CHEMICALS PRICE FORECAST

Most manufacturing industries consume chemicals or plastics as raw materials or auxiliary materials in their production plants. To simplify this discussion, I will refer to chemicals and plastics together as chemicals.

Since 2012, the peak year for oil prices, Crude Oil prices have fallen, and all chemicals users have enjoyed lower prices for Crude Oil derivatives. However, I believe this scenario will change in 2016 and 2017. In parallel fashion, Natural Gas prices have also fallen during same period, as shown in the graph below.  This is important to note as both feedstocks drive price movements for chemicals.

Crude

Background

Although several chemicals can be produced from Crude Oil or Natural Gas, most chemicals pricing follows Crude Oil prices. For example, Ethylene can be produced from Crude Oil or Natural Gas but follows Crude Oil prices, so producers of Ethylene using Natural Gas (at a lower price) enjoy a higher margin when Crude prices are high.

There are competing theories about the reasons for the Crude Oil price decline. Some conspiracy theorists believe the Organization of Petroleum Exporting Countries (OPEC) wants to financially restrict Iran and ISIS, which are both financed by oil exports. Others believe that OPEC wants to decrease the global oil inventory so the price will increase easily. My own view is that global oil prices declined in order to delay Shale Gas (mainly in the U.S.) investments and further production. Note: Shale Gas is Natural Gas in a different formation, which is cheaper than Crude.

Future

Any financial analyst of commodities or chemical specialist or, in fact, any person at large may try to predict the future. It is only after the fact, however, that we can realize who was right! So, I will give my view.

My first prediction concerns the chemicals industry in the U.S. This industry reported US$1,041 billion in revenue in 2014, and I believe it will reach US$1,400 billion in 2020, through a combination of price and volume increases.

My second prediction is related to Crude Oil. My view is that the Crude Oil price will reach an average of US$50/BBL in 2016 and US$60/BBL in 2017. As we all know, supply-demand balance defines the price, and in May, Bloomberg reported that OPEC ministers were “happy with the direction of the oil market” to “eradicate surplus production.” A second indication is the tremendous financial impact on the oil exporters. A recent Deloitte article provides a clear view of the impact on the budgets of oil exporters, showing they need a certain level of oil price in order to balance their internal budgets. Russia, for example, is heavily dependent on its oil revenues, with Oil and Gas accounting for 70 per cent of total export revenues. The country loses about $2 billion in revenue for every dollar fall in the oil price. The only oil exporter with high levels of monetary reserve to support this pricing environment is Saudi Arabia, and all others are struggling.

Assuming the oil prices as shown below, with Natural Gas around US$2.70/mmBTU, we may predict the following impact on Ethylene and Propylene.

2016 2017
Crude Oil (US$/BBL) $50 $60
Ethylene (US$ cts/lb) $29 to $31 $33 to $37
Propylene (US$ cts/lb) $34 to $39 $39 to $45

The above predictions are based on statistical correlation analysis over the last 10 years.

Let us be very clear that the prices of Ethylene and Propylene are driven by the feedstock but also by the supply-demand balance of each one, as well as other derivatives. For example, Ethylene pricing depends on demand for middle-distillate products like gasoline, diesel, and heating oil. Additionally, propane pricing represents a ceiling price for Ethane. As result of all these drivers, Ethylene and Propylene prices have presented a delta (Propylene less Ethylene) between -$5 in 2000 to +$20 in 2011. Therefore, the prices may fluctuate much more than shown here.

There are several different chemicals, and the cost of each is driven by its feedstock as well as the supply-demand balance in that region. With that understanding, one approach would be to look at long-term historical data plus the delta range between the chemical and their feedstock and then relate these to the historical Crude Oil price. This would give an indication of how much your prices may increase.

For now, I propose you check these prices at the end of 2017 to see if I was right. If not, sorry; I just gave my view.

