2025 Chemical Market Update With Kurt Barrow & Tony Potter Of S&P Global - Ep. 200

We're going to start conversing and, we'll make this happen. Kurt and Tony, thanks for joining me today and welcome to the chemical show.

And then, You know, really enjoyed my time there was really interested in the business side went got an MBA and then went out to work for consulting and a small kind of boutique consulting firm in the refining down downstream space. Then that company got bought is as oftentimes happen by the, which kind of rolled up into to, uh.

It's been it's been a great career, not not really super plan, but, uh, you know, enjoy my time kind of in industry on the technical side, did a lot of consulting and then now I run research right for for oil. And it's just such a dynamic. Interesting industry, you know, tied into the economies and geopolitics and there's just always so much to learn technology and obviously energy transition. And so it's just kept my interest and I've, uh, steady with it.

And I became, uh, on behalf of Exxon, the clients of consulting companies like the old. CMAI, where I eventually became a partner. And we sold CMAI to IHS in, in 2011. And then the, the journey with CMAI, IHS, IHS market, the logo keeps changing on my business card every two or three years, but I'm more or less still doing the same job. But I've had the privilege of doing it, not just in Europe, but I was four years in Dubai. I was five years in Singapore.

I've had the privilege of sort of talking to C level clients all over the world. It's fantastic.

And there's, there's a number of reasons on demand. We could talk about China is not growing at kind of the rate we'd expected. Evs are a small part of the weak demand today. It actually has more to do with kind of vehicle fuel efficiencies. But, you know, in a general sense, right? We've got oil. Prices kind of moving, moving downward.

And we can come back and talk about, you know, Trump and tariffs and some of the factors that are affecting the oil price, you know, kind of day to day week to week.

But, but I think the key takeaway is, is that we are, in our view, at least in the base case headed on a, on a general generally downward track for Brent if you kind of shift over a little more into the feedstock side, 1 of the big dynamics of the past few years is, you know, It's just the amount of NGOs that were coming out of the U. S. supply system. And that's, you know, part of that was coming as associated, in jails from the oil production.

And some of it was coming from the, some of the wet gas plays and the growth, the natural gas and the, the LNG, uh, to the, to the, uh. You know, feed the LNG plants and so forth, right? We do think that there's a number of factors that will start to slow that, still growth, right? And still relatively impressive growth, you know, two or 300, 000 barrels a day, but that is kind of one of the factors we see. And it's, it's part of the longer trend, right?

We'll come back and talk a little bit about, but, you know, at a high level, because of some of the fuel economy standards in, cars and trucks around the world, because we are starting to see, some electrification of transport, in some markets, there's a number of reasons that we do expect the oil demand globally. Right, refined products in particular and transport fuels to start to plateau and peak, and that's going to have some real direct implications for, for feedstocks, right?

It's going to mean that we have less, NGL growth, you know, of ethane, propane, to use as feedstocks when you come back to naphtha. Uh, and we'll need to essentially get more, Hydrocarb out of the crude system out of the refining system, to supply that, you know, to meet demand growth and chemicals that we, you know, Tony, Tony will talk about. So, that's that's kind of in a nutshell, right? Kind of the short and long term view, Victoria.

That will ultimately come with that right because we again we won't have as much surplus in gls, right? So the ngl Markets are quite interesting. They're one of the few markets that that we view as Not so much demand pull, right? It's not the demand, like you have in gasoline, right? You think about gasoline demand or or ethylene, right? You think about, you know, the pull from the derivative plants, right? The jail business is much more of a supply push. Business, right?

They're a, they're a byproduct of natural gas and crude oil production. You're generally not drilling for NGLs. Um, and then you kind of need to, to clear the market with those NGLs, right? And the, the clearing market is, petrochemicals, right? It's, it's the marginal market for, um, oil and gas. For NGLs and so it becomes really a price signal, right? At which point, you would switch that flex cracker or over long term, you know, change your investment profile to to those feedstocks, right?

And so if you. If you take our view, right, that we're, we're not going to have as much in jails, then effectively, you just need to go back to the refining system and get more feedstocks now, but they may cost you a little more. Right? So the nap, the crack may be a little wider. Ultimately, we may need, you know, we think we will go into, deeper conversion, like different cruel, the chemical technologies,

The Saudis have a gas initiative and, you know, we were hearing numbers that there'll be sufficient incrementally then for, you know, another 6, 000, 000 tons of ethylene and that's before they get on to, all of their crude oil to chemicals complexes that they they'd like to build at some point in the future. but generally, the industry is oversupplied. It's built its way into a problem in most value chains. What I show here is sort of incremental capacity in the.

