May 14, 2020

Not all GDP is equal for petrochemicals

Distilling Demand

The spread of the COVID-19 virus and the government interventions to slow the spread to save lives resulted in industrial output halting, causing economies to slow down one by one as the virus travelled across the world.  Perceptions have changed on what is essential and what is a luxury, what is needed now and what can wait.  Petrochemicals are used in a myriad of different end-use sectors.  This has a big impact on the demand for materials, and man made goods, and hence on the petrochemical industry.


Petrochemicals are used in many sectors


Distilling Demand


Forecast Revisions Spiral Downwards

Mid-April brought the announcement by the International Monetary Fund (IMF) of their new economic outlooks for GDP growth for the full year 2020, they projected contraction globally of 3 percent; almost 6 percent for the United States, 7.5 percent for the Euro Area, and over 150 other countries will see a reversal in living standards.  India registering growth of just 1.9 percent, China just 1 percent.  It is economic contraction on a scale larger than the last financial crisis.


The IMF announcement followed a Q1 2020 of chaotic short term forecasts where the global economy was expected to increase by 3 percent according to forecasts in January, but by March major financial institutions were revising their Q1 growth estimates on a weekly basis; for example, doubling contraction estimates for the United States for Q1 within 7 days.  There was confusion on what to believe, and messages from infectious disease experts were being lost in translation to business leaders.  Risks were being downplayed and quickly superseded. 


The Desire to ‘return to normal’ 

Governments have acted to limit the spread of the virus by reducing human interaction, ease the strain on healthcare services, and save lives.  In forcing sectors of the economy to shut in order to achieve social distancing, governments have had to make huge expenditures to temporarily allow business to survive, to provide some level of income to populations.  

But, in many cases emergency government support have been announced for an initial interim period. What happens if they are needed for another temporary fix?  The U.S. Government wants to borrow $3 trillion in the second quarter of 2020, five times the previous quarterly borrowing record set at the height of the last financial crisis in 2008/2009.  Will it need to again? 

The initial halt on industry, the slump in energy demand and crash of crude oil prices has happened.  But as weeks turn into months and months into quarters, structural changes to sectors and industries will occur.  Skyrocketing unemployment will dramatically affect the demand for goods for months to come.  While there may be pent up demand in some sectors to help achieve a ‘bounceback’ in the economy, in others demand loss will be harder to reclaim. 

And here comes the crucial trade off governments will face.  When do they lift movement restrictions to allow more people to return to work?  It is a fine line to balance short term health and longer term economic prosperity.  Into the second week of May and governments in Europe are starting to consider.

relaxing certain measures, and all eyes are on China and South Korea for evidence of any resurgence in infection rates. 


Not All GDP is Equal for Petrochemicals

For petrochemicals, not all GDP growth is equal.  Some consumer markets have been performing better than the rest of the economy so far in this pandemic, some far worse.  Any given petrochemical is used in a variety of applications and different end use sectors, each performing differently in 2020. 

Single use plastic has been boosted significantly in 2020.  After being viewed negatively for so long, it is now marketed as an aide in improving sanitary conditions, which has resulted in soaring demand , and this will be difficult to reverse quickly in the near term.  

Packaging for individual consumers at home versus commercial catering has been positive for some plastic packaging material consumption.  Alcohols such as isopropanol for sanitisers cannot satisfy demand fast enough.  Medical protective clothing demand has boosted demand some synthetic fibres.  In contrast, a lack of fashion demand has negatively affected polyester, sharp drops in car sales and production has affected synthetic rubbers and plastic materials that make up modern cars such as polycarbonate or acrylonitrile butadiene styrene (ABS).  However, that very same polycarbonate resin has found strong demand in protective screens in shops that have remained open.  Some construction output has been suspended in the first half of 2020 affecting materials such as PVC and some paints, coatings and adhesives. 

The events of the first half of 2020 will dramatically alter economies for the remainder of the year, and into 2021.  It will require new strategic decisions and business planning.

The COVID-19 pandemic is also changing the ‘big picture’ issues such as single use plastics and the circular economy, transportation, emissions, material substitution, and many more.  There are now new arguments for and against, new priorities, and opportunities for a ‘clean slate’ in approach, that the petrochemical market will have to react differently to.

Nexant is modelling the 2020 effect and its impact on petrochemical demand projections in order to provide its clients with the best insight possible to make these strategic decisions.  Nexant’s Market Analytics reports build on over 50 years of experience in providing detailed long term market forecasts using Nexant’s industry recognised petrochemical simulator.  By analysing consumption, supply, and supply demand and trade, the reports identify the key issues shaping the industry.  This is key in modelling the changing demand fundamentals of 2020 from the COVID-19 pandemic, and assessing their significance and lasting effects.


The Author

Jeremy Belbin – Market Analytics Report Manager, Nexant

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