Taking Purchasing to the next level,

Paulo Moretti

Chemicals – Global Market Outlook

Chemicals – Global Market Outlook

This is the third of a series of articles related to global Chemicals & Plastics, links to the previous of which can be found here:

  1. Market Analysis: Chemicals and Plastics, U.S. data for Chemicals & Plastics with past and future demand along with their growth rates.
  2. Plastics – Global Market Outlook, Installed capacity, current and future demand, growth rates, imports, and exports.

Parallel to the second article, this global market outlook focuses on Chemicals, aggregating 116 Chemical families totaling demand of 3.0 billion MT (6.7 trillion lb.) of global products.

Background

There are thousands of chemical products on the market. However, the data from this market analysis are restricted to chemicals most consumed in the industry (in solid, liquid, or gas form) that are considered commodity chemicals.

In terms of regions, the data was aggregated as North America (USA, Canada, and Mexico), Latin America (Central, South), Europe (Western, Eastern, Central, and Baltic), Middle East, and Asia-Pacific (India, Southeast, Northeast, and Oceania).

An analysis of demand can be broken into “Current” and “Future” categories. Each market analysis has a different year as its base line, with 2012, 2013, and 2014 being called Current. Future demand is considered five years ahead, correspondingly: 2017, 2018, and 2019. In a perfect world, we should have one single year as a base line, but different sources use different starting dates for their market data. In that regard, we need to view the data below in the perspective of magnitude and general direction, and not as a precise number.

Capacity & Operation Rate

The global capacity for all Chemical families is around 3.1 billion MT where Asia-Pacific presents higher capacity than all other regions together as shown in Chart I.

                          Chart I

Chemical_Capacity

Overall, Asia-Pacific represents the highest installed capacity in the world with 48% of 3.1 billion MT, followed by Europe (20%), North America (19%), the Middle East (11%), and Latin America (5%).

The high capacity means, of course, a high market demand in the region, but also an alternative to import from that region.

Some of the chemicals present a higher capacity concentration in a specific region. Table A below shows which chemicals, in each region, have the highest concentration of global capacity (local capacity/global capacity). Having a higher capacity concentration may mean that the region has abundance and probably lower cost for that specific feedstock. It could also mean lower total unit fixed cost (manufacturing and expenses) because they produce higher volumes. Consumers of these products should consider sourcing from these regions.

Table A   –  Percentage of Global Capacity
North America Latin America Europe Middle East Asia-Pacific
Cellulose Acetate (54%) Lithium (32%) Oxo Chemicals (80%) Bromine (48%) Calcium Carbide (97%)
Propionic Acid (48%) Ethanol (26%) Ammonium Nitrate (55%) Ethane (38%) Acetylene (97%)
Ethanol (47%) Potash (44%) Chlorobenzenes (89%)
Sodium Chlorate (42%) Propionic Acid (40%) Sodium Sulfate (83%)
Ethane (38%) Cellulose Ethers (39%) Terephthalic Acid  (81%)

Chart II below captures the operation rates for each region. North America presents the highest Current operation rate at 82% for the products produced in the region, followed by Asia-Pacific (77%), Europe (75%), Latin America (74%), and the Middle East (71%).

                       Chart II

Chemical_Oper_Rate

The analysis of operation rate can be considered from two perspectives: Unit Cost and Product Availability.

North America‘s higher percentage represents lower unit fixed cost (in manufacturing and expenses), compared to the other regions on the same basis. Basically, this is because we divide all fixed costs and expenses by a higher volume of produced products. However, each Chemical family presents a different impact of fixed costs on the total cost, as well as the magnitude of fixed costs from different sizes of the plants. For example, with Cumene, the unit fixed cost can be 5% to 7% (highest to lowest capacity) and with Sulfuric Acid, 61% to 75%.

The second perspective is to see which region may have more products available for purchase. Currently there is more product available from Asia-Pacific (469 million MT), Europe (181) and North America (131). It is interesting to note that product availability from Asia-Pacific is higher than total capacity from the Middle East or Latin America.