Bars for ethylene globally, the bars of the incremental capacity, the gray shaded area in the background is the incremental demand. And you can see that period starting in 2020, when the bar, the height of the bars is much higher than, than the demand. The height of the shaded area behind the color coding. China is is red. And, you know, you can see China is accounted for a good 50 percent of incremental capacity in in the last few years. And so. Industry capacity utilization is quite poor.

You go back 4 or 5 years. It was up at 90 percent and that's effectively full on an employee basis, right? Every year, the industry, you know, shuts 4 percent down for planned maintenance, turnarounds, loses another 4 percent to unplanned outages, when you're talking about 90 percent capacity utilization, the industry's full, you know, and you go back 4 Pre 2020 prices and margins were very good for the industry. Last year, industry capacity utilization bottomed out around 80%.

That's the black line on this. And you can see it's a long, slow haul up to the sort of, mid to high 80s where, you know, the industry, the NAP, the cracking industry can, can leverage margins, generally, profitability is poor. The industry is talking about rationalization. That process has started mainly in Europe, but you know, we'll get some closures in Japan. We'll probably get some closures in Korea this cycle for the first time.

The place that's actually very disciplined about closing all small capacity down is China. Often goes unnoticed, but, you know, they build 1. 5, 2 million tons of new capacity and they quietly shut, you know, 150, 200, 000 ton old cracker, which is exactly what they should do. But, you know, I've seen a few of these cycles now, and there's never enough rationalization to sort of jumpstart this, into a sort of profitable area of industry utilization.

you know, I would say in the ideal world for the producers, they'd shut down 20 million tons of capacity and that black line would take a step change upwards and all would be sweetness and light. And that's not going to happen. Everyone wants someone else to go first. We can envisage, you know, 5 or 6 million tons of rationalization this cycle and, you know, the industries into that, not all doom and gloom.

So, you know, for your U. S. listeners, it's the nap, the cracking industry that's challenged. That's the high cost. And if we maybe go forward a couple of slides we publish this every week. So this is a sort of spot variable cost of production for ethylene for. From from various feedstocks. These are generic crackers. They're not any particular. So, you know, the lowest cost production right at the moment, the bottom left is, you know, U. S. ethane cracking.

It's as cheap as Saudi ethane cracking right now. The generic NAPTHA crackers prevalent in Europe and Asia, the two orange bars on the right hand scale. You know, it's that right hand end of the chart that sets the general level of petrochemical and polymer pricing. So, you know, all of the things being equal, the old price moves up and down. So does NAPTHA. So does ethylene, polyethylene, benzene, styrene, you name it.

But what you can see is, you know, U. S. Ethan, best producer has got a. Six, 700 a ton cost of production advantage relative to a typical, nap, the cracker right now. So, you know, if you've got advantage price feedstock, money is being made, in some parts of the world. And then, then there are other little niches that are doing quite well. When we talk about an 80 percent capacity utilization, actually the high cost end, the industry, the nap, the cracking industry.

is disproportionately pulled back more, and that actually creates shortages of co products, and the obvious one at the moment is C4s, so there's a shortage of crude C4 molecules and you know butadiene margins are doing great as a. As a result of that, but those are niches.

You know, that was also up at 90 percent a few years ago, and that bottomed out last year at around 70%, but actually Parazilin has been doing okay, right? And so industry capacity utilization of nameplate capacity utilization isn't the full story. You've got to get it where the effective utilization is, where the pinch points are. And in the case of aromatics, the gasoline industry has been supporting it.

So, you know, high octane values and all the money has been made in making the toluene and the xylene for its octane value. If you had to buy mixed xylenes on the market, you know, there was no extraction margin to produce para xylene or ortho xylene. That's maintained some margin in the aromatics industry. Kurt's already mentioned gasoline balance is probably lengthening as a result of, you know, huge refineries like the Dangote refinery. As that premium and octane comes off, then.

Paraziline will begin to experience the full impact of that, you know, 70, 75%.

But if you look at the, financial performances, you know, of the Clarions and, you know, the big specialty chemicals producers, they've suffered as well. But we expect that to start picking up.

So the curves look more or less the same and, you know, are equally as challenged. Yeah, it can be a bit misleading to talk about ethylene profitability, you know, on its own, because you've got to look at the integrated economics into the derivative, but I should say the polyethylene curve looks the same as the ethylene curve.

We're seeing significant overbuilds in china As well as pretty low demand growth and then uh, we've got North america seems fairly strong. But how do you see companies, both global companies and regional chemical companies navigating this. Because I'm certain this is a conversation you're having with leaders all the time.

