Page 132 - CW E-Magazine (1-7-2025)

Point of View

growing indication that many are putting the brakes on projects or at least taking the foot of the accelerator. Signals from regulators in
the US and even Europe are driving this change. The new US administration is clearly not enthused with green energy and is putting its
emphasis on raising fossil fuel production and use. In Europe, initiatives such as the Carbon Border Adjustment Mechanism (CBAM),
which aimed to tax the carbon-intensity of products made outside the European Union, are being postponed and/or diluted to include
a narrower range of products. Products of the chemical industry (with a few exceptions) were excluded from the first lot of products
to come under the ambit of CBAM, but there is nevertheless relief that its inclusion, if it comes, will be later than earlier expected.

While the withdrawal of the US from the Paris Climate Treaty was widely expected, New Zealand too is reported to be pondering
an exit. Private finance groups are also stepping back from environmental, social and governance (ESG) commitments. BlackRock, a
heavyweight in the world of finance, has withdrawn from the voluntary Net Zero Asset Managers initiative, an international group of
asset managers committed to supporting the goal of net zero greenhouse gas emissions by 2050 or sooner.

Continued pressure on margins
The economic slowdown in the developed world, in part due demographic changes (declining and/or aging populations), is slowing
chemical demand. While the pandemic did compress demand for petrochemicals globally, much of the world, bar China – the world’s
largest consumption and production centre for chemicals – has seen a sharp rebound. Economic growth in China has plummeted from
an 8% 20-year annual average to just 4.4% in 2025.

As a consequence, the global near-term demand growth for basic chemicals is expected to be lower than anticipated just a few
years ago. They are, for example, expected to be down about 0.5% annually for commodity polymers, which may not seem much, but
is enough to crush profitability.

On the supply side, the main factor putting pressure on margins are the new projects coming up in China, driven by the country’s
quest to raise the level of self-sufficiency. Though there are some plant closures as well, they pale in comparison to the new additions
expected. India too is ramping up capacity in several petrochemical value chains – to primarily serve the domestic market – but these
numbers are puny compared to China.

Between 2024 and 2028, about 42-mtpa of incremental ethylene capacity is expected globally, while demand is projected to increase
by only 30-mt cumulatively during the same period. Such a supply surge, coming on top of existing oversupply, is the prime cause for
the significant decline in operating rates and margins.

The combination of the demand slowdown and the arrival of new integrated capacity has led to a sharp reduction in import dependency
in China and even turned some value chains to a net export position. Going by past experience, such a shift is unlikely to reverse, and
only accelerate. This is compelling suppliers in several other regions, including the Middle East, Southeast Asia and Northeast Asia,
to re-evaluate export strategies, and seek new demand centres for their products. India, with its significant gaps between domestic
demand and supply, is on their radar, as are countries in Western Europe and Southeast Asia. However, none of these regions –
individually or collectively – will make up for the demand ‘lost’ in China.

Chemical Market Analytics, a consultancy, reckons the industry has not yet reached the bottom of the trough, and that a recovery
to historical margins levels will not happen till the end of the decade.
How far down the road is the recovery?
There is consensus that the petrochemical industry is in a long-term and structural slowdown, with China the hub of the crises,
though not the only determinant. There is less agreement on how far the recovery is ahead – optimists put it at three years, pessimists
as much as nine. None of the two views offer any comfort!

The oversupplied market has already prompted a significant restructuring of capacity. Expect to see more!

India will stay the fastest growing large market for chemicals, in general, and petrochemicals, in particular. But producers here will
not be immune to the pricing pressures global markets will unleash.
Ravi Raghavan

132 Chemical Weekly July 1, 2025

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