Imports

It is important to also pay attention to the trade between regions. In part, imports reflect how a region covers its internal demand and also provides opportunity for purchases from lower-cost regions.

                                                                                                Chart III

Chemical_Import

Asia-Pacific represents 51% of all importation of Chemicals in the world and represents only 11% of their demand. Regions with a high percentage of imports (like Latin America) reflect the lack of local installed capacity.

Chemical_table_B

The Chemical families with high volume trading between the regions are shown in Table B and represent 63% of global trade volume of 116 Chemical families.  The high volume tradable products are evidence that it is relatively easy to import and export products between regions and also that the prices between the regions are very similar. I believe that any company should buy from international sources in order to create competition with local suppliers and keep the prices in a lower level. 

Exports

Exports reflect the competitiveness of regions across the world.  As we see in Chart IV, Asia-Pacific is the biggest exporter because of its huge installed capacity. On the other hand, the Middle East represents the highest export percentage compared to their installed capacity, showing their competitiveness based on lower feedstock costs.

                                                                                                  Chart IV

Chemical_Export

Chemical Demand

All 116 Chemical families in my analysis present a current demand (see Background note above) of 3.0 billion MT, which is expected to grow globally at a rate of 3.4% per year reaching 3.6 billion MT in the future.

                                Chart V

Chemical_Demand

In Chart V, we see that the Asia-Pacific region presents the highest global demand, both Current and Future, followed by North America, Europe, the Middle East, and Latin America.                                             

The Chemical families with highest demands in the world are shown in Table C. These chemicals represent 57% of all 166 Chemical families’ global demand.

                                                                        Table C

Product Volume (1000 MT)   Product Volume (1000 MT)
Industrial Gases                458,025 Propane            117,636
Sodium Chloride                266,970 Ethanol            105,121
Sulfuric Acid                243,473 Propylene              92,340
Ammonia                143,057 Urea              83,365
Ethylene                138,955 Sulfur              77,333

The Compound Average Growth Rate (CAGR), is the growth rate in percentage year over year in a specific region. It reflects the growth of all end-use applications of that specific chemical in a region, which of course, is driven by the overall growth of the region’s GDP.  In Chart VI, we see the CAGR for the internal demand in each region, which shows Asia-Pacific, the Middle East, and Latin America with the highest growth rates. The same data from a volume perspective (see Chart VII) shows very clearly that Asia-Pacific is the region where chemical producers should have business, either by having local plants in the region or exporting chemicals from other regions.

                                                                  Chart VI                                                 Chart VII

Chemical_Growth

In terms of Chemical families, the biggest growth rates are described in Table D.

                                          

                                       Table D

Growth Rate Product Volume Growth (1000 MT)
8.5% Lactic Acid 254
7.5% Rare Earth 49
7.5% Activated Carbon 507
7.5% Methanol 26,236
6.9% Ethanolamines 634
6.1% Oxo Chemicals 131
6.0% Lithium 51
5.7% Cresols 128
5.7% Terephthalic Acid 16,081

The growth rates at this level, much above GDP growth, reflect some new end-use applications or high growth rate from specific market segments. Every time we see a product with high demand where the supply is not following at the same rate, we can expect a price increase. This means that companies buying these chemicals may find difficulty getting the product if they do not have a contract in place.

 

Conclusion

Chemicals are used in all manufacturing industries as first or second tier materials, so it is important to understand market dynamics in the chemical world.  From the chemical business perspective, it is imperative to understand the supply and demand of each Chemical family and the competitive position in each region in order to define long-term business strategy.  From the purchasing perspective, managers need to educate themselves about each Chemical family they buy at a granular level, so they can select the suppliers that best fit long-term needs, as well as identifying opportunity for lower-cost materials.

