The linked article looks at the chemical inflationary cycle of the 70s, which has some relevant indicators for what we are seeing today, but there were also some stark differences. Rising raw material prices is a common theme and while it is convenient to blame OPEC+ this time, the group is not nearly as much to blame today as it was in the 70s. Consumers were facing not just higher oil prices, but also genuine shortages because of the OPEC cutbacks and the multi-year lead times that it took non-OPEC producers to ramp up E&P and ultimately production. This time the oil is there and relatively easy to get to, especially in the US, but the capital spending decisions of the US oil producers – mostly because of ESG related pressure – are holding back the production.
The other similarity is high demand growth for chemicals and plastics but the drivers were very different in the 70s than they are today. In the 70s we saw a major swing in grocery store investment in the west away from the local markets and towards the major supermarkets that we take for granted today. That evolution greatly increased the use of plastic packaging for food and plastic consumption for grocery sacks and drove well above GDP growth for polymers for most of the decade. This time we are seeing the continued middle-class growth in the developing markets – driving similar trends in groceries, but this has been the norm for decades. What we are seeing, in addition, is greater demand for medical-based packaging and protection, more packaging for food delivery, as well as what is likely a cyclical spike in consumer durable demand.
Going forward, we believe that investment slowdowns will drive a significant shortage of chemicals and polymers three to four years from now. Investments will slow in our view because the demand landscape post-2030 is very unclear – especially for polymers that could see competition from greatly increased recycle rates as well as renewables. The second uncertainty is feedstock supply – which could rise on the liquids side if less crude oil is needed for transport fuels, but could fall on the gas side if there is no longer-term support for natural gas and LNG. The third factor is carbon abatement costs, which could take away any advantage that liquids might have as a feedstock – see today’s ESG and Climate report (from which the chart below is taken). Despite the headlines that we see from Dow, Borealis/Adnoc, and ExxonMobil on new ethylene capacity, we see the rate of investment slowing – not enough to improve what could be difficult markets in 2022 and 2023 – but enough to cause shortages thereafter. See more in today's daily report.
Source: Bloomberg and C-MACC Analysis