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The Next Major Wildcard For Oil

The Next Major Wildcard For Oil

Fresh travel restrictions in Asia…

Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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The Plastics Sector Is Suffering As Oil Prices Rise

Four years ago, the UN declared plastic pollution a global crisis, decades after the discovery of the Great Pacific Garbage Patch--a collection of marine debris 2x the size of Texas. The Year 2020 was supposed to be a watershed moment for the industry after dozens of state and local policymakers planned to make the ultimate shift away from plastics. They clearly underestimated the sheer tenacity of the plucky industry, and a global pandemic. 

The plastics industry quickly seized the unexpected opportunity provided by the Covid-19 pandemic (which proved a double-edged sword) and an indulgent government to push back on the plastic bans, managing to post positive growth. 

The plastics and petrochemicals sector received a much-needed shot in the arm after the Trump administration gave it an ‘open license to pollute’ by relaxing tough environmental laws and fines for environmental pollution during the COVID-19 crisis amid historic lows in oil prices. That helped boost the industry big-time: After an initial dip in April 2020, plastics production quickly recovered and was growing in double-digits by the end of 2020.

But the tide appears to have turned against the petrochemicals industry--again.

Not only have plastic makers been facing growing competition as more refiners shift from gasoline and diesel to plastics, but now they are seeing a sharp contraction in profit margins thanks to higher naphtha and LPG costs--major plastics feedstocks.

Weak margins

Petrochemicals--the building blocks of plastics--are processed from naphtha and LPG, or propane and butane. Companies with production units that are part of a larger refinery complex can tap on these raw materials produced on-site as a by-product of oil distillation, but everybody else has to procure feedstock from the open market.

The result: Standalone plants lacking a fully-integrated refining system and ready access to affordable feedstocks are increasingly facing much higher production costs and could be forced to cut runs starting from the third quarter of 2021.

To make the situation even more dicey, Asia’s steam cracking capacity is set to increase by ~20% in the current year as per estimates by Armaan Ashraf, a senior analyst at FGE. 

Steam crackers plants turn naphtha and LPG into ethylene and propylene, the main building blocks for plastics. Meanwhile, a 33% surge in U.S. propane prices in the current year as well as a huge ramp in petrochemical capacity in Asia, led by China, is not helping matters, either.

Big Trouble for Petrochemicals

But the plastics industry woes do not stop there.

The shale boom led to an overabundance of cheap oil and natural gas, key commodities used in the manufacture of plastics both as feedstocks and as fuel. The fossil fuel industry has been heavily pivoting into the petrochemical sector as a second cash cow even as the world grew increasingly weary of its role in environmental degradation and investors started giving it a wide berth.

Indeed, the plastics industry was poised for an epic explosion--until the coronavirus crisis and the subsequent oil price collapse dealt it a potential death blow.

Last year, Time magazine reported that South Africa’s integrated energy and chemical giant, Sasol Ltd, opened a new plastic plants in Louisiana, one of seven such projects it had in the works, while Shell was is in the process of building a huge multi-billion dollar ethane cracker plant in Pittsburgh with the capacity to churn out 1.8 million tons of plastic each year. 

Related: Oil Rally Grinds To A Halt

According to the American Chemistry Council, hundreds of new plastic production plants and expansions were given the greenlight last year. Global plastics production was set to increase by about a third over the next five years and triple over the next three decades.

But the energy and health crisis put paid to those plans and rosy projections.

Thailand-based PTT Global Chemical announced that it will indefinitely delay its plan to build an ethane-cracker plant in Ohio citing uncertainty amid the health crisis while Shell said in March that it was shelving its Pennsylvania project.

Meanwhile, China’s plans to invest $84 billion in plastic and energy investment in West Virginia are yet to materialize three years since the promise was made.

Kevin Swift, MD for economics and statistics at the American Chemistry Council, told Time that the oil price and economic crisis means that spending is likely to be severely curtailed. 

Big Oil has shifted its focus from major investments to returning capital to shareholders in the form of dividends and share buybacks.

Plastic Overproduction

Some of the problems facing the industry are of its own making though.

Two years ago, Chemical Week predicted “growing pains” for the industry as the increasing rate of production threatened to exceed consumption. 

The Covid-19 pandemic has given a boost to single-use plastics--about 40% of the market--due to growing demand for PPE, disposable bags, cups, bottles, and boxes due to hygiene issues. However, it’s unlikely to offer adequate long-term support for the entire plastic industry, with China maintaining a sweeping ban on single-use plastics with similar bans expected to come into effect in the EU, Canada and at least 34 African nations over the next two years.

With a major freeze on capital spending that might take years to return to pre-crisis levels, weak economies and stiff public opposition, the plastic and petrochemical industries are standing on sinking sands.

By Alex Kimani for Oilprice.com

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Leave a comment
  • Anpol Anistie on July 08 2021 said:
    Not price, but lack of supply.

    The penny is dropping finally that no oil means no plastic for the throwaway luxury goods that the world has become accustomed to.

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