The coronavirus: petrochemicals’ perfect storm
Markets continue to grapple with the impact of the coronavirus outbreak on China’s economic growth and demand for commodities. But given that China is now at the heart of global manufacturing supply chains—which in turn fuel demand for petrochemicals—the coronavirus outbreak and the ensuing collapse in economic activity are weighing on both a large importer and exporter of polymers. And given that chemicals are widely seen as the next frontier for oil demand—as gasoline, diesel and jet fuel consumption is projected to peak over the coming years—how demand for petrochemicals fares matter greatly.
Run cuts in China are reducing the availability of feedstock (such as LPG, naphtha and reformate) for the petrochemical industry, just as the lockdowns have crimped demand. Petrochemicals producers are now struggling to ascertain when and by how much to adjust output: Produce too much and they could exacerbate an oversupply in an environment of declining prices; ramp up too slowly and they could miss the opportunity to capitalise on a tight market once demand recovers. These uncertainties reverberate globally. In 2020, China is estimated to account for 61 per cent and 41 per cent of global net imports of polyethylene and polypropylene, respectively. Producers around the world have invested in steam crackers and export capabilities to feed China’s seemingly insatiable demand, leaving them with abundant supplies should China’s demand growth disappoint this year, weighing on ethylene and naphtha.
At the same time, China is a large exporter of some polymers, including PET film and bottle grade resins (made from paraxylene which relies on refinery-produced xylenes). Therefore, the reduction in exports from China is causing buyers to seek alternative supplies from the Middle East and South Asia, but these may not be enough, raising the price per tonne of the resin. And the uncertainty going forward remains huge: Will the collapse in demand be offset by supply outages? Will a potential stimulus in China lead to a strong demand recovery? As chemicals producers need to adapt to the ongoing uncertainty, one thing is clear: no other market can displace Chinese demand. While a Chinese stimulus in H2 20, assuming the virus peaks soon, will offer some relief, the coronavirus is offering markets a taste of just how disruptive a downside scenario in China can be.