World chemical outlook 2017

Business people are by nature optimists, and that was true a year ago when companies and economists forecast a buoyant 2016 for the global chemical economy. In the end, however, business didn’t live up to expectations. U.S.
chemical production rose a sluggish 1.6%, and European output didn’t grow at all. Overall economic growth slowed in China and India. Perhaps chastened, the Europeans have lowered their outlook for 2017. But in the U.S. and Asia, industry executives are once again calling for a good year ahead. Given the political uncertainty roiling much of the world, those executives would be wise to have a “plan B” at hand.

Normally, a year in which a lot of new chemical capacity opens is a period of dampened prices and thin profit margins. But the slew of new ethylene plants destined to come on stream in 2017 doesn’t necessarily mean it will be a bad year for petrochemical makers.

The biggest names in petrochemicals—Dow Chemical, ExxonMobil, and Chevron Phillips—each have world-scale ethylene cracker complexes slated to start up on the U.S. Gulf Coast in 2017. Other firms, such as Mexichem, Indorama, and LyondellBasell Industries, are completing smaller crackers and large ethylene expansions.

Observers say this new capacity is sorely needed. LyondellBasell CEO Bob Patel told analysts in November that he doesn’t expect a repeat of the late 2000s, when a fleet of new crackers in the Middle East flooded the world with new production. From 2007 to 2011, when there was a recession, global capacity addition exceeded growth in demand by about eight crackers worth of output.

But over the past five years, demand has outstripped new supply by about three ethylene crackers worth. “Even with eight cracker equivalents forecast to come online in the U.S. by 2021, the forecast is relatively balanced over the next five years,” Patel said.

“The globe has no spare capacity like it did when the big Middle East wave came,” points out Steve Lewandowski, vice president of olefins at the consulting firm IHS Markit.

Lewandowski says the market for ethylene will only get tighter for most of 2017. He doesn’t expect the big new crackers to start up midyear as scheduled. Given the complexity of turning on massive multi-billion-dollar units, he says, the fourth quarter is a more realistic expectation. And it could be well into 2018 before these plants ramp up and operate full out.

Moreover, Lewandowski points out that most firms, including Chevron Phillips and ExxonMobil, aim to get their polyethylene plants running before they inaugurate new ethylene crackers. To do so, they will need to tap the limited quantities of ethylene available in the merchant market. “We definitely won’t have enough ethylene in the U.S. to fill out all the derivatives,” he says.

The new year is beginning with higher oil prices. In November, OPEC and Russia agreed to a deal that would cut global oil production by about 1%. Prices jumped from about $45 per barrel to more than $52 in the subsequent weeks.

In Lewandowski’s view, that kind of modest movement in oil prices is not enough to undermine petrochemical consumption. “If we jumped to $120 I would say something different, but a move $10 up, I don’t think it’s a killer for global demand,” he says.

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