What does 2022 hold for GCC Chemical Markets?

The effects of the pandemic are still with us but, as vaccination efforts continue, restrictions are lifted, and with the Gulf region seeing low fatalities and speedy recovery, the economies in both local and export markets are getting back on track. However, the pandemic has continued to distort trade and exacerbate supply chain disruptions, making downstream customers of major petrochemical and polymer producers anxious to maintain supply in an extended period of uncertainty. Easing logistic challenges, on the other hand, are giving way to more normal supply-demand balances, meaning, looking forward, end-use demand is likely to become more of a driver on market direction. 

Packaging still strong

Despite some turbulent market conditions, the packaging market is expected to remain strong, pushing demand for both polyethylene (PE) and polypropylene (PP) in the Middle East, driven mainly from the demand for food and hygiene packaging used in both local and export goods.

While US-based PE and PP producers suffered from extreme weather conditions, with a tirade of hurricanes hitting facilities in 2020 and polar temperatures bringing production to a halt in 2021, it is expected exports will resume to more normal levels in 2022. However, they still need to overcome the lack of container availability for shipments and need improved freight movements. Still, the recovery of export volumes from this region will ease tight supply conditions in major markets and free up product from the Middle East.

In Asia, many new PP start-ups commenced operations in 2021. With local supply exceeding demand growth, export markets will be a key target. While hindering many, the container shortage has benefited Asian suppliers, as they have been able to serve countries throughout Asia without the need for deep-sea freight. Again, the growth of PP producers in Asia may slow demand for Middle Eastern materials. The increase in production units in Asia may also increase the gap prices with GCC producers, although, towards the end of 2022, this may ease if materials are able to be transported more easily across regions.

Although prices in Asia are expected to fluctuate throughout the year, easing coal pricing will likely see increased output and improved margins from their coal PP units. However, naphtha and LPG prices remain high, supporting PP prices. For Middle East PP shipments, high feedstock costs and strong demand make European and Indian markets more attractive. For the rest of the year, it is anticipated that stronger feedstock forecasts and inflation will, to some extent, also support PP pricing.

According to the ICIS supply and demand database, there will be 7m tonnes/year effective PP global capacity in 2022, which is a growth of 8% year on year. Demand growth, on the other hand, is forecast at 6 percent. Led by China, Asian production units will account for 5.8m tonnes, or 80 percent, of new PP world capacity in 2022, 9 percent higher than 2021. This equates to an increase in self-sufficiency from 84 percent in 2019 and 89 percent in 2021 to 90 percent in 2022. This will increase exports from China, mainly to Turkey, Pakistan and southeast Asia. Malaysia will also shift from a net PP importer to exporter with the Pengerang project starting up in the first quarter of 2022.

Forecasts for general utilisation rate of world PP show a decrease to 84% in 2022 compared with 86% in 2021. Major export players, including the GCC, may, therefore, compete more effectively by targeting higher-end PP applications.

Methanol

The Middle East is one of, if not the, largest net exporter of methanol and China the largest importer. Proportions of China’s methanol imports continue to increase, making it increasingly reliant on Middle Eastern imports. However, India is likely the most heavily dependent market on Middle East methanol imports, relating to US sanctions hampering purchase of Iranian material and the geographical proximity of the two regions. In a unique position within Asia, South Korea imports most of its methanol from the Americas. Middle East imports represent the second largest portion. Despite the presence of four methanol plants in southeast Asia, buyers purchased more imports from the Middle East than from southeast Asian producers.

ICIS expects methanol prices to be sustained by the global energy crisis and current high gas prices. Although sources say the Chinese government is aiming to set coal prices at 5,500 NAR at the pithead, this will be difficult to achieve in the winter months and Chinese coal-based methanol producers will continue to struggle with negative margins.

When the energy crisis comes to an end, methanol to olefins (MTO) producers should resume their position as marginal methanol consumers. This is anticipated to be after Q2. It is expected that Asian ethylene prices will be 4% higher than 2021, while propylene prices will remain level due to higher naphtha outlooks. As such, Asian methanol prices should also remain level.

