makes methanol a very competitive olefins feedstock,” explained Berggren.
The methanol-to-olefins chain is driving the most demand, dominated by Chinese consumption.
Polyolefins and polymers
In 2021, LyondellBasell, the polyethylene (PE) and polypropylene (PP) global leader, produced over 1 million t of PP and PE as part of a JV in China, and announced further capacity additions together across the region. In a JV with PolyMirae, LyondellBasell invested in a 400,000 t/y capacity addition of PP in South Korea in 2021; and in 2022, it added another 250,000 t/y PP in Thailand with JV partner HMC Polymers. LyondellBasell is also investing lower downstream and announced a significant expansion for propylene oxide (PO) and styrene monomer (SM) in China, together with Sinopec.
“By most estimates, 60% of global growth will come from APAC,” noted Allen Yu, VP for APAC at LyondellBasell.
The polyolefins value chains, including PE and PP, the world’s most used plastics, but also PET, PS, and PVC, are very tied to China’s performance. China accounts for 37% of the total volume of PE consumption, associated mainly with packaging, an industry that has been on a steady growth trend, accelerated by the usage of plastics by the food and beverage sector. Similarly, polyethylene terephthalate (PET), used particularly in synthetic fibers and bottle production, is benefiting from the same upward trend in packaging. Both PE and PP are trading in line with pre-pandemic levels, PP trading at 8,413 CYN/t in June, and PE at 8,543 CYN/t (see charts). Polyvinyl chloride (PVC), the world’s third most widely used synthetic polymer, is experiencing high demand, driven by the healthcare sector, primarily. Mordor Intelligence expects the PVC market to grow at a 4% CAGR for the next five years.
Bio-based platforms
Demand for ethanol, an organic compound made from sugar or starches like corn, has seen simultaneous demand from both the energy and food sectors, which compete for the same feedstocks. OTC prices for ethanol have been on an uphill climb since 2020, and today ethanol is trading at US$2.83 per gallon, based on data from Trading Economics (see chart). The sustainability agendas of governments and companies around the world are pushing demand for ethanol as a base for bio-based alternatives to petrochemicals. Roger Marchioni, Asia director for Chemicals and Polymers at Braskem, sees Asia as the “next growth boundary” for its plant-based, bio-polyethylene (bio-PE).
The Brazilian petrochemical company and leader in bio-polymers is already shipping bio-based PE to the continent using Singapore as a transhipment hub, but it wants to move a step closer by also creating a local footprint for feedstocks and production. Braskem signed an MoU with SGC Chemicals in Thailand to assess the possibility of creating a bio-ethanol dehydration plant in the city of Rayong: “While we can move ethanol, oil, or naphtha around the world, we are open to the opportunity to explore the sugar cane industry in Thailand to localize bio-feedstocks. The collaboration with SCG is an example of Braskem’s globally minded-investment strategy, far away from our Brazilian HQ,” said Marchioni.
Like bio-feedstocks and bio-based compounds, biodiesels are also becoming more popular. Paul Nai, the managing director of Lubrizol, has observed a stronger interest in palm oil, which is produced in Malaysia and Indonesia as a feedstock for bio-based fuels used in combination with diesels in proportions of up to 40% biomaterials and 60% diesels. The opening of Neste’s biorefinery in Singapore has been a game-changer for the country’s bio-based fuels, and major players ExxonMobil, Chevron and Shell have all announced developments in this space. In 2022, ExxonMobil partnered with Singapore Airlines to supply sustainable aviation fuel (SAF) at Changi Airport, the first SAF pilot in the country.
While requests for bio-based fuels are emerging in Asia, it is Europe that dominates demand. Asia, with its ample feedstock availability as the biggest producer of palm oil, is playing a bigger role in supply. Sudheer Vijapurapu, the CEO of New Asia Shipbrokers, said that biofuel-related trade has grown by almost 50% from Far East Asia to Europe in the last year. From 50,000 t/month in 2017, current volumes are at 300-350,000 t/month, and these could grow further: “There are 6 million t/month of renewable fuel capacity globally today, and this could grow fourfold in three years’ time. The strong European mandate for cleaner energy creates a huge demand for biofuels, but the feedstocks are in Asia.”
CONCLUDING THOUGHT
“Whereas a mature market like Singapore is slowly getting back to pre-pandemic demand levels, emerging countries like Vietnam, the Philippines and Indonesia have not only already recovered to 2019 levels, but are also seeing bigger FDI flows. Sino-American trade tensions, rising labour costs and China’s policy during the pandemic are likely to send an outflow of investments to ASEAN.”
Zhang Xi, Vice President, Southeast Asia and Managing Director, Air Liquide Singapore