For years, petrochemical companies have enjoyed a golden age of expansion, fueled by cheap natural gas from Texas shale fields and marked by soaring profits and multi-billion dollar capital projects generating thousands of jobs. Executives from Gulf Coast’s biggest chemical makers — LyondellBasell, Chevron Phillips Chemical, Dow Chemical and Exxon Mobil Corp.— have been relentlessly optimistic about the world’s appetite for plastics and the prospects for their chemical businesses.
But the golden age may be losing its luster. On Thursday, the German chemical maker BASF, which employs about 2,000 in the Houston area, said it would cut 6,000 jobs across its global operations after recently shuttering a chemical plant near Baton Rouge, La. The Houston companies, Westlake Chemical and LyondellBasell, and The Woodlands chemical maker Huntsman have each suffered two consecutive quarters of poor earnings.
Spot market prices for North American high density polyethylene, the commonly used plastic driving the region’s petrochemical boom, have fallen by one-third since March 2018 , according to research firm IHS Markit. Chemical companies’ sentiment is dramatically more cautious than it was a decade ago, with negative statements about risks and uncertainty becoming more common in filings with the Securities and Exchange Commission, according to analysis by the global consultancy Deloitte.
Analysts agree the petrochemical industry is edging toward a downturn, which they forecast to hit in as soon as three years.
“The golden age is behind us,” said Robert Stier, senior lead of global petrochemicals at the research and pricing firm S&P Global Platts. “The times of exceptional margins are over.”
Indeed, average operating margins — which measure profits before taxes and interest — fell 22 percent among 52 chemical companies in the first quarter this year compared to the same period last year, according to the global research consultancy Accenture.
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As conditions weaken, Gulf Coast chemical makers should fare better than most because of the region’s access to low-cost natural gas, which provides feedstocks for petrochemicals. Still, analysts said, the Gulf Coast industry, which employs 68,000 people in Texas — won’t be immune from a slowing global economy, trade tensions with China, oversupplied markets and the backlash against plastic waste.
When the downturn hits the chemical industry, profits will fall for Gulf Coast producers, leading to delayed investment decisions, lower production and slower startups of new plants that could delay or reduce the creation of jobs, analysts said.
While demand for plastics is expected to soar in the coming decades, a weakening global economy could dampen the growth. In April the IMF cut its forecast for global growth to 3.3 percent – the lowest annual growth rate since 2009. GDP growth is an key indicator for petrochemical demand because the world’s economies tend to consume more plastics with rising prosperity.
Car sales – another key indicator for petrochemicals because of the plastics that go into modern automobiles – have taken a hit in China and Europe, where Ford recently announced it is slashing 20 percent of its workforce. The global Purchasing Managers Index, an indicator of economic trends in manufacturing, has marched steadily downward since February 2018.
Tariff troubles, plastic backlash
U.S. trade tensions with China are making matters worse. Retaliatory tariffs imposed by China pose the greatest threat to new chemical plants on the Gulf Coast, many of them built to exploit what was expected to be a quickly growing Chinese market. Already, chemical exports to China have plunged 24 percent from the previous year, according to the industry lobbying group American Chemistry Council.
This has forced U.S. companies to find other customers in other countries and cut prices to attract new business, depressing prices across global markets, analysts said. Prices for American high density polyethylene purchased through long-term contracts have slid 13 percent since last year, according to ICIS. In the Asian spot market, high density polyethylene prices were down 23 percent in late June from just over a year ago.
“We’ve come off a peak level of profitability,” said Mark Eramo, analyst and vice president of business development at the research and consulting firm IHS Markit. “It’s developing into a year that is going to be worse than we forecast.”
Beyond trade wars, the industry is increasingly concerned with the backlash against plastic waste, which could increase demand for recycled plastics instead of new virgin plastics. Last year, plastic bans and sustainability issues were mentioned as risks in SEC filings about 40 percent more often than in 2010, according to Deloitte’s recent analysis.
Paul Bjacek, chemical and energy research lead at Accenture, said eventually plastic bans and rising demand for recycled plastics could, in an extreme case, slash global demand growth for virgin petrochemicals in half by 2040, to 2 percent from about 4 percent per a year.
Petrochemical companies, meanwhile, are still opening and expanding plants at a rapid pace. A wave of new chemical plants coming online will flood markets and depress prices or forcing companies to run a lower operating rates, analysts said.
In North America alone, the capacity to manufacture ethylene — a building block of most plastics — will have skyrocketed 73 percent by 2022 compared to the end of 2016, according to ICIS. The vast majority of that growth has come on Gulf Coast.
The petrochemical marketplace also is getting more crowded. With gasoline demand expected to fall as electric, hybrid and other fuel-efficient vehicles increase, big oil companies such as French oil major Total, Saudi Arabia’s state-owned oil company Saudi Aramco and Abu Dhabi National Oil Company are investing in petrochemicals through big projects and acquisitions. Exxon Mobil, Chevron Corp. and Phillips 66, which already had major chemical operations, are rapidly expanding their petrochemical businesses, too.
“The oil companies are very worried about the electric vehicle,” said Joseph Chang, analyst at ICIS. “No matter how many times people say ‘Oh it’s further out,’ it’s inevitable that transportation fuel demand will flatten. They’ve all had this shift in mindset, thinking, ‘Now we better make chemicals and more of it.”
Could be worse
Global demand for ethylene is expected to grow by 5 million to 6 million tons per a year – but another wave of new projects coming online from now until 2030 should keep the ethylene market oversupplied for at least the next seven years, meaning lower prices and profits, according to the analyst and research firm Wood Mackenzie. The worst of the glut is expected around 2023 to 2024.
But the Gulf Coast’s access to cheap and plentiful supplies of natural gas should help local producers weather the projected industry downturn, analysts said.
“Everyone is going to be impacted, but the Gulf Coast starts in the better place” said Andrew Slaughter, executive director of energy research at Deloitte. “The upside is that the chemical business is fundamentally healthy and growing faster than the fuel business, so long-term prospects are good.”