¶ Chemical Industry Insights by John
Welcome to The Chemical Show, the podcast where Chemical means business. I'm your host, Victoria Meyer, bringing you stories and insights from leaders driving innovation and growth across the chemical industry. Each week we explore key trends, real world challenges, and the strategies that make an impact. Let's get started.
Welcome back to The Chemical Show Where Leaders Talk Business. I am here today with John Richardson, who is a senior consultant at ICIS, and those of you who are longtime listeners of The Chemical Show know that John always brings a sharp, insightful perspective about what's going on across the global chemical industry. Certainly with the lens, especially towards China and the Middle East and its role in the global chemical business.
So, John and I are here to have another great conversation about all things chemicals. John, welcome to the Chemical Show.
Thank you very much, Victoria. Glad to be here again.
Yeah, I'm really glad to have you here. So first of all, give me the one minute intro, to you because some, again, we might have some new listeners who don't know. John Richardson. I.
Right. Yeah. I mean, I'm a journalist by background, sort of drifted into the chemicals industry back in 1997. I became a consultant in 2006. So all my stuff is confidential. Now, of course, I'm no longer a journalist, but, um, what I try to do, Victoria, is to bring a kind of independent perspective to stuff. And I try to connect the macro with the micro, if you like. And it's not. Rocket science, really. I just talk to lots of people and think about it.
Yeah.
I just try and network quite, quite often with quite senior people who talk to me in confidence to try and work out what's happening. So that's, it's still journalism really. but more commentary these days I think.
Yeah, and I can certainly see that, in fact, uh, I think one of the things, I know you're quite prolific in writing and publishing, Your lens on the chemical industry and your lens on what's going on across China, um, and its relationship to the chemical and petrochemical industry. And of course you publish that a lot on LinkedIn as well as on the ICIS blog. So if people aren't following you now, they should be because there's always something I. Good to be learned.
So John, let's just start with, let's set the stage. I think I know where we are currently when we look at the chemical industry, but you know, from where you sit, what's your view on where are we at this moment in time across the petrochemical industry?
Let's forget the trade war for the time. Put that aside because materially hasn't made that much difference. Right? We are still at a situation where we're in the deepest trough. In the history of the industry, certainly the longest trough I think, could argue that around 2008 things were worse briefly before the great financial rescue, right? But this certainly is the de the longest trough. And it fundamentally is because people got China wrong.
So it's boring this, but it, you know, it got to remind people that people thought China would carry on growing at six to 8% per year across petrochemicals, and the growth is less than that. And people built capacity all around the world, and the assumption that China will grow at six to 8% and it's much less than that. And that's because of demographics, debt, the end of the real estate bubble.
We, we can see that so clearly from, if you, I could show you 20 margin charts, Victoria, literally flip them through every product for north and Southeast Asia showing the turning point was January, 2022. It's remarkable. So what collapse,
what happened in January of 2022?
Well, in September, or was it August, 2021? You had the ever ground moment. So the government said, we're not supporting ever ground, this property developer. And the bubble started really deflating. and then you had the, because the pandemic. Kind of delayed things, right? So we had a brief dip at late 2019 where margins turned negative in Asia. And then of course you had lack, lack of feed stop from refineries 'cause people weren't traveling.
You had that huge boost for demand from people buying stuff in lockdowns that was made in China, the physical goods we bought, right? So actually look at the margin patterns ICIS data, the margins were excellent, in that period of the pandemic. And then of course. Markets opened up, people start traveling again. The capacity comes online. Operating rates increase and bang. You have the ever ground moment, right?
And the drip, drip drip, which has been building for 20 years, 30 years of China's worsting demographics. That's a slow motion thing, isn't it?
So was that being masked up until that point in time, or was it just not known? Because I think now that's a conversation, right? The. fact that China's demographics, its population is declining over the next, I don't know, decade through the end of the century, what have you.
