Petrochemicals
Petrochemical markets face more capacity additions
Outrageously high profits reported by big oil companies like ExxonMobil, BP, Shell, Chevron, or TotalEnergies for 2022 created a roar of disapproval from politicians, President Biden controversially commenting that ExxonMobil, which posted an industry-record profit of US$59 billion for the full year, “is making more money than God.” Southeast Asia’s homegrown giants were not far behind. Petronas, one of the largest in the region, doubled its revenue from RM50 billion (bn) in FY 2021 to RM101.62 bn in FY 2022.
However, while gains in the upstream caused O&G players to be disdainfully compared to deities, downstream businesses, especially in the polymers space, took losses. Lotte Chemical Titan, a large polyolefin and olefin producer listed on the Malaysian Stock Exchange (Bursa Malaysia), wrapped up the year with a net loss of RM714.64 million, against the RM1.04 billion posted in FY2021. Chandra Asri, Indonesia’s largest petrochemical company, saw a revenue drop of 7.6% year-on-year (y-o-y); except for its olefin business, which grew by 15.7%, its polyolefin, styrene monomers, and butadiene segments registered big revenue losses.
This discrepancy is explained by the fact that the price of raw materials (oil and gas), which represents about 60-70% of the total cost of petrochemical producers, stayed relatively high, whereas the price of basic chemicals flattened out, squeezing margins. The ICIS Petrochemical Index for Northeast Asia, which measures the average change in a basket of 12 essential petrochemicals in the region, is 13.9% y-o-y lower at the time of writing. The prices of polyethylene and polypropylene, two of the most used plastics, started to drop in the second half of 2022 as supply chain restrictions eased, demand softened, and more products came onstream, oversupplying the market to the point of reflux.
The outlook for the rest of the year remains generally downbeat, especially in Asia, where multiple crackers and derivative units are coming online. Globally, 1,473 petrochemical projects are believed to start operations between 2023 and 2027, according to Global Data. Of these, polypropylene (PP) projects will be the most numerous, followed by polyethylene (PE). According to ChemOrbis, China will add over 8 million t/y of PP, 1.5 million t/y of which comes from Sinopec Hainan, PetroChina Guangdong, and Sinochem Hongrun’s PP plants.
The paraxylene (PX) markets are also bracing for overcapacity. PolymerUpdate, a market intelligence company, informs there are multiple PX plants commissioned in China; this new supply will meet an already saturated purified terephthalic acid (PTA) downstream market. Between 2023 and 2024, more than 26 million t/y of PTA will flood the market from 10 plants. The styrene monomer (SM) market buckles up for a similar deluge, even as demand sags.
Meanwhile, crackers see little incentive to boost production and Asian naphtha prices continue to drag through a bear market. Indonesia’s Chandra Asri’s cracker, as well as Taiwan’s Formosa Petrochemical and South Korea’s YNCC’s crackers, are working at reduced capacity, but the run rate cuts will not be enough to control prices, because at least nine new refinery projects with a 2.9 million b/d capacity, most of which will be in Asia, will become operational by the end of this year, according to the US Energy Information Administration.
Survival of the fittest
Prima facie, these huge investments might not make sense in an overflowing market, but the fact that billions are poured into petrochemicals is a bellwether of anticipated growth in the longer term. The Statista Research Department suggests the global petrochemical market is to double from US$584.5 billion in 2022 to over US$1 trillion by 2030. It is this continuous growth that makes companies unyielding in the face of uncertainty. “Having been in this industry for more than 30 years, since joining Lotte in 1991 in South Korea, I have witnessed many economic cycles, but the underlying trend has been of accelerated growth, spearheaded by Southeast Asia, which has motivated massive investments in polyolefins by the petrochemical industry,” commented Park Hyun Chul, president and CEO of Lotte Chemical Titan (LTC).
Lotte is investing US$3.95 billion in the LINE project (an acronym for Lotte Chemical Indonesia New Ethylene), an integrated petrochemical facility that will produce 1,000 kilo tons per annum (KTA) of ethylene and 520 KTA of propylene, boosting the company’s total capacity by 65% once the expansion is complete in 2025. Also expected to be ready in 2025, AGC’s capacity expansions at its two caustic soda plants in Thailand represent the Japanese company’s largest-ever investment, estimated at US$770 million. The manufacturer will increase its caustic soda capacity to 1.64 million t/y, a 20% increase from the current output. AGC will use chlorine resulting from the process to increase the capacity of polyvinyl chloride (PVC) by 30%, to 1.7 million t/y.
Oversupply in polyethylene terephthalate (PET), the most common thermoplastic polymer, is not deterring Indorama Ventures, the world’s largest PET producer, to invest in the US$2.4 billion PTA-PET facility in Texas – the Corpus Christi Polymers Plant is touted as the largest vertically integrated PTA-PET plant in the Americas, and it will bring 1.1 million t/y of PET and 1.3 million t/y of PTA to the market in 2025. Global Data forecasts that the new PET capacity additions in Asia will amount to 4.68 million t/y by 2026, with Asia representing 58% of the newly added supply. Zhejiang Petrochemical Daishan Polyethylene Terephthalate Plant 2 will add 2 million t/y when it comes onstream in 2026.
“The industry must stay vigilant against the challenges arising from the Ukraine conflict and the energy crisis. The pressure of the war will be heavier on European countries, whereas oil producers like Malaysia are better positioned. Nevertheless, the conflict has a global, indiscriminatory impact on everyone. Also, every country in the world is grappling with inflation, which deters consumer spending.”
Paul Fong, Managing Director, Dow Malaysia and Singapore
Even in a surplus market, there is still room for growth in PET. The largest PET producer, Indorama Ventures, only captures 1% of an incredibly fragmented global market. Aloke Lohia, the founder and CEO of US$18.7 billion Indorama Ventures (IVL), said: “Based on the principle that it is not the strongest of the species that will survive, but the most agile, success to me is not about having the largest market cap, but the most agile operation”.
In this survival-of-the-fittest competition, the battle is mainly fought in the cost arena. In this sense, SEA brings an important advantage, for all the reasons discussed in this report. Starting operations in 1995, Thailand, Indorama was one of the first PET producers in the region, and has grown today to 146 manufacturing sites around the world. “From the start, we wanted to control our supply chain, and Asia provided us with the raw materials, the customers, and the demand. Our base in Thailand is a relatively small market, but Asia presented us with larger opportunities to expand quickly,” Lohia commented.
In 2022, Indorama registered a 28% Y-o-Y growth, in defiance of current macroeconomic challenges.
Article header image courtesy of Evonik Article separator image courtesy of Indorama