Petrochemicals 2030: Reinventing the way to win in a changing industry
PART II
Today’s petrochemical paradigm: Finding a new balance
between strategy and performance
As these different
trends come to bear on the petrochemical sector, the industry will be facing a
new set of challenges. To thrive in the next decade, petrochemical companies
will need to move beyond advantaged feedstock and emerging markets, and focus
on a broader set of strategic priorities.
1. Harness the new sources of industry
profitability
For the period 2020 to
2030, we anticipate fewer truly advantaged investments and a step change in
industry conduct. Since the early 2000s, over half of petrochemical investments
have been based on advantaged feedstock, in particular in the C1 and
C2 chains. Companies have not been concerned about the impact
this new capacity would have on the industry’s supply-demand balance, because
they knew they were investing with such decisively low costs that they would be
far below the marginal cost of production.
By 2020, most of the
world’s advantaged feedstock projects will have come onstream, and for the
period from 2020 to 2025, we anticipate fewer truly advantaged investments. To
meet demand growth, the industry will rely on ethylene cracker investments
based on liquids feedstocks—naphtha, gasoil, and heavier feeds. Cost-curve
logic dictates that these investments will generate a return that is close to
cost-of-capital returns across the cycle, and significantly below that of the
earlier advantaged-feedstock projects.
As a result, we expect
tighter investment discipline to be shown by most industry participants, and a
higher average level of capacity utilization industry-wide, which would help
industry-wide returns. There is also likely to be greater industry margin
volatility, because the industry’s steeper cost curve resulting from these
trends would mean that outages and small shifts in the demand-supply balance
would have greater impact on prices and therefore margins.
2. Take a more strategic approach to growth
As discussed above, we
expect that end-market growth rates for petrochemical products will slow down
as high-growth emerging-market economies mature and shift from manufacturing
products to providing services.
To offset this
slowdown, the petrochemical industry needs to rediscover one of the roots of
its original success—its ability to substitute for traditional materials, such
as paper, wood, and metal. But in the past 15 years we have seen this
substitution come to a standstill—and even reverse. The industry should double
down in its innovation efforts on areas where new growth can be unlocked
through substitution and not just focus on end-market growth. We also expect
that petrochemical companies will start to pursue opportunities for
inter-material competition between different plastics to capture additional
growth.
Major projects have
been a signature of the industry, but the closing of the advantaged-feedstock
window combined with lower growth will result in fewer attractive large
investment opportunities, and the ones that remain will involve potentially
higher risks. We expect to see more large-scale partnerships emerge in
response, combining resource/feedstock supply; technology and product
application know-how; and growth-market access. Companies bringing a strong
position in one or more of these areas will have a better negotiating position
relative to the few remaining opportunities in coming years.
3. Attack rising capex costs
Since 2000, we have
seen a rush to build new facilities to capture the benefits of advantaged
feedstock and strong market growth. However, investment costs measured in terms
of capital expenditures per ton of chemicals output are creeping up. This has
resulted from higher input costs, tighter construction-market conditions,
higher costs related to the locations where plants have been built, and the
fact the industry is reaching the limits of the cost reductions that can be
gained from building on an ever-larger scale.
In response, leading
players are taking a more disciplined approach to capital allocation, as well
as approvals and decision-making processes. They are more aggressively managing
the concept evaluation, scope and design of projects, and introducing lean
principles into all stages of the engineering, procurement, and construction
process.
4. Embed digital and advanced analytics
As the
advantaged-feedstock window of opportunity is closing, petrochemical companies
should step up their efforts to search elsewhere for ways to boost
profitability and improve returns. The industry’s complex and integrated
operations, where variable costs make up a high share of total costs, are well
suited to benefit from the improvements digital and advanced analytics have to offer.
We are starting to see
a step change in operational performance, as companies boost yield, energy, and
throughput; reduce down time; and improve commercial margins by applying
advanced analytics to operations, maintenance, and commercial processes. We
also see efficiency improvements through digitization of work processes, which
can at the same time help improve safety performance.
5. Identify new opportunities for upstream
value creation
As gas became the
feedstock of choice for petrochemicals, many producers have all but severed the
historic ties between refining and petrochemicals. That may change: the
slowdown in opportunities for chemical companies to use gas feedstock may have
them looking at petroleum-based feedstocks again. The attraction is likely to
be mutual: oil companies are frantically interested in the higher demand-growth promise that petrochemicals holdcompared with fuel markets for
heating and transportation. These fuel markets are expected to grow below 1
percent a year; petrochemicals, in contrast, are expected to grow at between 2
and 3 percent through 2030. Based on these projections, petrochemicals could be
responsible for 70 percent of new oil-demand growth.
We expect deeper
integration between refining and petrochemicals to emerge in response, and
larger-scale future investments to become fully integrated refining and olefins
sites, or even crude-to-chemicals units, and not just colocated refining and
petrochemical plants. On a like-for-like basis, these units may have
capital-investment costs that are 10 to 20 percent lower and cash costs that
are 5 to 15 percent lower than simple colocated units, by capturing synergies
on raw-material integration and optimization, energy efficiency, and sharing of
common infrastructure. NOCs are likely to be well positioned here, combining their
financial strength to fund new technology development with their need to tap
into the relatively high-growth petrochemical market.
6. Build the business case for embracing a
more circular economy
The petrochemical
industry is inextricably caught up in the circular-economy debate. Eighty percent of petrochemical building blocks are
used to produce plastics, in what today is essentially a once-through value
chain where the products are thrown away after use. The push across society for
a more circular approach is real, in particular with respect to managing the
waste streams. A plethora of potential solutions is being applied or tested,
which includes the introduction of renewable and bio-based materials,
mechanical plastics recycling,recovery of hydrocarbon
content through chemical recycling, and incineration combined with energy
recovery. But these efforts are generally not at scale and are not yet
presenting attractive economics.
We expect to see that
forward-looking petrochemical companies will start to direct a significant
share of innovation budgets, capital investments, and strategic thinking toward
circular approaches. This will include not only adapting to how demand
reduction and plastics reuse will substantially cut growth for conventional
products, but also to developing a credible portfolio of options that includes
recycling, energy recovery, and end-market and application offerings that are
inherently more circular.
The global
petrochemical industry is starting to move on from its development phase of
cheap gas-feedstock windfalls and emerging-market demand take-off.
Petrochemical companies around the world need to get ready for a more
challenging playing field. An important ingredient for success is going to be a
renewed focus on operations excellence, this time enhanced by digital and
advanced analytics. But future winners will also need to back that up with
significant strategic moves to capture the new round of value-creating
opportunities coming into view.
By Eren Cetinkaya, Nathan Liu, Theo Jan
Simons, and Jeremy Wallach February
2018
https://www.mckinsey.com/industries/chemicals/our-insights/petrochemicals-2030-reinventing-the-way-to-win-in-a-changing-industry?cid=other-eml-alt-mip-mck-oth-1802&hlkid=3bac0398112d49debb863e413e60d5d4&hctky=1627601&hdpid=f847a86d-74db-429d-8089-9b10917d0616
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