I think it's, yeah, it's a gradual thing, right? It's a drip, drip, drip, as I said. I suppose to some extent it was maxed by the property bubble, right? And the other thing I think as well is that. go back to two 14 when there was stuff in the China Daily in the government, newspapers, the government run newspapers. We are gonna be petrochemical, self-sufficient. Now, people at the time said, nah, nah, they can't do that because you know the feed stock advantage.
But if you talk to the senior people in the industry, they would tell you. But China's never really always built plants for profit is strategic. It's about, as this former CEO told me many years ago, it's about keeping people in jobs in the washing machine factory, the example are used by guaranteed supplies of raw materials, right? And so two 14 they said, we want to be self-sufficient in more of these value chains, right? We're gonna build all these plants.
And, and some people said, oh, they haven't got the cost per ton economics. They haven't got the feedstock advantage, the rest of it. But that missed that strategic. That drive. Now, initially the, the strategic, the strategic push was about adding value to the economy. We don't want to import these raw materials, we wanna make them a cells or population is aging, want higher value industry. and increasingly these days it's actually making higher grades
¶ Domestic Chemical Manufacturing Expansion
of chemicals and polymers, you know, going to more towards specialties, away from basic commodities, right? But anyway, two 14, we're gonna build these plants can be highly integrated, super efficient. You know, we're putting all these money into government institutions or government bodies that will help us build these plants. Or economically and build our own crackers, our own reactors. You know, we can build our own equipment without to import it.
So now you can build a cracker complex in China, which is at least on a capital expenditure basis, 50% cheaper than building one in the US Gulf,
Mm-hmm.
But on an operating basis, it's not about necessarily running for profit always. It's about that self-sufficiency. And then you have the first trade war. That was 2 17 18, wasn't it?
Yeah.
So, oh my goodness. We're in a very uncertain iCal world. There's all these shifts taking place. We better push even harder towards self-sufficiency. So you have a combination of China building all these plants. You have the, the, the, the ever grand moments. You have the drip, drip drip, which is hard to discern on a yearly basis. I know the demographics are getting worse, right? All combining.
And you had that moment, as I said, of you know, things being maintained or margins boosted by the pandemic and it is quite remarkable and nothing, if you look at the margins now, post liberation day versus before liberation day, There is no material change. The margins in in in poly athia remain negative on a variable cost base. Integrating nap, the base are still negative. Since 2022, if you look at from January, 2022, up to the end of May margin is polyethylene and negative.
Hmm. If
you look at January until March before Liberation Day, they were negative about the same level. So fundamentally nothing has changed. So, but a situation where in order to get back. To normal operating rates. That's a 19 92, 20 21 operating rates.
That's what we'll call the chemical super cycle, right When operate rates were fantastic given that demand is so uncertain and the don't seem for many upsides for demand over the next few years, given the situation in China, you have to close capacity down. Now, where that happens, of course, is a big debate. Who makes those decisions?
Yeah. So John, I think one, a couple of things on this that strikes me and you talk about, the negative variable margins, um, as it relates to polyethylene in particular. You know, I know that we've seen that in conjunction with the fact that. China in particular is, uh, not necessarily making investment in
¶ Polyethylene Margins: China vs. Middle East
production decisions on the basis of margins in the way that a Western company would. And by the way, I, I also want to just make sure and highlight that. If we looked at what was going on in the nineties, with investment in the Middle East and Saudi and across the Middle East, a lot of that had to do with. Jobs and did not necessarily have to do purely with, profitability and margin, although the Middle East had excellent feedstock pricing basis. So that margins were there for a long time.
But if we look at this, people sitting in Europe, maybe the US in other countries, that frankly China's moving a lot of product to, they view this as. Maybe price dump, uh, dumping. Right? So they're concerned about dumping, that there things are getting dumped at low prices and that it actually is anti-competitive from their perspective. Do you think Chinese companies see it the same way?
Do they view this as a competitive strategy to go, you know, dump product at low prices in other regions just to keep things moving? Or is there a different mindset and strategy going on
this? All the cost of capital, you know, working capital, cost of building stuff is cheaper, as I said. So, you know, the economic incentives are different because it's state driven, what, what's just interesting about this new wave of cracker capacity, which is coming on stream now to 2028?
