Expect the unexpected: Economic factors remain strong, overcapacity still rules for feedstocks

AKRON—Bill Hyde has been watching the feedstock costs for synthetic rubber for a number of years now, and thus far 2024 hasn't gone quite as he expected.

That's because looking back to 2023, the vice president of olefins and elastomers for Chemical Market Analytics said he and his CMA colleagues were expecting a mild recession in some of the key global economies. And GDP is one of the key drivers for all of the petrochemical materials that feed SR.

And while there was a downturn in Western Europe, much of the rest of the world didn't see the economic difficulties that were forecast.

"The U.S. economy surprised on the upside. We never actually got close to a global recession," Hyde said in his talk, "Rubber Feedstock Costs: Will Things Ever Stabilize," delivered during the recent International Tire Exhibition & Conference in Akron.

"And as we move forward, we also think GDP growth will be relatively stable. Is it going to be strong? No. Is it going to be weak? No. It's going to be kind of average."

One thing that has impacted the markets this year, especially in the U.S., has been the stubbornly high inflation rates. And Hyde said that has led to delays in the time when the Federal Reserve Board can start reducing interest rates.

"That's a key thing for our markets, because that has a significant effect on consumption of durable goods, especially big ticket durable goods. When the consumer feels under pressure, the first thing they stop buying is a big ticket durable good," he said. "And as they come out of that sort of distress, the last thing they start buying again is a big ticket durable good."

And with more than 60 percent of synthetic rubber going into automotive/mobility, the high interest rates have contributed to some continued weakness in that market area.

Global light vehicle production in most regions still has not recovered to previous peak levels, which actually occurred in 2017, not in 2019 before the COVID pandemic hit. Hyde said in 2018, he probably would have advised that the lesser volumes were a minor blip and soon would return to historical trend lines.

But then COVID hit, followed by the Russian invasion of Ukraine.

"Mainland China actually got back to the previous peak last year," he said at ITEC. "The U.S. is going to get there around 2028. That's a huge difference between what we see now and our pre-COVID outlook. Europe and Northeast Asia may never get back to their pre-COVID peaks—at least not in this decade.

"That's a huge driver in our outlook on rubber demand."

Hyde said the thing that jumps out at him with regards to energy prices is the stability of the forecast. And whenever he sees a straight line forecast, it makes him uncomfortable.

"The reason for that is if you look at history, we don't have extended periods of stability in almost every market. Certainly in the energy markets we don't," Hyde said.

The other assumption is that the OPEC+ coalition will be able to maintain crude oil market balances to control pricing. "You will see some movement, but on average we think they'll be successful in maintaining control over the overall market balance. And they do that by adjusting production levels."

Right now, those nations have production relatively low. Even if the U.S. has a different energy policy next year because of the presidential election and began producing more crude oil, the CMA group believes OPEC+ would adjust their quotas to offset that.

"The other thing is that most of the forecast risk is to the upside. There is a little bit to the downside," Hyde said, "but most of the things that seemed possible to happen, would drive prices higher. With the geopolitics we're seeing today, it's remarkable with war in the Middle East, and the Iran and Israel conflict, that we didn't see bigger increases in oil prices than we did."

That speaks to a couple of things, one of which is that neither Iran or Israel were as aggressive as they could have been, so markets didn't really react to that. Plus, right now OPEC+ has enough surplus capacity to make adjustments to that.

One trend that keeps marching forward is the rampant problem of feedstock overcapacity.

Across the board, Hyde cited overcapacity numbers for virtually every material. Ethylene has more than 30 million tons a year of capacity than is needed, as does propylene. Butadiene is a much smaller market, but still has about 25 percent too much capacity.

"When you have massive overcapacity, what do you end up with? You end up with historically weak operating rates. You end up with weak margins, and sort of counterintuitively, we're expecting some pretty significant capacity additions," he said.

So why do certain nations continue to add apparently unneeded capacity that will continue to deeply impact the global industry? The answer, Hyde said, is it depends on where you are in the world.

Producers in the U.S. added substantial ethylene production capacity between 2015 and now because the nation offers low-cost feedstock. "They said, 'We can deliver polyethylene anywhere in the world, outside of the Middle East, cheaper than they can make it there, so we're gonna do that,' " Hyde said.

Those projects likely will halt now, he added, because the region is almost out of low-cost ethane.

China continues to add production in a variety of materials because it only is concerned with its own situation.

From a market balance, the nation still is a net importer. And with China having most of the demand growth, it will remain a net importer, a position the country's leaders have a cultural aversion to.

"So they say, 'We're going to continue to build, and frankly we couldn't care less what that does to the rest of the world,' " the CMA analyst told the ITEC audience. " 'All we care about is what is going on here in China. And if that means the Europeans and Japanese and Koreans need to shut down capacity, then fine, they should do that.' "

With massive change due to come to petrochemicals as the world looks to evolve toward electric vehicles from internal combustion engines, the nations in the Middle East will have to undertake some serious transition projects.

For example, Hyde said it's been reported Saudi Aramco, owner of SR giant Arlanxeo, said recently it plans to expand into crude oil-based chemical production in a massive way. He expects the world to hit peak oil demand somewhere in the first half of the 2030's, so Saudi Arabia is one that must begin alternative plans.

"What does Saudi Arabia do with the crude oil that is such an important part of their economy? If you can't put it into fuels, you want to make sure you monetize it. Chemicals are really your only option," he said.

So Aramco is looking at a project that would bring in about 4 million barrels a day of crude oil into chemicals.

"That's about 200 million tons a year of petrochemicals. Not all ethylene and ethylene derivatives, it's a wide suite," Hyde said.

But it could be 80 million tons a year of ethylene-related materials, which would represent a massive percentage of the current ethylene market of 220 million tons annually.

CMA doesn't even account for that project in its market balances yet because details haven't been worked out. But Hyde said he wouldn't be surprised to see other countries in the region follow suit with similar plans.

Hyde said that butadiene is an odd commodity because it has no control over its feedstock.

"Almost every butadiene producer in the world is in the butadiene market because they're running an ethylene cracker, making C4 co-products,"

The No. 1 goal, he said, is to clear the market and—most importantly—don't affect the ethylene cracker.

"You can lose a lot more in ethylene production than you can make in the C4 business in a long period of time," Hyde said. "So don't slow down the cracker. Try to make as much money as you can, but when those two objectives come in conflict, don't slow down the cracker."

But what the market is seeing today is almost the reverse of normal circumstances. In much of the world the ethylene margins are effectively zero or close to it. So ethylene crackers are running at really low operating rates, cutting down the supply of butadiene. And in Asia, producers are cracking a lot of propane, so people are seeing really low operating rates on the ethylene crackers, which means even less butadiene supply.

So even though butadiene demand has not been strong and shows what should be a large overcapacity on paper, there's not enough of the crude C4 coming out of the ethylene crackers to push the market balance long. So that has tightened the market in a way that normally wouldn't occur with weak fundamental demand, and pricing has come up.

"In our view, it's come up too much," Hyde said. "So Asia is the key market for price trends. Right now, all of the butadiene derivatives—not just synthetic rubber, but ABS and nitrile latex—are losing money.

"... They can't support the prices where they are today, so pricing will come down," he said. "But it will come down relatively slowly."