Taking Purchasing to the next level,

Paulo Moretti

Plastics – Global Market Outlook

In a recent article published at MyPurchasingCenter called Market Analysis: Chemicals and Plastics, I provided U.S. data for Chemicals & Plastics with past and future demand along with their growth rates.
In this follow-up article I will share global market data for Plastics with regional details for installed capacity, current and future demand, growth rates, imports, and exports. This aggregated market analysis was executed on 35 Plastics families totaling 340 million MT (750 billion lb.) of global products. A third article will cover Chemicals across the world.
It is critical for purchasing personnel to understand supply and demand of the products they buy, so they can advise their business partners of both the opportunities (lower cost) and the threats (supply disruption) in this space.

Background

The term Plastics is very broad and each reader will naturally relate to a different product. Here, I include as a Plastic any polymer (large molecule composed of many repeated subunits), thermoplastic or thermoset, elastomer, rubber, copolymer, or resin in any form (pellet, powder, liquid, etc.).
Plastics families include Polyethylene (LDPE, LLDPE, HDPE), PET, PP, PVC, Amino resins, Natural Rubber, PS, ABS, PC, PVA, Epoxy, Silicone, Acrylics, etc. Here I use the acronyms most widely known in the market.
In terms of regions, the data was aggregated as North America (USA, Canada, Mexico), Latin America (Central, South), Europe (Western, Eastern, Central, Baltic), Middle East and, Asia-Pacific (India, Southeast, Northeast, Oceania).
In terms of demand, the graph breaks this into “Current” and “Future” categories. Each market analysis has a different year as base line, with 2012, 2013, and 2014 being called Current. Future demand is considered five years ahead, correspondingly: 2017, 2018, and 2019. In a perfect world, we should have one single year as a base line, but different sources use different starting dates for their market data. In that regard, we need to see the data below in the perspective of magnitude and general direction, and not as a precise number.

Capacity & Operation Rate

The global capacity for all Plastics families is around 455 million MT (1 trillion lb.) where Asia-Pacific presents higher capacity than all other regions together as shown in Chart I.

plastic_capacity

Overall, Asia-Pacific represents the highest installed capacity in the world with 55% of 455 million MT, followed by Europe (17%), North America (14%), the Middle East (10%), and Latin America (4%).
In particular, the Asia-Pacific region leads in capacity of Natural Rubber (93% of global capacity), ABS (83%), PET (79%), SAN (77%), and Polybutylene Terephthalate (71%). North America leads in Sulfone Polymers (64%) and Polyvinyl Butyral (42%), and Europe in Polyisoprene (55%), Butyl Elastomers (40%), and LDPE (31%). Latin America and the Middle East do not lead installed capacity in any Plastics family.
Chart II captures the operation rates for each region.
North America presents the highest operation rate at 82% for the products produced in the region, followed by Europe (76%), Asia-Pacific (75%), Latin America (71%), and the Middle East (67%).
The analysis of operation rate can be considered under two perspectives: Unit Cost and Product Availability.

operation_rateNorth America‘s higher percentage represents lower unit fixed cost (in manufacturing and expenses), compared to the other regions on the same basis. Basically, this is because we divide all fixed costs and expenses by a higher volume of products. However, each Plastics family presents a different impact of fixed costs on the total cost, as well as the magnitude of fixed costs from different sizes of the plants. For example, with Polystyrene, the unit fixed cost can be 10% to 16% (highest to lowest capacity) and with LLDPE, 33% to 42%.

The second perspective is to see where there may be more products available to buy from, in terms of percentage of capacity (not quantity itself). Of course, the quantity of 18% (available capacity) in North America capacity (11 MM MT) is higher than 29% in Latin America (5 MM MT). It is very probable that the region with lowest operation rate may offer a lower price in order to increase their capacity utilization (for example, the Middle East and Asia-Pacific).

Imports
It is important to turn our attention to the trade between regions. In part, imports reflect how a region covers its internal demand and also opportunity for purchases from lower-cost regions.

importsAsia-Pacific represents 50% of all importation of Plastics in the world and represents 27% of their demand. Regions with high percentage of imports (like Latin America and the Middle East) reflect the lack of local installed capacity. The Plastics families with high volume trading are PP (18 MM MT), HDPE (16), LLDPE (11), PVC (9), Natural Rubber (8), and LDPE (8).