Yeah,
a lot more of it this time round is state owned companies. The previous round was private companies. Even private companies can respond to state signals of cheap capital. And, you know, please, please export. We need to support jobs. But obviously if you're a state run company, it's even more so. So, you know, the crackers they're building at the moment are mainly, as I say, you know, Patrick, China and Sinopa. So it's just different, they're not motivated to think in the same way.
Yeah, I think that's interesting. All right, so, so let's talk tariffs a little bit. Or as we sometimes, you know, you, you noted already the pre Liberation Day post Liberation Day, which, you know, liberation days often have different meetings, in different places. But we know that the liberation day was the, Trump US imposed tariffs on everyone, which were quickly put on pause.
What's the view when you talk to leaders in different companies, and I know you're, you're speaking with a lot of people in the east and elsewhere. Um, what's the view on what's going on with tariffs?
Um, uncertainty. Layered upon uncertainty. Wouldn't be surprised about that. But I mean, um. You had the liberation day shock when people thought, is this a great depression?
¶ Tariffs and Global Business Perspectives
Right? If you're talking about 46% tariffs, I think on Vietnam or Malaysia and Indonesia, these are ruin us tariffs, right? Never mind the situation with China and you know what on earth is happening and then you had the relief of the poors, you had the panic over China, then your relief of the truths. You have a panic over Europe. Signs of things improving. So what does tomorrow bring? And you can't plan for investment.
No, certainly reinvestment the question now with, with chemicals and polymers for a lot of people, but you can't plan a business. And you don't want demand is because the converters, the people buying the chemicals and polymers, they're thinking, well, you know, I will buy smaller lots now I'll be more cautious. I dunno what the effect is downstream on the consumers of the final product. Right. The whole uncertainty urgency is making 2025 looking, looking at pretty much a flat year.
Do you think we've got overall demand? Decline, demand destruction, John. I mean, certainly we know that we've got oversupply. We're in a period of oversupply and, despite all the shutdowns we're seeing, particularly in Europe, with a variety of companies announcing closures, which has to do as much with their own energy policies, as it does with what's going on, in China and the East. you know, Does your data show that? Demand is declining. Is it just flat? Where, where do you see this?
if you talk about China, the problem is getting reliable data outta China for everybody, right? Because obviously the GDP numbers we know are just a government thing, political thing. So what's really happening on the ground is extremely difficult to assess just talking to people. have we got negative chemicals growth in China this year? Probably not, I don't think, but we're certainly in the, what is it? Well, it's low single digs, right? That material being affected by the trade?
Well, it's really hard to say. What we do know, as I said, is it's a lot lower than it was during the chemical super cycle. Right. I mean, what China's been able to do in terms of manufactured goods, I've just seen the data for, for May is to been able to compensate for a collapse of exports to the US by increasing exports everywhere else. So, you know, you suspect that will support chemicals consumption.
On the domestic front, China, the property market, showing signs maybe of bottoming out in the bigger cities, but not in the third and second tier cities. Not yet. That's a long way off. And there's not gonna be the same momentum for growth from real estate as before, so, so it's a long answer. I think. We don't know. All we know is low single digits.
Part of the objective for investment is around employment, and use of capital and stuff. And I know a couple years ago it seemed like, there was a lot of chatter in the news and different media reports, about low employment in China, particularly for young adults, recent college graduates, et cetera. Um, and that's gone quiet a bit. Is that still an issue? Do you hear anything about this?
No. Very, very, very big problem. I think, um, the real unemployment rates are, again, hard to discern from the official data, but, there's this, um, lying flat phenomenon
¶ China's Trade Resilience Amid Challenges
where people, um. not driven, not motivated to, to work as hard 'cause they don't see the prospects, right? So it's a psychological thing. We hear people talk about lying flat. Um, so you stay at home with your parents. Your parents have got very nice condo, thank you very much if you're middle class, but you can't afford one yourself 'cause the property prices are still too high, and your job prospects are not great. So that's that kind of effect on consumption. it's still there.