MEG struggles for 2022

China’s coal-based Mono Ethyl Glycol (MEG) producers, which account for 32 percent of total local MEG capacity, have reduced production due to pledges to bring carbon emissions to a peak by 2030. However, with the Chinese government saying it will introduce ways to intervene in coal prices, the MEG market plunged sharply, following falling coal prices. The start-up of Saudi Arabia’s Jubail United Petrochemical Company’s (JUPC) new MEG unit and a third MEG plant at China’s Zhejiang Petroleum & Chemical have weighed on spot discussions. Downstream demand has also slowed, and polyester inventories built up, dampening MEG markets. China has reduced its dependency on imports with rising domestic MEG supply and may export more cargoes in 2022 with several new mega plants due to come online. Overall, it is expected MEG will struggle to gain decent upward price traction in 2022.

Polyester gives way to environmental pressures

Virgin polyester growth is expected to decrease to 5 percent in 2022 with increasing environmental awareness and labour recovery in the recycling sector. Fastest growth is expected to come from polyester yarn and fibre and then PET resin, restoring growth levels in 2022. However, high freight costs and tank shortages, at least for the first of 2022, may lower cargo turnover.

Ammonia and urea bullish

Nitrogen fertilizer prices saw huge increases in 2021 and the bullish market conditions are set to run into the first part of 2022. Until gas prices ease, most European manufacturers are unlikely to restart units. These capacity curtailments have created further upward price pressures, as suppliers and buyers scramble to secure scarce spot volumes. Until these are reversed, the global supply/demand balance is likely to remain tight.

In 2021, urea prices jumped by over 200 percent, buoyed by the grains market, depleted stocks and delays in production due to worker availability during the pandemic. Major urea producers are limiting exports to ensure reliable domestic supply, and the outlook for prices remains high over the next few months. Import hubs have stepped away from the market, not able to afford current prices. Although 2022 demand is not easy to forecast, the price surge is supply-driven, which will likely not change in the early months of 2022.

After a strong start to 2022, oil markets could fade.

Energy outlook

After a strong start to 2022, oil markets could fade. Global markets saw an increase in demand in 2021, as mobility improved compared with the start of the pandemic, but production levels are still substantially lower than pre-pandemic levels. Although producers have not been able to raise production levels as quickly as quotas allow, levels should be closer to matching allowances after the first quarter.

High gas prices mean certain users and manufacturers are likely to switch power generation sources which will help keep the market tight during winter months, but this will slow with seasonal changes. The sustainability of the Chinese economy’s bounce back post-COVID will have a big impact on prices.

Energy transition in the Middle East mainly revolves around switching from oil to gas, but high gas prices and restricted supplies may mean a delay in the transformation of domestic sectors. In Kuwait, newer gas-fired power plants mean gas demand is forecast to rise by double digits year on year in 2023, but high LNG prices could pose some threat to this.

China uncertainty

Although China’s growth in 2020 sustained demand for polymers, this slowed in 2021. Middle East producers should ensure robust supply and demand scenarios to encompass uncertainties in China, where the balance of import and export could swing dramatically in either direction depending on the country’s policies. A drive to reduce greenhouse gas emissions and a less commodity-intensive economy will fundamentally shift demand for polymers. An expected slowing in growth in the construction sector in 2022, high internet sales sustaining packaging demand, coal prices and greater plastics circularity, will all impact demand from China and create uncertainty on market direction.

Managing the future

As well as the impact the pandemic has had on the markets, companies are also having to adapt to the new world. We are on a digital journey. Companies with strategic, data-driven supply chains have come out ahead from the pandemic. Real-time access to data has enabled faster, smarter decision making. Managing supply and demand balance is becoming increasingly nuanced, making it harder to predict and making key data sources an invaluable business tool. Data helps businesses understand the future – or which bit of the future is here already.