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Top 5 Challenges Petrochemical Industry to Face in 2019

Top 5 Challenges Petrochemical Industry

Chemicals | May, 2019

Petrochemicals industry is both focused and competitive, with substantial technological developments, high capex and opex worldwide. Considering the production volumes, the industry holds more than 12% of the overall petroleum industry in 2018. The products manufactured in the petrochemical industry are used in numerous applications, which include packaging, household goods, medical equipment, textiles, paints and construction material, among others. The industry is likely to witness few major challenges which would coerce the industry to change how it works in the coming years.

•             Limited Availability of Feedstocks

Production of petrochemicals and the derivatives is based on conventional feedstocks in the petrochemical industry. So far, North America and Middle East (ME) are the main sources of these feedstocks in the industry. However, the potential for investments based on these conventional feedstocks is likely to be limited within the next five years. For instance, availability of conventional feedstock in North America for domestic market is anticipated to decline in the next 10 years.

According to the data reported by International Gas Union (IGU), in North America, gas production had grown marginally in 2017 (approximately 0.5%), mainly recuperating from a drastic decline in 2016, which resulted from the lower US associated gas production from several oil projects. Furthermore, the US gas production rose by 1% in 2017, completely driven by superior unconventional output from a combination of the oil-led Permian basin as well as the sustained production growth from the Marcellus and Utica basins in the Appalachian region.

•             Sluggish Growth in Maturing Economies

The demand for petrochemical is directly proportional to GDP growth, as petrochemical find application in the most of the end user industry such as consumer goods, automobiles, construction, textile and healthcare. As per the report published by International Monetary Fund, the global economy is projected to grow at 3.6% in 2020 and this sluggish growth is likely to hamper the petrochemical demand globally. China is the largest producer of petrochemical based end use products and thus it is considered as the biggest market for petrochemicals. Ongoing US-China trade war and lower automobile sales in China has significantly impacted the demand for petrochemicals in China. Furthermore, slow GDP growth rate in China and slower growth in per capita chemical consumption are another key factors that are anticipated to undermine the petrochemical demand in the country.



•             Constant Margin Erosion in Certain Petrochemical Chains

Significant margin erosion has been observed in few chains of the petrochemical products a. Markedly, the maximum erosion has been observed in the chains which are based on aromatic compounds such as para-xylene, phenol, polyamide, among others. Over the past five years, globally, petrochemical companies have demonstrated shrinking margins, owing to high feedstock cost coupled with lower product price. Many petrochemical companies across the globe have witnessed decline in profit margin since 2016. 

•             Volatility in Crude Oil Prices

The prices of crude oil, which is refined to produce benzene, ethylene, propylene and other compounds have been increasing since 2005 and traded for approximately USD140 per barrel in 2008. Though, in 2014, the prices gradually fell from nearly USD108 per barrel to about USD34 per barrel by January 2015, as the oil production in non-OPEC countries (particularly the US) grew and the global demand decelerated. Furthermore, according to the U.S. Energy Information Administration (EIA), as of January 2019, the US Crude Oil First Purchase Price was USD47.85 per barrel, compared to USD62.64 in August 2018 and USD55.65 in November 2018. This reflects that the petrochemicals market is affected due to steep fluctuations in prices, leading to uncertainty in both the upstream and downstream investments.

 

•             US China Trade War

The series of economic counterstrike actions which is now known as the trade war between the US and China has mainly originated with US measures to which China has replied in kind. Notably, the US imposed three rounds of tariffs on Chinese products, totaling around USD250 billion worth of goods, as of April 2019. The first two rounds positioned 25% tariffs on USD50 billion worth of imports from China. The trade war between the two countries has a direct impact on the price of several petrochemicals and feedstocks in China. The increased tariffs imposed on the US imports into China will affect the Chinese market and increase the prices of goods in the global market. For instance, increased Chinese propane tariffs are anticipated to make sourcing of propane from the USA uncompetitive as well as create a scarcity of propylene to produce acrylics, polypropylene and other derivatives. Additionally, even if the products come from elsewhere, the price is anticipated to rise substantially.

In order to survive, petrochemical manufacturers will have to move past the conventional feedstock, while simultaneously focusing on a larger set of strategic priorities. Markedly, renewed focus on operations excellence, which is enhanced by the use of digital analytics is a significant factor for success of the petrochemical companies. Furthermore, numerous petrochemical producers are disengaging refining and petrochemicals, as they prefer gas feedstock over the conventional feedstock. However, a slump in opportunities for the companies to utilize gas as a feedstock is anticipated to force them to return to petroleum-based feedstocks. Lastly, despite having access to superior quality feedstock, the industry requires skilled labor to ensure the manufacturing of quality end-products.

According to TechSci Research report, Global Phenol Market Forecast and Opportunities, 2024”.  Global phenol derivatives market is projected to reach USD19.9 billion by 2024, growing at a CAGR of around 5% during the forecast period. Phenol derivatives find various applications in electronics & electrical goods and automobiles through polycarbonate and epoxy resins. Moreover, growing demand from wind energy industry is being witnessed, owing to huge use of epoxy resins in the production of wind turbine blades. Additionally, shale oil/tight oil contains more amount of naphtha than conventional oil, thus growing shale oil exploration and production activities would further increase the feedstock supply.

Global market for phenol derivatives has been segmented into raw material, technology, derivative and region. Based on raw material, the market has been categorized into toluene, benzene, propylene and others. Among these, benzene and propylene are the most preferred raw materials for phenol derivatives. Of all the derivatives, the bisphenol-A segment is expected to dominate the market during the forecast period, backed by its use in the production of polycarbonates and epoxy resins. Polycarbonate is majorly used in food & drink packaging such as water & baby bottles, compact discs, impact-resistant safety equipment and medical devices, while epoxy resins are used to coat metal products such as food cans, bottle tops and water supply pipes.

Another report published by TechSci Research titled, “Global Naphtha Demand Supply Analysis, By End Use, By Region, Forecast & Opportunities, 2011 – 2026”, states that global naphtha consumption is projected to cross 960 million metric tons by 2026, on account of oversupply of naphtha, low prices of naphtha, and increasing demand for ethylene, propylene and aromatics petrochemical products. According to IEA, 11.5 million barrels/day of oil is used in petrochemicals production, of which around 90% (50% naphtha & 40% LPG) is used as a feedstock and remaining for thermal energy generation, in 2016. Moreover, naphtha is primarily used for gasoline blending and increasing demand for gasoline is anticipated to fuel demand for naphtha across the globe. Naphtha is the best suitable blending component for gasoline, as it significantly improves octane number of the fuel. Rising demand for gasoline across the globe is anticipated to boost naphtha consumption for gasoline blending in the coming years.