I don't think that's been really changed by the trade war, the whole export component side of the economy, though of course it's now more vulnerable. We dunno what's gonna happen next. Again, it's the uncertainty I.
And we're all living with that uncertainty, which is really hard. Um, okay, so I'm gonna layer in our next layer of uncertainty, John, uncertainty slash opportunity, which is, intelligence and ai. And, and we had a great conversation before we hit the record button just about how we're each, using AI personally, professionally, et cetera, and, and what that does. So, how do you see this evolving? Right.
So I think one of the things we said, that success when we look at success across the chemical industry and who's really risen to the top. And I think this applies in the chemical industry more broadly, uh, other industries. It's not just about the assets, it's about the intelligence, and the fact that. People can have the same steel in the ground, um, and the same bits of information and make different decisions, can harness ai, can harness other leverages differently.
What do you, what are you seeing, from what you're, where you're at?
well, the strange things about AI is how, you me, measure productivity. We didn't talk about this Victoria, but it's very much an individual thing, isn't it? Yeah. so how do chemical companies measure what their staff are doing? And are they using it to go down the beach, spend less time at work, do the, the job more efficiently, and how do you actually monetize that so people doing the same job in less time? And how you therefore benefit from that in terms of productivity.
It's an interesting question, but then you think, okay. Let's assume we can start making use of this. We're living in an incredibly complex world. We've got tariffs, of course, we've got the impact. Longer term of climate change, we've got demographics. The old issue of how on earth you estimate demand, what is demand over the long term? How do you build a plan? Existing models for estimating demand, they're based on multiples of GDP. That probably doesn't work anymore.
Can we use AI to build long-term demand models, which are more complex based on varis in weather patterns and migration and demographic spending patterns. All these things using, you know, building a model will be so much more complex that we almost give up. Just too complex. Then let's go back to the here and now of the, sort of the median term.
Well, can we use AI to forecast, margins, trade movements, trade flows in ways that are much more reactive and complex in ways that we, me humans can do? Can we trust the data? That's an evolution that I think will happen as people try things out and build greater confidence in these models. And as you know, the models learn, don't they?
Yeah, they do. Now, what's interesting with this, John, is I think, most companies view their data as proprietary. So, you know, why is chat GPT so good at a lot of things, whether it's writing a book, whether it's interrogating something, whether it's writing a, an email, what have you, putting together a menu. I mean, people use it for all kinds of stuff, planning trips, what have you. but one of the reasons that it's so good and so robust and I think about.
How it is today versus how it was when I started using it two years ago, is because of all the millions of people asking questions, providing insights, doing the things. So it's gathering up all this data and information to create intelligence, if you will, which is a lot harder to do inside of a company because most companies still view their.
Margins, profitability, demand supply, all the data that we've been talking about today as really proprietary information and how, I guess the question is, how does this change and will it change? Do you see a connectedness coming with data to make the industry decision making more robust? Because otherwise you're still working with just a very limited data set.
It's more democratic, you know? So I think, within a chemicals company, you've got your way of doing things, you've got your special view of a market, your knowledge, you know, based on the data to keep that proprietary is gonna be very difficult, As these machines learn, I mean, there's an interesting theory, of course, is that because you're worried about ai, you keep less and less of it offline, you start storing your knowledge. Don't put it online at all.
Maybe, you know, maybe there'll be a sort of counter movement of people protecting their knowledge. You know, you keep it on in note form even, you know, because once it's online, it's out there, right? Obviously you can put it behind server walls and things, which provides some protection, right? I think that will, that will help. But I mean, the thing is then you get AI producing replica, or synthetic data, which is good enough. You recognize this. It's pattern recognition across numbers.