And the thing is, they dotted around the coast of Europe. They're not connected to anything other than their own derivative plants. And so if you want to take a cracker shutdown decision, you have to take a site shutdown decision. And over the cycle, they've tended to be cash positive, right? These things are fully depreciated. As long as they don't need a big capital injection, there's cash to be made.

What's different in this cycle is that as Players are faced with the choice to inject capital to de carbonize, right? That's probably going to tip some of them into shutdown decisions. And it's, you know, it's probably right that all small capacity shuts down in favor of, you know, newer, bigger, more efficient capacity. That's the way markets work. But the exit costs are high in Europe. Site remediation costs. You've got the whole political factor.

No EU politician worth their salt wants to shut a, um, a chemical complex down on their soil. You know, France, I'm thinking France, Spain, Italy, where some of these small crackers are. And the politics is always about employment. And that's the issue. And so it's a slow process.

Ironically, as Europe talks about decarbonization and about, things like CBAM, Carbon Border Adjustment Mechanisms, that actually could create effectively a tariff around Europe that Prolongs the life of all small crackers, you know, a lot of unintended circumstances. So we'll see how that pans out, but Europe certainly started that, that journey of shutdowns. We talked about the players regionally, many of the players in Europe are global players.

I mean, Exxon is shutting down a cracker in France. Sabic is shutting down a cracker in the Netherlands you know, so they have global supply strategies anywhere. I'm not expecting Exxon to sell less polymer in Europe as a result of shutting down the gravel machine cracker. Um, the issue is where it comes from.

We're starting to see it in Asia as well. So, you know, I know you guys are tracking and monitoring, these political shifts. What influence do you see this having on the chemical industry, either, you know, this year or next year? I know nothing is immediate, but how do you see this playing out?

What's this mean for trade and tariffs when they weren't a very, you know, globally interconnected market or, you know, for oil and for chemicals. Right? And I think the other thing, right? That we're thinking about right is okay. You know, what are not just the actions, but what are the reactions, right? Because, Trump puts tariffs on Columbia, right? What's, what's Columbia do, how do they react?

And then, you know, you've got some of the bigger players, that are kind of in the middle, like India, Brazil the, the one to keep good relations with the West and with, uh, with, uh, With China and with Russia, perhaps, and so, how does all that, uh, all that, I think, if you get down into kind of some of the. Energy policies that Trump is, you know, has announced on the campaign trail, signed some executive orders on. some of those are quite impactful, uh, in the media.

Things like reduction of subsidies of electric vehicles, right? That's going to slow, the sale of electric vehicles in the us. Particularly for some of the, some of the big three automotive manufacturers, maybe a bit less for Tesla, and so forth. But things like oil production, the executive in the, in the White House doesn't really have much to do with oil production in the us. They will relax some of the regulations, some of the environmental rules, shelve the methane Rule.

Um, but most of the drilling and most of the growth of oil production is on state and private lands, and most of the decisions that the executives are making on how much to drill is really being informed more by their shareholders desire and the price of oil, right? And so that in some ways. You know, the administration could actually lower the price of oil and actually reduce some of the drilling activity potentially.

All sorts of games can be played. But, but let's say, let's pretend, you know, China slaps a 25 percent tariff on U. S. plastics. All that would happen is we'd probably see more U. S. exports to places like Europe. And then the slack into China would be taken up by the Middle East, so that the world would reshape. To tariffs, right?

The bigger concern is, you know, what does inflation do to demand, and does that depress the industry tariffs are going to lead to inflation, which potentially could lead to low growth, right? I mean, tariffs. The U. S. could be shooting themselves in the foot here. And you know, the U. S. is a big component of, of global demand. That becomes an issue as well.

There's been a lot of ongoing efficiency and carbon management. There's a lot of green chemicals, circularity at play. And yet, in many ways, we are still. In our infancy, as it relates to sustainability and decarbonization, and we've got this whole big question of who's going to pay for it? Because sometimes it seems to only make sense when there's subsidies, right?

If we think about electric vehicles, for instance, and the knock on effect it has, but we're, I feel like we're in a bit of a the pendulum is swinging. How's that? Um, how do you guys see this playing out, when you talk about sustainability, decarbonization across energy and chemicals?

Um, at the moment, we estimate, you know, probably about 8 percent of polyolefins are mechanically recycled. Um, Globally, even if you assume a doubling and almost tripling over the next years in those volumes is what we sort of expect. It's not enough to blunt the underlying growth demand for virgin pollen. Right. So it takes the edge off it a little bit, but virgin demand keeps growing. And that, that's an important message for the chemical industry.

It says that the chemical industry still needs to invest to grow. So you've heard Kurt talk about, you know, the oil complex peaking, and then in 2050, there's 12 and a half million barrels a day of, less of, of oil demand. The chemical industry keeps growing. And even if you assume them absolute massive increase in, in mechanical recycling, the world's still gonna need to build another a hundred million tons of ethylene between 2030 and 2050 at least.

