About a year ago we wrote a piece highlighting the longer-term risks to plastics supply and demand because of oil company interest in chasing a market that they perceived to be growing faster than other oil products markets, and potentially running headlong into a plastic market that was either seeing slower growth because of concerns around plastic waste and sustainability or was declining.
A year of COVID-related uncertainty put some of the projects on hold, but as we move through 2021 we have a couple of factors driving the plastic bet again. First, demand for plastics is very high and pricing is “off the charts”, suggesting that converting oil to plastics could be profitable as well as a home for some of the oil. Second, with the climate agenda now front and center in every economy and more discussions around electric vehicles, hydrogen, and biofuels, the future for oil demand is looking incrementally bleaker. The economics of NOW thesis would support large-scale investment in oil to chemicals – either directly – or through refining to more common feedstocks. But…
- The plastic waste story has not changed – there will be moves to limit plastic use, there will be moved to recycle plastic into existing (and perhaps new) polymer markets, and there will be a lot of pyrolysis.
- The pyrolysis will produce fuel and whether or not it ends up in an ethylene plant or as diesel or fuel oil substitute, it is a negative for the oil industry as it is recycled oil when looked at from a life cycle perspective – or in the US it is a substitution of NGLs for oil – which is worse for the oil industry.
The current strength of the polymer market and the CURRENT problems with increasing recycling volumes present a very attractive opening for new investment in oil to chemicals today, and the supply chain disruptions could keep the market for polymers robust for the full year, although likely not at current levels. If a series of these investments go ahead, we see real long-term risk to the polymer markets 4-5 years from now.
