Trade consequences of the petchem revolution

A petrochemical revolution, spearheaded by China’s unprecedented expansion, is reshaping the global petrochemical landscape and influencing patterns of oil consumption.

According to the International Energy Agency (IEA), petrochemical demand is propelling global oil consumption to surpass pre-Covid levels, but the long-term trajectory indicates a potential peak in global oil demand this decade.

Ciarán Healy, an oil market analyst at the IEA, highlighted the unprecedented speed and scale of China’s petrochemical expansion, which is transforming the petchem market. This transformation has far-reaching implications, changing global oil consumption patterns, impacting traditional petrochemical centres, and influencing the trajectory of carbon dioxide (CO2) emissions from oil.

China’s petrochemical sector’s current growth trajectory is outpacing historical precedents.

This is shifting oil demand to the country as it increases production of plastics and synthetic fibres, while generating increasingly cutthroat competition among those that previously dominated the market,” Healy said.

Global oil consumption

While global oil consumption in 2023 outpaced pre-Covid levels, the driving force behind this resurgence is predominantly petrochemical demand, with China at the forefront. Petrochemical feedstock demand in China is set to average 1.7 million barrels per day (mb/d) more than in 2019, contributing significantly to the overall increase in global oil consumption. “Were it not for the sector’s rapid growth, total oil consumption would remain comfortably short of the pre-pandemic mark,” Healy said.

The expansion of China’s petrochemical sector has led to a reorganisation of global trade in petrochemical products. “China has long been the world’s largest polymer and synthetic fibre importer, accounting for the equivalent of almost 3 mb/d in feedstock terms, or 3% of global oil consumption, in 2019 and 2020,” Healy said. “Now, its previous suppliers are under pressure after recent increases in Chinese production, in particular during 2023.”

European petrochemical producers are particularly affected, facing low operating rates and struggling to break even.

Shipments of intermediate and finished petrochemical products to Europe from the Middle East and East Asia, excluding China, have risen slightly – but, in part due to weak local demand for plastics, Europe does not appear able to absorb the additional supply. Production across all these regions has slowed, although declines in Europe have been the largest,” Healy said.

In contrast, US producers have capitalised on the growing demand, substantially increasing exports of petrochemical feedstocks, intermediates, and polymers. “Soaring domestic availability of ethane and propane, the most important US feedstocks, has outpaced increases in consumption, keeping processing margins strong and supporting rising exports. Ethane used in US plants now accounts for more than 2% of global oil demand, doubling over the past decade.”

This growing feedstock supply has helped US producers expand their global market share and “huge volumes” of US ethane and propane have poured into China since the pandemic. The US-China symbiosis has allowed both countries to flourish in the petrochemical market.

Peak oil

However, Healy cautioned that the magnitude of the surge in petrochemical activity “risks masking” major shifts in global oil markets that have already begun to take hold. “These structural changes have brought a peak in global oil demand into view this decade, according to analysis in the IEA’s medium-term Oil 2023 report and the latest World Energy Outlook.”

One significant consequence of the petrochemical revolution is the shifting dynamics of carbon dioxide (CO2) emissions from oil. Petrochemical products, not primarily used as fuels, contribute to lower direct emissions. However, this shift raises environmental concerns and necessitates a comprehensive approach to address potential environmental issues associated with the petrochemical industry.

Yet, despite the global economy’s growth and an increase in the population, oil demand excluding petrochemical feedstocks remains lower than in 2019 and has grown little since 2017. Factors such as improvements in engine efficiency, a surge in electric vehicle sales, and widespread teleworking have contributed to this plateau. Projections indicate that global road fuel use is set to decline from 2025, and oil consumption in advanced economies is already nearly 10% below 2007 levels.

“These changes are set to bring an overall peak in global oil demand this decade despite growing demand for petrochemicals – which, while substantial, is not expected to alter the broader direction of travel,” Healy said.
Source: Baltic Exchange