So for a chemicals company, I think it's a question of time before that develops. It democratizes, right? So what's, what's left? Well, it is the interpretation. It is the intelligence. It's the ability, at least until Gen AI comes along, until we ask
¶ Data Sharing's Impact on AI
the right prompts, we ask the right questions. We make the machines work for us, do increasingly sophisticated things in much more complex ways than we could have done before. And I think that's the moment when you start really monetizing it from a higher level, if you see what I mean from a. Research department level, but as I said, I keep coming back to productivity in individuals, in companies. How do you measure that?
Yeah. Well, you know what's interesting with that too, John, I don't know how much, you know, I would have say there's arguably a debate about whether there is a productivity improvement. There may be is on finite discreet tasks, but then. I thought you go down the rabbit trail, you free up your time and it's not that you're freeing up your time so you can go.
Sit on the beach or have a cup of coffee, you're freaking up your time because you're asking what's the next set of questions, that you can do. So I don't know that I, I think there is productivity improvement, but it's productivity so that you can move on to the next topic. And let me tackle this task quickly, because my next task that I've got facing me is a bit more complex.
That depends on the individual. If you're just sort of like that curious person's always pushing themselves on to the next more complex thing, you are massively relieved by the fact that you can get the PowerPoint slide done by AI for you, right? Or the presentation for your boss. 'cause it's done in in minutes, isn't it? Which better than you could do, right? But then, you know, for some people, oh, I will go to the beach, but for other people they will push onto the next task.
But I think the people that push onto the next task. That's the difference.
Yeah,
that's, that's the shock that's coming. For, um, well, I'm getting your retirement Victoria, so maybe I'll be alright.
But for younger people, you and I both have kids that we need to be
Exactly, yeah, yeah. Gainfully
employed, innovators, entrepreneurs, whatever it is, but they have a whole lifetime to, to live and exceed and
education to pay for. But I mean, um, I think that, you know, the, the, the issue will be for the younger people, certainly how they adapt. To, to constantly innovate. As you say, you do the basic tasks, the more complex tasks become done by ai. How do you move on to the next thing and the next thing and what is the next thing?
Yeah.
but I mean, the routine stuff just goes, doesn't it?
And I think that's maybe appropriate, right? We, we talked about this quote I'd seen, recently, I wrote down it's complacency kills progress, right? Yeah. So there's this aspect of we've all been com it's easy to become complacent and you say, oh, I know what I'm doing. I'm doing my job the same way, the same time. I'm an expert at this. and then along comes ai because it is systematized, it can become. More systematized.
And so you have to keep progressing, and doing something new and different.
I mean, Sam Altman said very interestingly, is it the new Industrial Revolution or is it the new Renaissance? Which I thought was interesting because it, it is up to individuals then isn't. The Renaissance was about some extraordinary individuals, wasn't it? Right. maybe that's it. It's up to each of us to do that progress and just, and the machines learn, don't they? So how it responds to you as an individual is the most astonishing thing I've noticed with ai.
That, the same person puts in different prompts and gets different answers. So it's how you innovate as an individual, which is just a very different way of looking at the world.
Yeah, absolutely. Alright, so John, uh, final question for you. What should we be looking for? So you
¶ Debating Productivity's True Impact
sit there, you, you monitor a lot of stuff, you provide your assessments. As a leader in the chemical industry, what advice are you giving people in terms of whether they be, uh, milestones or, road science that they be, should be looking for to help navigate us through the current time that we're in?
Well, I guess. Trade war aside, we dunno what's gonna happen. So let's look at the sort of other stuff, right? Any number of options of what could happen. I think short term. Short term is looking where we are in the cycle. So the, the view is maybe things get better by 2028, late 2028. So we're into this very, very extended down cycle started in 2022. So you minimize your losses. You, you know, you look at all the markets around the world, where can I sell these commodities?
What's the best net back volume versus price? Right? you're really global and if you're a commodity producer, and then you start thinking, well, what is the long term? will we ever see that tremendous demand boom again where everything was easy during the chemical supercycle, which is essentially driven by China, right? There's an argument that it won't be. So you've gotta think, how do I evolve my business to, to maybe not look at, it's not just all about supply, demand markets tightening.