Exports
Exports reflect the competitiveness of regions across the world.

exportsAs we see in Chart IV, Asia-Pacific is the biggest exporter because of its huge installed capacity. On the other hand, the Middle East and North America are areas that represent the highest export percentage compared to their installed capacity, showing their competitiveness based on lower feedstock costs.

Alert from China
• China‘s rise in status to big-time exporter (all products/services) is well documented, jumping from US$232 billion in 2000 to US$2,342 billion in 2014, a 10-fold increase.
• Recent McKinsey data showed China’s internal debt reached US$28 trillion (282% of their GDP), mainly driven by the housing market.
• During August/September 2015, China devalued the Yuan currency, and according to ValueWalk analysts, China may devalue up to 20% by 2016. Currency devaluation makes products cheaper.
• Asia-Pacific, mainly driven by China, has the biggest installed capacity (250MM MT) for plastics, and the region is operating at 75% of capacity. It has exported 43 MM MT, with still 63 MM MT to be produced.
• One conclusion from this information is that we may see more Plastics coming from China to help pay its internal debt.

Plastics Demand
All 35 Plastics families in my analysis present a Current demand (see Background note above) of 340 MM MT, which is expected to grow globally at a rate of 4.1% per year reaching 417 MM MT in the Future.
In Chart V, we see that the Asia-Pacific presents the highest global demand, both Current and Future, followed by Europe, North America, the Middle East, and Latin America.

plastic_demandThe following nine Plastics families represent 80% of total Current demand of Plastics in the world: PET (60 MM MT), PP (58), HDPE (38), PVC (38), LDPE (20), Amino Resins (17), Natural Rubber, (11) and PS (10).

Growth Rate
In Chart VI, we see the Compound Average Growth Rate (CAGR) for the internal demand in each region. From a growth perspective, the Middle East has the highest rate at 10 MM MT, whereas Latin America has the third biggest rate at only 3.7 MM MT. Developed regions like Europe (lowest growth rate) represents 6 MM MT, and North America shows 6.7 MM MT. Again, Asia-Pacific has the highest impact on Future demand with 50 MM MT of Plastics.

growth_rate

In terms of Plastics families, the biggest growth rates are with Biodegradable Polymers (12.7%), Silicone (7%), Natural Rubber (5.6%), Polyvinyl Butyral (5.3%), and Polyamides (5%). Even with high growth, these Plastics have capacity available to attend the demand.

Conclusion
Although it is considered mature, the Plastics industry is still showing growth rates higher than GDP. This will be driven by consumer purchasing power improvement as well as convenience of plastics over other materials in our lives.
From the business perspective, it is imperative to understand the supply-demand of each Plastics family and the competitive position in each region in order to define long-term business strategy.
From the purchasing perspective, we need to educate ourselves about each Plastics family we buy at a granular level so we can select the suppliers that best fit our long-term needs, as well as identifying opportunity for lower-cost materials.

Taking Purchasing to the next level,

Paulo Moretti

Market Analysis: Chemicals and Plastics

With an extensive background in purchasing excellence and market analysis for chemicals and plastics (see bio below), I am convinced that any purchasing personnel dealing with a strategic product must perform a strategic sourcing market analysis.

To demonstrate past and future demand and growth rates, I have aggregated chemicals and plastics (C&P) data from U.S. market analyses in the tables below. Also tabulated are growth rate comparisons from logistic carriers, which I believe you will find surprising.

Market Analysis 101

Strategic product market analysis requires data in six key areas: 1) Supply & Demand (global or regional),  2) Supplier Capacity by region, 3) End-use Application by region (with growth rates), 4) Detailed Manufacturing Cost and Capital, 5) Historical Price by region, and 6) Imports, Exports, and Trade by region.

