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February 28, 2023
6 Min Read
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Petrochemicals are found almost everywhere in a variety of products and serve as feedstock for the production of plastics. Their cost and availability have a big impact on manufacturers’ costs and earnings. The Oil Price Information Service (OPIS) Energy Insights spoke to this in a Feb. 24 webinar, “Petrochemicals: An Ill-understood Sector with a Big Impact on Business and Consumers.” Part of the Dow Jones professional information business, OPIS is a data analytics and insights provider acquired by News Corp. in February 2022 for $1.15 billion.
Webinar participants from OPIS were Kathy Hall, executive director of Global Petrochemical Products, and moderator Denton Cinquegrana, chief oil analyst. Hall said most petrochemicals are used to make plastic, gasoline, or other chemicals.
“Chemical facilities have swing capacities for making different types of chemicals or grades of plastics, but with regard to refining, some petrochemicals have a use in the fuel or gasoline blend stock pool,” Hall said. “When oil prices are high, chemical prices react to that automatically. But these markets have developed their own personalities as commodities and are traded independently of energy in a lot of cases.”
A question of fundamentals
Often regarded as niche, the chemicals sector has become so important that it has its own fundamentals. For example, in the event of a chemical shortage, its price won’t depend solely on the price of crude oil.
“Refineries birthed the petrochemicals industry, and the largest refiners are still the largest petrochemicals companies,” Hall said. “Lots of refineries are on land that have chemical complexes on them.”
Chemicals that are directly produced in the refining process include aromatics, which have a distinctive smell. They include benzene, toluene, and xylene, and can be used to make gasoline.
“You also can make propylene, a very versatile chemical,” Hall said. “Propylene is a building block for plastics and solvents. You also can upgrade that into other chemical units.”
More than 90% of chemical plants are in massive complexes near refineries, and many of those are in Texas, she added.
“When a weather event hits Texas, it knocks out a lot of chemical plants and refineries,” Hall said. “The on-purpose chemicals that have plants around them, the building blocks are ethylene and propylene. From those you can make primarily plastics — polyethylene and polypropylene — but also personal care products and cosmetics.”
Demand for medical-grade plastics is recession proof
The demand for plastics is a primary driver of the ethylene, propylene, and benzyne chemical markets, Hall said. Plastics are ubiquitous, so demand for these chemicals is steady.
“You can live in a world without plastics, but plastics have made our lives so convenient,” she said. “Demand from the medical field is recession proof. Three years ago, at the start of worldwide lockdowns, nobody bought anything but personal protection equipment, which is made from plastics. It is the same with disposable plastic. There is an environmental focus to remove it, but disposable plastic minimizes germs.”
Ups and downs in building and construction sector
By contrast to steady demand from the medical sector, other markets that use plastics and chemicals are cyclical in nature. For example, demand from building and construction, which uses lots of plastic, concrete, and metal, peaks in good weather. In May 2020, demand for plastic in construction exploded because of the global pandemic.
“Reality hit in May 2020, when people thought they might be home all summer and home improvement projects began. There was a huge demand surge for plastic pipe, decking, and containers,” Hall said. “The popularity of chemicals kept going into the next cycle and we saw unending price increases. Many sectors did very well in selling plastic. There was a shortage of plastic pipe around the world, which meant there was a shortage of PVC and polyethylene around the world, and that meant there was a shortage of ethylene.”
As the pandemic eased and life started to return to normal, demand for certain plastics rebounded.
“People started leaving their homes and buying cars again, and fuel prices bounced back,” Hall said. “[Sporting events] came back, which use a lot of plastic utensils and bottled beverages. But in the background, we learned about the supply chain.
“You could have the lowest cost and [great inventory], but if you couldn’t get it somewhere that became its own fundamental. Freight costs priced out many people, making certain sectors unprofitable. All this came home to roost for consumers who could not get sneakers because the plasticizers were held up at port. Lots of things were laid bare by necessity during the past three years.”
Coming out of the pandemic, rising interest rates put the brakes on some construction projects, which gradually affected plastics producers.
“As interest rates increased last summer, the construction demand for plastics lessened,” Hall said. “You always need pipes for water and cable, but if construction slows, so does the demand for pipe. In 2021 and early 2022, you were doubling your orders for pipes. But when interest rates went up, construction jobs were getting canceled, and everybody had too much pipe.”
Most companies run their inventories down at the end of the year. Demand for plastics has improved since November and December, she said.
“It’s not the safety net that a lot of plastic commodity markets would like to see, but it is slowly moving higher,” Hall said. “Plastic plants are running at higher rates in January than they have in many months. That is a sign that, if there had been a glut in the market, there now are new orders looking for this material. Also, January is a safe time to ramp up production rates because there is no end-of-the-year inventory valuation situation. But at the same time, the orders must be there to increase production from relatively low rates. It is coming back a little bit. It is not a bull market, but it is not as gloomy for plastics as it is for other sectors,” said Hall.
Recycling elevated to a need-to-have
The ability to effectively recycle plastic has not kept up with the burgeoning growth of the industry, said Hall.
“Recycling of plastics is not new. It’s been going on since the 1970s in the United States,” Hall noted. “Recycling used to be a nice-to-have; now it’s a need-to-have due to government mandates or retail-level demand. That has created an industry that is quickly commoditizing itself.”
There is insufficient infrastructure for recycling plastics, she said.
“There were grim statistics that said recycling is down to less than 10%,” Hall said. “We are making four times the amount of trash with the same number of sorting facilities. It is overwhelming the [recycling] infrastructure.”
Investments are starting to flow into recycling and making things from non-fossil sources, including waste plastic and biomass, she said.
“Those investments are starting to come, but it is a teaspoon in the ocean right now. It is gradual,” she said. “You take the recycled content and blend it into your products. And over the years you increase that blended content, if possible." But to retain its integrity, plastic needs to perform a certain way, she added. "The safety and quality won’t be compromised by recycling. Chemical recycling — turning [waste] plastic into things that can be used to make other chemicals — is an innovative way to solve a problem that the plastics industry began 100 years ago,” said Hall.
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