You know, will we have an upcycle, like will we have before? And the longer term becomes much harder. I mean, you can sort of vaguely talk about. Material science aided by AI helping to do with climate solutions. He can talk about all of that stuff, I'm just thinking through that to be honest, Victoria. I dunno what that is, but I think it's, you've got to have a, a group of people thinking beyond. It's just a question of sitting back and waiting things for things to tighten.
That longer term is much harder.
Yeah. Uh, it strikes me, I probably need to go look dust this book off on, that's sitting on my bookshelf, the Innovator's Dilemma, by Clay. Clay Christensen. Right. And it went through all of the, um, you know, the steam ship that was, what was it, the coal ship that was stumped by the steam ship. Right. Just these evolutions of these beacons in industry. Right. So the Swiss watch. Right. That was, Superseded then by digital, which was pretty crappy to begin with, but then became amazing.
And now we all wear computers on our wrists that tell us everything. So I think, we are in this period where we have to look at what's the innovation, and how do you, you know, you kind of got, you have to innovate yourself to the future because otherwise it's gonna happen to you.
can we invent a new polymer? Is that possible? I mean, it's been
done. Why, why, why not, John, why not?
I dunno, I, we've all assumed that polymers sciences of, you know, sort composites and stuff and playing with
¶ AI: Industrial Revolution or Renaissance?
the same basic molecules, but maybe not,
and I think what's interesting if we look at innovations is in the glass industry. Right. Like if you think about glass, glass has been around forever, right? Thousands of years probably. I don't know the real, the dates on this. And yet these glass manufacturers, Corning and others continue to innovate. and I saw something, you know, so double pane windows are kind of a standard, in many places because of the insulating factor and stuff. Um, they are now rolling out. Five pane windows.
They're like multi pane, very thin. Very thin. They look like a single pane of glass, but it's much like the glass that's on your iPhone. Like, I mean, I gotta be honest, I dropped my phone regularly, unfortunately. Um, and yeah, it's thin. Knock on wood. I can't chase myself, John, but it's been a long, it's been a while since I've broken a screen. Despite some pretty hard drops. Right? And why is that? It's not just the case I use, but it's the fact that the glass has gotten better.
So I think we're seeing innovation in very old materials. That we think about more broadly across the chemical industry, about, okay, how is it that the glass manufacturers are innovating a new glass when glass has been around forever? And it's cheap. Cheap, right. except for the really good stuff. And, uh, and so there may be, maybe there is a model to a different polymer, a different way of dealing with the polymer, et cetera, that changes the game.
You can try and sort of break out the tyranny of cycles on it. You create your own demand, which if we're in this very different world of climate disruption and demographics, that's what you gotta do. but immediately, who's gonna shut down, who's gonna blink first? We've got to close lots of assets. If we are to get back to decent operating rates, that's the sort of medium term challenge for companies, right?
Can, can we close enough? Are people willing to close enough assets? Because I am concerned that the companies that need to be closing basically end up shutting their doors altogether.
Yeah, and we could see that in Europe. Of course, I believe that's, the announcements are extraordinary in Europe, aren't they? But is that enough in Europe and what are we gonna see in Southeast Asia? Are there some of those less competitive assets and uh, in Korea? You know, those are the questions that we've been asking now for what, since 2022, but we don't have any clear answers yet.
Yeah. All right. Well, time will tell.
Yep.
John, as always, this has been a really good conversation and one that we could, uh, continue on for a long time, but I know it's the start of your day and the end of mine, and, this has been great.
Thank you very much, Victoria. Thank you.
Yeah, thanks for joining us and thanks everyone for listening. Keep listening, keep following, keep sharing, and we will talk with you again soon.
Thanks for joining us today on The Chemical Show. If you enjoyed this episode, be sure to subscribe, leave a review, and most importantly, share it with your friends and colleagues. For more insights, visit the Chemical show.com and connect with us on LinkedIn. You can find me at Victoria King Meyer on LinkedIn, and you can also find us at The Chemical Show Podcast. Join us next time for more conversations and strategies shaping the future of the industry. We'll see you soon.