Supply/demand dynamics.

 1. China’s self-sufficiency. The biggest driver of the petrochemical demand slowdown is China, where an aging and shrinking population as well as efforts to rebalance the economy toward services and high tech are creating a weaker demand outlook. However, China’s petrochemical production park is growing, accounting for 60% of global capacity additions in 2023.

China has already achieved technical self-sufficiency in several key products and value chains, including PP, PVC and Px/PET. Moreover, China has even turned into an exporter of selected products, adding PP and PVC exports to an already established long position on PET.

Key strategic questions: Does China’s demand slowdown, rising domestic capacity and increased export spell the end of export hopes into China for GCC players? What strategies should be proactively put in place?

2. Overcapacity. While global capacity additions will be slower than before, we still expect the growth in supply to outpace that in demand. (Exhibit 2)

According to our calculations, bringing back the utilization rates to historical averages requires the removal of 20 mtpa to 45 mtpa of production capacity across building blocks. This rationalization has already begun in Europe, and is expected to accelerate in China, Korea and Japan. However, the current pace of closures is still not sufficient to counter capacity additions and slower demand growth. Thus, overcapacity is here to stay.

Key strategic questions: Will structural overcapacity and sluggish demand be the features of the petrochemical industry over the next 10 years and beyond? Can GCC’s historical cost advantage hold up in this context?

3. Affordability, energy security and sustainability backlash. Perhaps no topic in petrochemicals is as potentially disruptive, or carries as much uncertainty, as sustainability including circularity.

Plenty of variables remain hard to predict globally, e.g. continued scaling back of sustainability targets by large brand owners and financial institutions, unclear definitions of “recycling” and “recycled content”, customers willingness to pay for “green premiums”, and others. Thus, it is not clear if and by when sustainability will have a very material impact on the demand for virgin polymers.

Key strategic questions: how should petrochemical players allocate capital and set R&D priorities amid such divergent global developments?

4. Bright spots – India and Southeast Asia. There are some bright spots on the petrochemical demand map, where demographics, economic growth and material intensity of industry converge. Several economies, notably Southeast Asia and India, are projected to lead the growth with up to 5-7% CAGR.

Key strategic questions: What is the right market entry model for GCC players – local presence or imports? Which product and customer pools should be prioritized?

5. US ethane and broader feedstock developments. In the US, the shale oil (then shale gas) boom had triggered a complete re-birth of the petrochemical industry and abundance of cost-competitive petrochemicals feedstocks. Consequently, the US petrochemicals quickly move to Q1 in C1, C2 and mostly C3 chains, while US LNG and LPG exports dominate the world. What is less visible is the steady growth of US ethane exports, already feeding several crackers in Europe and Asia. New projects are coming – in India, Latin America and also in MENA. If arranged well, imported US ethane may bring 15-20% cost advantage on ethylene derivatives vs a default naphtha cracking route.

At the same time, expectations are also growing that naphtha could reclaim its role as the dominant feedstock by the second half of the next decade.

Key strategic questions: could travelling US ethane undercut the GCC’s ethylene cost competitiveness? If naphtha is making a comeback in the long-term, what new sources of competitive advantage should GCC players target? Should this already impact today’s investment priorities – e.g., prioritizing localization near demand growth hubs?

6. European markets’ transformation. European petrochemical industry is clearly in dire straits – and this is not just another cycle as it happened before. Following a short period of happy times in 2021, Europe has been confronted by a combination of three strong headwinds:

• Demand stagnation in Europe (EU+3) – as many end-industries are losing the momentum
• Lack of competitiveness due to a lack of feedstock cost advantage, high energy cost and ageing installations
• Complex, very bureaucratic and thus costly decarbonization agenda imposing hurdles for European producers – yet without adequate protection

Consequently, Europe is unable to compete in the global markets anymore, while it has become a dumping ground for surplus volumes from other regions. With the capacity rationalization in Europe gaining momentum, European imports will intensify.

