Senior consultants see positive outlook for US petrochemicals but supply-chain risks ahead

What is the general consensus when three senior consultants to the North American petrochemicals industry discuss their market outlook? A healthy dose of optimism, but without getting carried away.

Ojas Wadivkar, Partner at AT Kearney, was one of the consultants on the panel discussion at Petrochemical Update’s recent Petrochemical Supply Chain & Export Logistics conference in Houston.

He said the outlook would be very dependent on the decisions of the Trump administration. Looking globally, he outlined three scenarios: “One is the optimistic scenario, what we call Globalization 3.0, which is essentially open trade, free movement of product, etc., which will lead to greater growth. Second is the polarization scenario, which is what we used to see, not necessarily the Cold War scenario, but you have different blocs, the Western bloc and the Eastern bloc, that will actually reduce the trade between these blocs. And the third is what we call island-ization, which is each major region becomes its own island. North America becomes insular, Europe becomes insular, Asia becomes insular, and that’s the most pessimistic scenario. All in all, I like to be optimistic, so I’d like to think it’s between globalization and polarization.”

Chemicals to have increasing influence in oil markets

Stephen Zinger, SVP Chemicals, Wood Mackenzie, said his firm had been having an internal debate about peak oil demand. Whereas demand for fossil fuels used in transportation and in heating has been growing at lower than GDP growth rates, and in some cases compressing, demand for chemicals has been growing quickly, he noted.

“A lot of chemical chains are still growing at above GDP growth rates on a global basis, and so the debate I’ve been pulled into at Wood Mackenzie is: is chemicals going to drive the oil markets, because it’s the only one that’s growing? And I have to keep reminding them that we’re kind of the tail that wags the dog. We’re still less than 10% of oil consumption around the world, so we’re not going to make or break it, but on the increment it’s going to be important.”

On the pessimistic side, he said, the petrochemicals industry tends to build in waves. “When margins are very good, and they’ve been very good in North America for the past four years because of this difference between gas and oil prices, we invest in waves and we overdo it and markets change – whether its macro or other factors.”

But on the upside, Zinger pointed to data from the American Chemistry Council documenting more than $150 billion in investments in the U.S. related to shale gas alone.

He argued: “If you go back 10 years ago, we were thinking about contracting this industry, and now we’re talking about $150 billion in investments, so that may be an optimistic number, but it’s not far off – because a lot of the capital’s been committed. But I do think just like shale gas surprised us all, there’s going to be other surprises, whether they’re geopolitical, or demand, or supply changes, and this type of environment can’t last forever – there’ll be ways to arbitrage that.”

Testing the supply chains

Zinger, Wadivkar and Michael Mourot, SVP, Sinclair Group, agreed the rise of U.S. ethylene would provide new strains on the supply chains. Noting that North America already exports a lot of commodity chemicals, he said 50-70% of that capacity is “going to have to be exported into world markets”.

Mourot said that a lot of the technical capabilities to move product are now 30 years old, and that the industry now lacks the most cost-effective way to move product out of North America. More can be done on both the regulatory and safety side to improve the situation, he said. “That’s the other element many people miss - handling chemicals; many of them are chemicals we’ve got to protect from a safety perspective. All of those are capabilities that are not where we want to be, and I think there are other regions that are quicker.”

Turning to the audience, which was made up heavily of people from supply chain companies, Mourot said: “Part of why I think you’re here, is that when I look at what’s going to hinder the capability to do this, it’s not the plants, it’s not the technology – that’s world scale – the supply chain, we’ve found becomes the weak link.

“The capability to move products, move them quickly, safely, will become a critical element in the next three to five years, and we have not invested in it as much as we should from a global perspective. We should have invested in building a world-class cracker, a world-class polyethylene plant, but when we bring those plants up, our problems are the supply chain capabilities. We did not look at that in the way we designed for the volumes and the movement we’d done before. Our challenge here is how do we do that knowing the plants that are going to come online; to move product around the world we need to think of the world capability. We’re going to have to change our thought processes and mindsets.”