Analysis: Pandemic exposes cracks in oil majors' bet on plastic

DL Holdings

04/06/2020 08:02

* Big Oil bet on plastic to prop up demand for decades
    * Over-investment, plastic bans threatened strategy
    * Pandemic hammered demand in emerging growth markets
    * Cheap plastic may flood market, deepen waste crises

    By Joe Brock
    SINGAPORE, June 4 (Reuters) - The energy industry's bet that
a petrochemicals boom would support decades of oil and gas sales
growth is on shaky ground as an already saturated plastic market
is hit by a coronavirus demand shock.
    While soaring demand for personal protective equipment and
takeaway food containers has boosted sales of some plastics, it
is likely to be only a temporary spike, say analysts.
    In the longer term, a virus-led hit to economic growth in
Asian, African and Latin American markets threatens demand at a
time when the industry is already facing bans on single-use
plastic that are spreading across the world.
    Plastic resin prices, which have been declining over the
past two years, have plunged further since the coronavirus hit,
an added challenge for investments of hundreds of billions of
dollars in petrochemical capacity over the past decade.
    "The petrochemicals world has been hit by a double whammy,"
said Utpal Sheth, Executive Director, Chemical and Plastics
Insights at data firm IHS Markit.
    "Capital investment has been slashed by all companies. This
will delay the projects under construction and new projects."  
    Dow Inc  DOW.N  said in April it would idle three U.S.
plants producing polyethylene, the base for plastic bags and
bottles.
    Thailand's PTT  PTT.BK  and South Korean partner Daelim
 000210.KS  have indefinitely delayed an investment decision on
a $5.7 billion project in Ohio, three industry sources said. The
companies did not respond to request for comment. 
    A massive Pennsylvania plastics project, owned by Shell,
that President Donald Trump touted during a visit last year
faces risks of oversupply and a low price outlook, an energy
industry report said on Thursday.  urn:newsml:reuters.com:*:nL1N2DH018
    Dow and oil majors Exxon Mobil  XOM.N , Royal Dutch Shell
 RDSa.L , Chevron  CVX.N  and BP  BP.L  declined to comment on
demand forecasts for this story.
        
    MARKET TROUGH
    Still, there are 176 new petrochemical plants planned for
the next five years, with nearly 80% of those in Asia, according
to energy consultancy Wood Mackenzie.
    Many plants under construction or late in the planning
stages can't be rolled back without incurring massive losses.
    Exxon in April kicked off construction on a $10 billion
project in China, while Shell and state-owned China National
Offshore Oil Corp last month approved the expansion of one of
the country's biggest ever petrochemical complexes.  urn:newsml:reuters.com:*:nB9N2BX012
 urn:newsml:reuters.com:*:nL4N2D00A9 
    Chinese firms are reviving a $20 billion project in eastern
Shandong province to help support a flagging economy, Reuters
exclusively reported this week.  urn:newsml:reuters.com:*:nL4N2DG06C
    "Even before the coronavirus outbreak, we were already
expecting to see various petrochemical value chains ... heading
into an oversupply situation," said Catherine Tan, principle
analyst at Wood Mackenzie.
    Significantly reducing the wave of new capacity would take
years, raising the chances of a prolonged plastic price slump,
industry sources said.    
   
    ENVIRONMENT FEARS
    As they come under financial strain, some plastic producers
have requested rescue funds from governments, while industry
groups have lobbied lawmakers to roll back bans on single-use
plastic, arguing it protects people from disease and germs.   
    The U.S. Plastic Industry Association wrote a letter in
March to the U.S. Department of Health calling for a reversal of
plastic bag bans, arguing that single-use plastic was the safest
way to transport and package food. 
    However, a New England Medical Journal study in March found
the coronavirus was still detected on plastic after 72 hours,
compared with up to 24 hours on cardboard and copper.
    With the price for virgin, or non-recycled, plastic now at
historic lows and oil demand withered, environmentalists fear
that producers will pump out cheap plastic to stoke demand and
soak up some of the global glut of cheap oil and gas. 
    Plastic waste is already piling up in parts of Asia as
people use more disposable packaging under coronavirus
lockdowns, and recyclers struggle to operate.  urn:newsml:reuters.com:*:nL4N2CN2VV
    "We will see a flood of plastic waste. Even if that wave
isn't sustained, the plastic that gets pushed out now will
pollute the planet for decades," said Carroll Muffett, head of
the Center for International Environmental Law, an NGO.

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Key plastic-making ingredient prices fall to historic lows in
China as Covid-19  spread    https://tmsnrt.rs/36Xopyp
Global polyethylene production capacity by region    https://tmsnrt.rs/3dxEOMq
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 (Reporting by Joe Brock; Graphics by Gavin Maguire; Editing by
Richard Pullin)
 ((joe.brock@thomsonreuters.com; +6598355351; Reuters Messaging:
joe.brock.thomsonreuters@reuters.net))