And that's a very positive message for the industry in terms of, you know, the need to. And decarbonized. The other thing that's going on is the, the advanced or the chemical recycling where you turn plastic into, something that looks like chemical feedstock that doesn't get rid of the need to build the cracker to process that, right? So it, it, it impacts the feedstock balance. It's a very slow process. And there are some parts of the world where it's hardly developed at all.

The only chemical, the only plastic. That with substantially higher recycle rates is PET bottle resin. And, and that's, that's fairly obvious. The average consumer can identify it. They can separate it. You know, So you can collect it very, very easily. And by the way, a lot of it gets down cycled into polyester fiber, right? Only about 12 percent of bottles end up as new bottles. But the total numbers, when you look at what gets reused as polyester, that's that's more like 60%.

And then you look at how the chemicals made, right? The decarbonization of the plants themselves. That is a very slow process. There are tests. E furnaces, electric furnaces. But no one's built a new cracker yet with E furnaces, right? All these new crackers in China have conventional furnaces, when you add it all up, you can't conceive of the chemical industry getting to net zero without substantial carbon capture, you know, at the end of the pipe.

The Inflation Reduction Act was the 800 pound gorilla and where a lot of companies were putting a lot of attention, right? Because there were some really big tax credits there that looked quite, quite attractive. But now that's all been put on hold in know, our own view is that a good portion of that will continue on. Maybe it gets suggested and relabeled a bit by the new administration, but, but that uncertainty, right, is really.

It's something that companies have to have to struggle with that. The economics aren't there, you know, what to what degree do you rely on policy? And how much do you want to put that risk out there? I just say 1 other quick thing on the at a 50, 000 foot level. If you kind of step back and look at the energy, we have not done a lot of decarbonization kind of Tony's point. We've done a lot of electrification. PV, solar and wind is economic, and we see a lot of growth in that.

Um, you know, in the West, in China, a lot of other markets in the Middle East, as well, EVs also we're, you know, becoming somewhat successful, different markets, but the actual decarbonization of the molecules of carbon, uh, still, still in its, early, early stages, right?

It's, it's got nothing to do with the cost of production of those, those recycled pellets, it's the Dan owners and the Nestle's, you know, they want to be able to print on their yogurt pot that that yogurt pot is 40 or 50 percent recycled, uh, material and will the consumer pay? Well, rich consumers in Europe. We'll pay an extra penny, to go green. Um, I think the evidence from the U S is even the green consumers. No, I still want it as, as, as cheap as the Virgin plastic yogurt plus. So, yeah,

One, you do it all the time with clients, but then World Petrochemical Conference is coming up, and I would imagine that we're going to see some of these things in greater detail. And, and more topics at WPC. So can one of you guys talk about that a little bit? What should we be expecting from WPC this year? Uh, and, and who should be,

So we got some special guests who, you know, from the industry, scan the QR If you want to send Kurt or I an email, we can probably wangle you a discount. Uh, or I think, uh, I think actually, I think, yeah, we do have a discount.

We've got people like Dan Juergen, uh, speaking, uh, uh, but it's then in days two and three, there's a multitude of breakout streams, some of them value chain specific and all of Fin's ammonia stream, uh, refining and feedstock stream, but some of them also as a whole day, dedicated to, circularity and.

The, and the developments there, so, you know, whether it's mechanical recycling, advanced recycling, looking at the technologies involved, looking at alternate feedstocks, you mentioned green chemicals, there's lots of green chemicals, but they are very niche in relatively small volume and a very tiny sliver of the supply pie right now. But, you know, come and learn. You know, the prospects for for all those areas of the industry, especially the chemical stream as well, actually.

And so, uh, attending WPC is great value. Because the amount of information that is shared, that you can take and directly apply to your business and look like the smartest person in the room, because you know, what's going on.

We had a long period of profitability that's soon forgotten, right? We're struggling now and it's a long downturn, but it will come to an end, right? And then the industry does need to invest. To grow. So it's about getting your organization fit for that growth and you need to be studying your investment options now. To start up in the early 2030s, and it doesn't matter who the president of the United States is, right?

You're gonna build, a refinery, an energy plant or whatever, to last 40 years, maybe 50 years, it's gonna see a few presidents, right? So don't worry about who's in power. Love

Okay, too frozen right in, you know, we're going into a period of high uncertainty like we talked about, but that doesn't mean, you shouldn't be making business decisions and keeping kind of that long view across, political systems will will ship, right? And we'll be here 5, 10 years ago talking about a shift of that pendulum back the other way.