London August 17 2023: With economic uncertainty still swirling globally, the outlook for chemical markets in the second half of 2023 and over the next year remains mostly gloomy with some bright spots. Following a slow start to the year, flagging economic growth, persistently high inflation and rising interest rates are likely to hinder recovery for certain chemical segments.
The overall outlook for petrochemicals is somewhat negative over the next 12 months. Customer decisions to destock, or reduce inventory, in late 2022 and weaker-than-expected orders from China after relaxing its zero-COVID policy contributed to depressed demand and market oversupply. Forced to temporarily lower production to tackle high inventory and expensive input costs in some regions, petrochemical producers will see a decline in operating rates, product prices and EBITDA margins, according to an S&P Global Ratings commentary.
Petrochemical companies in the US are expected to fare better in terms of input costs than their counterparts in Europe and Asia. This is because US petrochemical plants use natural gas-based feedstocks such as ethane, which is cheaper than the naphtha feedstock used by facilities in Europe and Asia. Petrochemical producers in Europe will be particularly challenged as new capacity from Asia comes online and oil prices remain volatile due to the war in Ukraine.
Despite the negative outlook on petrochemicals, S&P Global Ratings analysts believe that industry players can weather the storm by staying prudent with M&A and other growth expenditures and by proceeding with caution when it comes to shareholder rewards.
“While the industry outlook is currently bleak, a saving grace for many of the companies we reviewed in this commentary is the cushion they built in their credit metrics [in 2021 through mid-2022] to withstand this downturn,” said Daniel Krauss, primary credit analyst at S&P Global Ratings.
As rising inflation and soaring interest rates force customers to economize, demand over the next year will remain low for olefins such as ethylene and propylene, which are used as raw materials to manufacture polymers and other chemical products for various end markets. Unseasonably cool temperatures and a somber economic outlook will continue to weigh on polyolefins, including polyethylene terephthalate (PET) and recycled PET, for the balance of the year. Contributing to the weak demand is a decline in home construction, which is a key end user of chemical products, particularly in the US. Some of that demand softness is likely to be tempered by a rebound in the automotive end market as travel continues to pick up. The longer-term outlook for global olefins and polyolefins through 2027 is likely to be bearish, according to an S&P Global Commodity Insights report.
The outlook for methanol, which has applications in sectors such as construction, electronics and transportation, is also dismal for the second half. Pricing pressure will be driven by a ramp-up of production capacity, primarily in the US and Iran, and a slowdown in global construction demand. One bright spot during the second half will be the increased use of packaging and plastic bottles, for which methanol is a raw material, S&P Global Commodity Insights experts said.
The second-half prospects for gasoline blendstocks, including methyl tertiary-butyl ether (MTBE), toluene and isomer-grade mixed xylene (MX), are varied. Monsoon season will slow gasoline blending activity in most parts of Asia, although MTBE demand will remain stable in China and Southeast Asia. The winter driving season will likely fuel the MTBE market in the US, led by exports to Mexico. In Europe, the summer driving season is forecast to raise the premiums of toluene and MX, although spot volumes for both products will continue to be limited due to economic uncertainty across the region.
In the specialty chemical segment, demand is anticipated to bounce back in the second half amid expectations for an economic rebound in China and year-over-year declines in raw material and energy costs.
“Demand and sentiment in services industries such as tourism and hospitality have recovered more quickly, while manufacturing sectors remain more sluggish as higher expenditures remain more cautious. As we accelerate toward sustainable solutions and energy transition, specialty chemicals will continue to play an integral part in delivering ‘more for less,’” said Adam Bland, executive director of specialty chemicals at S&P Global Commodity Insights.