Since most prices are driven by supply-demand balance, having this information helps us understand the impact on the price we are paying. Understanding supplier capacity allows us to choose those suppliers who can attend to both our current and future needs. Understanding the end-use applications and their respective growth rates allows us to visualize which industry may compete for volume of our product during cyclic troughs. If we are able to collect manufacturing cost and capital figures, we can understand how much margin our supplier is enjoying and how much pressure we can exert to decrease the price.

My global market analysis here covers 129 product families classified as C&P, in the form of gas, liquid, and solid.  Below is a collection of data compiled specifically for the USA, showing the historic and future demand and their growth rates.

USA Data

In 2014 alone, the U.S. market consumed 1,150 billion pounds (521 MM MT) of C&P. Of this amount, 41% was in gas form, 42% liquid, and 18% solid. The main products in volume are:

Gas: Industrial Gases, Propane/Ethane, Ethylene, Propylene

Liquid: Ethanol, Sulfuric Acid, Ammonia, Caustic Soda

Solid: Polyethylene (s), Sulfur, Alumina, Urea

According to the U.S. Department of Commerce, the 2013 gross output was US$784B for chemicals and US$210B for plastics, an 80/20 split. Of the 129 product families in my analysis, the data show 90% volume for chemicals and 10% for plastics, which drives me to conclude that plastics have a unit value two-three times higher than chemicals on the average.

Oil or Gas?

Most C&P products are derivatives of oil and natural gas, either directly or indirectly through energy use. In terms of pricing, most of these follow oil pricing, even if the product can be produced using natural gas. With the 2014 decrease of oil prices (from around US$100/BBL to US$50/BBL), everyone is asking about the impact on the chemical industry.

Because overall prices follow oil pricing, the previous year’s decreasing derivative prices may have incentivized the demand. Europe and Asia, both heavy users of oil, have become more competitive compared to the U.S. because it uses more natural gas (cheaper) than oil, which in turn may trigger more trade between regions. Keep in mind, that most processing crackers are flexible and can use oil or natural gas, depending on the price of derivatives (which brings more return as a whole).

Growth

For this analysis, I collected U.S. consumption data from 2000 to the present. The graph below (where 2000 = 100) compares the volume (my data) and gross output (Dept. of Commerce) for C&P to U.S. GDP and U.S. GDP per capita. It is very clear that the gross output (either total or per capita) for C&P is correlated to GDP. The correlation reaches R2=0.99 for a parabolic formula (Y=A+B*X+C*X^2), which may be considered an excellent correlation. This GDP correlation makes sense because C&P are also consumed by sectors like Manufacturing, Construction, Mining, and others, which all end at the consumer.  This means that when the country is doing well, C&P is doing much better.

Using different sources of data, my analysis selects the growth rate for each product that makes sense once compared with installed capacity plus announced capacity increases. The table below shows the past and future growth rates for the five-year periods of 2000-05, 2005-10, 2010-15, and future projections up to 2020. I have also added the growth rate from the U.S. Dept. of Transportation for a number of carriers in each mode.

Conclusion

At the moment of publication, any forecast is “wrong” in terms of exact numbers because nobody is able to predict all aspects that affect the final results. The overall growth of 3.1% for C&P is aligned with the U.S. GDP growth forecasts done by the World Bank, IMF, United Nations, OECD, European Commission, and Economist Intelligence Unit.

Additionally, the overall growth is aligned with the decrease of oil prices, which will decrease C&P prices, in turn favoring a higher demand.

All C&P are transported via truck, rail, or marine (including barge). U.S. Dept. of Transportation data show that only truck transportation has shown some increase in the number of carriers. Railroad and marine transportation have either stagnated or decreased. Comparative data is available for neither carrier capacity vs. C&P volume, nor for volume of anything else that is transported. My first impression is that future transportation by rail or marine will be tight.

Taking Purchasing to the next level,

Paulo Moretti