Reinventing growth strategies to stay profitable in petrochemicals
Winning in the petrochemicals business has hitherto hinged on
two strategies: accessing low cost hydrocarbons in abundant quantities to make
products that are largely undifferentiated from one another; and accessing
growth markets in emerging economies. But, as a recent McKinsey study points
out, this approach may not work for long. Growth in several emerging markets is
slowing and pressure to create circular value chains, incorporating more and
more of recycled polymers, will dent markets for virgin resins, and pose
immense challenges for businesses. Companies will need to work harder on their
core capabilities and strategy, including digital and advanced analytics, to
improve productivity and ensure profitable growth.
Strong growth
The global petrochemical industry has seen more than 15 years of
strong growth. Production of ethylene – the olefin that has come to be a
barometer for the industry – rose from 100-mt in 2000 to nearly 150-mt in 2016,
and stocks of petrochemical companies have outperformed other chemical sectors
and the market as a whole. The traditional approach to growth in the industry
has been to build large plants using cheap feedstock – particularly natural gas
– and ship the polymers and chemicals so produced to growth markets, such as
China. In parallel, producers in growth markets (including India) stepped up
investments to cater to their booming domestic markets.
Since 2000, over half of all petrochemical industry investments
– especially in the C1 and C2 value chains – have been based on advantaged
feedstock. Producers with access to low cost gas, accounting for around 20% of
the industry’s output, captured well over 80% of all value created between 2000
and 2014. For the others – including players in Western Europe, Japan, Latin
America and North East Asia – the business environment was very challenging to
put it mildly.
But the situation has changed in the last three years. Asian
players cracking naphtha – an oil derived feedstock – have benefitted from the
low oil price and, importantly, been able to retain a significant portion of
the cost advantage that has come their way.
The global petrochemical industry has also witnessed a structural
shift that has resulted in the creation of a four-tier structure comprising:
national oil companies (NOCs) and other emerging-market players; international
oil companies; pure-play petrochemical producers; and diversified chemical
companies with large petrochemical-production assets. The NOCs and the emerging
market players have accounted for a major chunk of the new capacity been
created in the industry, and several of them, including India’s Reliance, now
count as industry leading companies.
Diminishing feedstock advantage
McKinsey believes the advantage posed by advantaged feedstock is
diminishing. In the Middle East most new petrochemical projects are
increasingly based on liquid feedstock such as naphtha and gasoil, or a
combination of gas and liquids. These do not have the price advantage that
gas-based crackers enjoyed vis-à-vis the competition elsewhere in the world. In
North America, where an aggressive ethylene capacity build-up is currently
underway, prices for ethane and propane could be driven up both by increased
demand from domestic companies and by petrochemical producers elsewhere seeking
to import this resource. Reliance and INEOS, for instance, have contracted
imports of significant volumes of ethane to feed their crackers.
By 2020, most of the world’s advantaged feedstock projects will
have come on-stream, and further investments will be based on heavier feeds and
will generate returns that are close to the cost of capital across the cycle
and significantly below that in the past.
Slowing markets and margin erosion
The fastest growing market for much of the last 15 years has
been China, but it may no longer be the engine of growth. As the country’s
economy transitions from infrastructure- and manufacturing-driven development
to one focussed on services and upgrade-type purchase, incremental demand for
chemicals will slow. McKinsey estimates the slowing down in China will curb
global demand growth for chemicals to 2.0-3.0% per annum through 2030, compared
to the 3.6% growth seen annually in the last decade. Other emerging economies,
including India, will be not be able to make up for the slack in China at least
till 2030.
Overall, tighter investment discipline will translate to better
operating rates and margins, though at the risk of greater volatility. But in
several value chains (e.g. phenol, polyamides, para-xylene and purified
terephthalic acid) that have seen significant value erosion in the last decade,
the supply overhang will not go away for some time.
Deeper integration
The petrochemical industry will also see deeper integration with
the refining industry that goes far beyond just co-location. Oil companies are
eyeing faster growth than their traditional fuels business affords and will
seek opportunities in petrochemicals. This is abundantly evident in India
today, but will require refining operations of sufficient scale. Where
possible, such integration will afford several benefits including lower capital
and cash costs thanks to synergies in raw materials, energy and shared infrastructure.
NOCs, especially in emerging economies, with deep pockets and access to large
markets for energy and petrochemicals, are well placed to leverage such
opportunities.
Leveraging digital technologies and advanced analytics
The petrochemical industry’s complex and integrated operations,
where variable costs make up for a significant portion of total costs, make it
well suited to benefit from digital technologies and advanced analytics.
Benefits include optimisation of product portfolios to better reflect, predict
and respond to market realities; reduction in energy & water consumption
norms; predictive maintenance leading to reduced downtime of operations etc.
Strategic approach to growth
To offset the anticipated slowdown in demand, the industry will
need to rediscover one of the roots of its growth – its ability to substitute
other materials. But the easy pickings to replace paper, wood and metal are
done, and further inroads will require a much larger focus on innovation. There
could be opportunities for substitution of one polymer with another, and this
will create winners and losers.
There is now intense pressure on the industry to adopt closed
loops of manufacturing, use, reuse and recycle. This is coming not just from
governments and regulators, but also from consumers and retailers. Several
approaches are being taken up as part of the solution: use of bio-based and
biodegradable materials; mechanical recycling; and recycling to recover
chemical or energy values. While these are not yet done at scale, there is
considerable pressure on the industry to step-up the scale of such operations.
Europe, for example, has recently outlined an ambitious scheme to significantly
enhance the share of plastics that go into closed loops and minimise the amount
ending up in landfills. In India too, several restrictive measures are being
put in place – including outright bans on single-use plastics that have little
economic value at end-of-life to incentivise recycling.
Forward-looking companies will divert significant budgets and
human resources to rise up to the challenge and develop a credible portfolio of
options to transition the industry from its current linear growth model to a
more sustainable circular one. One consequence of this will be lower growth
rates for virgin products.
The
petrochemicals industry of the future will need to reinvent to stay relevant in
a changing world. Being in the right place simply may not be enough
Ravi Raghavan
CHWKLY 130318
No comments:
Post a Comment