IEA: COVID-19 Economic Shock, Capacity Overhang to Pressure Petchem Margins, Stall Investment
2020-05-29    [Source:Chemical week]

PUdaily, Shanghai —— The worldwide economic shock due to the coronavirus disease 2019 (COVID-19) pandemic and a major petrochemical production capacity overhang could mean weak industry margins and low plant utilization rates for several years, according to the International Energy Agency (IEA; Paris).


    The wide-ranging annual benchmark analysis by the IEA in its world energy investment report also includes a forecast for the largest annual decline in energy investment on record in 2020, with the total to plunge by $400 billion, or roughly 20%, compared to capital spending in 2019.


    The economic crisis and expectation of a worldwide recession is widening the near-term gap between capacity additions and demand growth for midstream and downstream infrastructure, raising questions about the “safe havens” of investment in petrochemicals and liquefied natural gas (LNG), the IEA says. A surge in investment in recent years in the petrochemical, refining, and LNG sectors has left each “now facing a major overhang of capacity, putting intense pressure on margins and pushing back many investment plans and timelines,” it says. Natural declines in upstream fields offer a hedge against overinvestment, but there is “no such protection further down the value chain against demand coming in below expectations,” it adds.

    Investment in petrochemical capacity driven by higher margins, rising US shale production, and optimism about future demand had already started to run ahead of near-term growth in consumption, according to the IEA. Since 2014, some $120 billion has been invested in building new petchem capacity or expanding existing plants, with over 70% of this invested in China and the US, it says. The effects on demand of the COVID-19 crisis, however, “means that this problem of overcapacity now looms very large.” 


    Despite clear opportunities remaining, given that longer-term demand expectations for plastics and gas are relatively robust, the IEA says there are also risks, “given that these sectors involve large, capital-intensive investments that require high levels of utilization over time. Unlike the production declines in the upstream, there is no natural protection against the risk of demand coming in below expectations.”


    Prices for chemical products in 2019 were already falling and 2020 has put further pressure on the economics of production facilities, triggering “a reassessment of the timelines for some of the planned projects that have not yet started construction,” it notes. In both petchems and LNG, uncertainty around the trajectory of demand and prices and the shape of an eventual recovery from the economic slowdown “are going to weigh heavily on investment decisions,” it adds.


    Highlighting worldwide ethylene capacity additions that were already outpacing growth in demand in 2018–19, with more new capacity scheduled to start this year, the petchems investment boom “implies lower margins and utilization in the coming years despite relatively robust long-term demand prospects,” the IEA says. The annual increase in worldwide ethylene production capacity in 2019 was 60% higher than the level of demand growth, leading to a “significant drop in ethylene prices across the board” and a sharp decline in earnings of between 60% and 80% for many commodity chemical companies compared with 2018, it says. “This mismatch extends out into the future and could be exacerbated by the economic slowdown,” according to the agency. With approximately 12 million metric tons of new ethylene capacity expected to come online in 2020, this will be the largest capacity addition since 2010 if all projects go ahead as scheduled, it says. “These additions coincide with a significant deterioration in trade and industrial activity, which may weaken the demand outlook for chemical products,” it adds.


    While petchems demand remains robust in the longer term, “a confluence of weakened economic outlook and overcapacity casts clouds over industry margins and utilization rates in the coming years,” it warns.


    The IEA’s energy investment report also forecasts that oil and gas expenditure will fall by almost a third year on year in 2020, with investment in the US shale industry to be halved. “The energy industry that emerges from this crisis will be significantly different from the one that came before,” the IEA says.


    The agency’s stated assumptions for 2020 include a U-shaped recovery and a 6% decline in global gross domestic product (GDP) for the year. The forecast energy investments cover the oil and gas, power, and energy efficiency sectors, and are based on latest available data, government announcements, project tracking, and industry interviews carried out as of mid-May.

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