Chemicals and Market Impact

In an important, but inevitable, change in tone, it is worth noting that the Borouge ethylene expansion announcement includes the idea that the complex will explore the possibility of a major carbon capture facility that will take much of the CO2 from the existing complex as well as the new plant. We have stated previously that the mood has changed sufficiently such that large industrial investments without a carbon abatement plan will not get approval from stakeholders and this is a prime example of what we expect. Locations with low-cost CCS will see disproportionate investment in our view and Abu Dhabi already has CCS in place as Adnoc is selling blue ammonia already to Japan. As we noted in a recent Sunday Piece, we expect carbon abatement challenges to slow expansions in basic chemicals and, despite this announcement by Borealis, see a market shortage in 2024/25 as a consequence.

Source: Bloomberg, C-MACC Analysis, November 2021

In the meantime, what happens next for basic chemicals and polymers is much harder to judge. There are clear signs that US production and European production is improving and this should take further heat out of the markets, but as we noted in today's daily report if Europe cannot get enough energy over the winter, industrial production may be sacrificed to keep people warm – this could swing supply/demand balances for materials the other way. The monomer markets in the US are currently weaker than the polymer markets and as noted in the exhibit above, the writing is likely on the wall for a meaningfully lower US contract price for propylene in November, which could in turn cause polypropylene to weaken. We see an increasing number of reports that are talking about higher polymer inventories in the US, and we still wonder whether US consumers of polymer will want to hold higher than usual year-end inventories. Despite what is becoming a less and less predictable US weather outlook, we would still expect inventory reduction to be a year-end focus. See more in our daily report.