For GCC players this situation presents an opportunity – especially in terms of export opportunities. Exports to Europe have to be supported with proper in-market presence and predictable logistics – as this is key to get access to premium buyers. Europe has already learnt to inflict heavy discounts on “netback seekers”. While a capital engagement into European players and assets may not sound obvious in the current context, there will be opportunities here. However, a very careful assessment is required, looking into feedstocks assets, consolidation of logic and value that goes beyond Europe (e.g. technology or R&D).

Key strategic questions: How can GCC players position to win the import market to Europe and what competitive advantages will matter most under the different market, value chain restructuring and regulatory scenarios?

7. Oil and gas majors still rushing to petrochemicals. As demand for fuels declines, oil and gas players are actively exploring different growth strategies, including investing in petrochemicals in selected regions, notably Asia and the Middle East, and thus contributing to overcapacities in the market. They are now also joined by industrial gas players, coming from a blue H2 angle, with a growing pipeline of projects in the US and the Middle East.

The very high capital requirements for organic projects and some bolt-on inorganic moves are creating barriers to entry, favoring oil and gas companies with their strong balance sheets but significantly disrupting smaller, localized and pure-play petrochemical companies.

Key strategic questions: Will this spark ruthless competition between the oil and gas players in the future? How will small and pure-play petrochemical players need to adapt to survive or partner at scale?

8. Tariffs and trade wars. The trade environment is facing major disruption triggered by US tariff increases with unclear path to if/when the trade relations could return to “normal”. If fully implemented, they could well redefine the future of trade across all goods-traded sectors, without exception.

As of 3 April 3, the US administration made a historical move with the Reciprocal Tariffs to rectify trade practices and reduce US trade deficit (tariffs vary 10-34%). While this is too early to assess the full impact, global petrochemical trade flows will be affected.

Key strategic questions: What challenges and opportunities will this present for GCC petrochemical players? How should go-to-market strategies, investment priorities be adjusted? How can scenario-based thinking can be leveraged when uncertainty is the only constant?

9. “New” feedstocks and technologies. E-technology, CO₂-to-X, chemical recycling, along with recyclate and bio-feedstock have been present in the petrochemical industry for years. While they are often highlighted as the future pathways for the industry, their actual impact on overall production remains minimal – still in the low single-digit range. Despite ongoing pilots and proof-of-concept efforts, the reality is that these solutions have not yet delivered meaningful scale of cost competitiveness.

Key strategic questions: Will these alternative technologies and feedstocks ever reach the scale and cost-efficiency needed to drive meaningful impact? If so, how long will it take – and what are the signals to watch for? How should petrochemical players think about the timing and size of their investments in these areas?

What it will take to win – six implications for GCC leaders

The next 10 to 20 years in petrochemicals will not look like the past 10 years, or even the past five. Here are six key imperatives to become the petrochemical winners of tomorrow.

1. Increase portfolio and capabilities coherence. Companies with a portfolio anchored in similar success factors will be better positioned in the current competitive landscape. Several companies have already streamlined their business portfolio to increase coherence.
2. Ensure a robust strategy to capture growth in India and Southeast Asia. Players should expand their access to priority customer segments and channels through strategy partnerships and joint ventures with local players.
3. Underpin China strategy through capacity localization and partnerships. As the Chinese market becomes self-sufficient and more competitive, bulk exports to China will not work. Players will have to find the value-creating bets that can still succeed in the world’s largest market.
4. Rethink European market positioning. GCC players should reassess their European strategies, balancing selected opportunistic export, while positioning for the long-term through selective partnerships, in-market capabilities, and even acquisition opportunities.
5. Reinvigorate sales and marketing muscle. To navigate intensified competition, growing product complexity, and the effects of experienced workers retiring, prioritize the strengthening of foundational sales skills and tactics – combining the best practices of the past with the new knowledge and digital tools.
6. Proactively reformulate structural operating model and talent strategy. A coherent business portfolio provides the base for reformulated operating models and respective talent strategies. All process industries, including petrochemicals, are facing a talent trap. To navigate this, players should focus on improving their value proposition for younger talent and retaining knowledge, leveraging new tools.