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07.10.2020

Demographics, climate, environment will shape the petrochemical industry’s future

EPCA[1] Annual Meeting is Europe’s largest event for the global petrochemical business community. It gathers over 2,500 corporate and thought leaders – bringing together both vision and C-suite savviness – to drive forward the industry and its positive impact on the world. This year is seeing the world battle the coronavirus pandemic, which has dominated all economic and social activity and seems to be imposing a framework for the New Normal.

EPCA aims to go beyond the New Normal and envision petrochemical industry’s contribution to “Building a Smarter, Circular, and More Inclusive Post-Pandemic World”. This is the theme of this year’s 54th edition of the event, taking place  from October 5th to October 7th, for the first time in a virtual format.

To mark the occasion, IHS Markit’s industry knowledge platform Chemical Week has prepared, in partnership with EPCA, a special digital edition entitled “Beyond the New Normal”, featuring interviews with members of the European petrochemical business community who drive the future responsibly. Let me encourage you to read the interviews. We could not stay silent in this debate, particularly that we are running one of the largest petrochemical development projects in Europe today. The interview “Demographics, climate and environment shape the petrochemical industry’s future” that I gave on behalf of the Company, is on pages 18 and 19. The interview was recorded before we announced our ambition to achieve zero net emissions by 2050.

ADAM CZYŻEWSKI
‘Integration of production is most crucial to survivingthe crisis.’

The COVID-19 pandemic has been a major challenge for Europe’s petrochemical producers and the immediate future remains uncertain. However, the fundamentals of the industry, and its major trends, are unchanged, particularly those related to sustainability and the environment, says Dr. Adam Czyzewski, chief economist at PKN Orlen (Plock, Poland).

“The future of the petrochemical industry is shaped by global megatrends, the main ones being demographics and climate and environmental protection,” he says. “The COVID-19 pandemic does not change these trends, so it does not change the future of the petrochemical industry. Humanity needs materials that must be produced sustainably. Climatic and environmental footprint studies show that materials produced by the petrochemical industry have advantages over other materials, but on one condition, which applies to all materials: When they are used up, they will not be thrown away, but will be returned to production as secondary raw materials.”

The crisis has caused big declines in demand for petrochemicals and their derivatives. But the impact has not been the same across end-use industries, Dr. Czyzewski says.

“Petrochemicals are ubiquitous, and there is no industry that does not consume them in production,” he says. “Therefore, the volume of petrochemical production in the short term is strongly correlated with GDP. The decline in demand related to the COVID-19 pandemic has not been spread evenly across the economy. Transport suffered the most, which moved to the automotive and aviation industries.”

This soon became visible in decreasing consumption of petrochemicals, “which was felt very much by companies with a narrow production profile,” although a market rebound will follow, Adam Czyzewski says. “The deep drops in demand caused by COVID-19 are not permanent, as most of it is postponed demand rather than lost demand. Companies and consumers have not given up on car purchases or air travel forever. They will start buying and flying and the time of accumulated, postponed demand will bring a new upcycle for petrochemical companies.”

But, in the meantime, the current challenging conditions could trigger some restructuring in Europe’s petrochemical industry through mergers and acquisitions. “Before demand recovers, some petrochemical companies will experience financial difficulties and will dispose of some assets. Others, in a better situation, will be willing to buy these assets, particularly since deferred demand is followed by deferred investments, so there will also be temporary supply shortages and the attractiveness of producing assets will increase,” Adam Czyzewski says. “Hence we can see two responses to the COVID-related changes in demand. Some will seek diversification of products and, in turn, of risk. Others will focus only on their core businesses, strengthening their financial position through divestments. But regardless of the choice, it is integration of production that is most crucial to surviving the crisis.”

Petrochemicals is a cyclical business, even though the industry grows faster on average than the overall economy. Companies can reduce their vulnerability to cyclical swings by tailoring their product portfolios to meet changing market requirements, Dr. Czyzewski says. “In the long run, the consumption of petrochemical products grows faster than GDP, because these products, thanks to their properties, displace other materials,” he says. “Economic cyclicality cannot be avoided, and petrochemical installations have a long lifecycle, counted in decades. They cannot be adapted to the business cycle. However, it is possible and necessary to adapt the offer of final products to the needs of recipients.”

Companies can make improvements along the entire petrochemical value chain, by moving closer to the end user, increasing flexibility, and widening the range of applications of their products including making them suitable for recycling, Adam Czyzewski says. “The petrochemical industry will slowly start to function in the ‘Product as a Service’ and ‘Material as a Service’ models. This is essential to control petrochemicals throughout the value chain and is a prerequisite for a circular economy,” he says.

Global megatrends, rather than the COVID-19 crisis, will determine how petrochemical companies shape their portfolios, but the potential for diversification is not unlimited, Dr. Czyzewski says. “Since the world needs materials and hydrocarbons are perfect for their production, the petrochemical industry will grow and enter sectors such as construction with new materials,” he says. “Going further up the value chain is necessary and beneficial. However, it is impossible to shift the industry as a whole to products with the highest added value. Someone will have to produce basic petrochemicals. Here, too, there is room for profound technological changes. The direction is versatility and adaptation to recycling.”

Environmental concerns do not represent an existential threat to the petrochemical industry because of the essential nature of its products. And it can play a key role in the transition to sustainability and a circular economy through the increasingly innovative and sophisticated products it manufactures, says Adam Czyzewski.

“The problem is the increase in the number of people who must be provided with the necessary means to live. This is related to an increase in demand for all kinds of materials that need to be produced from something. Crude oil that is displaced from transport is perfect for this. There is plenty of it,” he says. “In addition, the materials produced from it are characterized by a huge range of applications, both existing and new. And they leave behind less of a climate footprint than other materials. You just need to focus on innovation in the field of the circular economy. This is a challenge for the petrochemical industry, but also for other industries that produce materials.”

One outcome of the pandemic for Europe’s petrochemical industry is likely to be more localized production, says Dr. Czyzewski. The lockdown highlighted weaknesses in some petrochemical supply chains and drew attention to the region’s dependence on imports for some major products.

“I think that the ‘just in time’ production organization model will be supplemented with a ‘just in case’ model, which will increase the attractiveness of having production nearby. That’s a great opportunity for the petrochemical industry in Europe,” he says. “PKN Orlen is addressing this by increasing production of netimported products to the region, which is the core principle of our Petrochemical Development Program. Our intention is to give our customers the comfort of having a reliable, local, and regional supplier of petrochemical raw materials. Our investment will be the backbone of the development of the chemical industry in Poland and Central and Eastern Europe.”

The industry also now understands better the importance of close and reliable supplier-customer relationships, as well as maintaining financial strength and strong logistics to support supply chains, Adam Czyzewski says. “We have learned that sometimes the quality of the provider is just as important as the price of the products,” he says. “Reliability and strong financial standing in times of pandemic proved to be crucial to continuous operation of many businesses. The pandemic showed us that the role of distribution and storage infrastructure is much more important than expected and we should invest in strategic logistics assets.”

Plastics will also continue to have a central role in Europe because of their range of uses and adaptability, Dr. Czyzewski says. “I think Europe should not be doctrinal about plastic, treating it as an absolute evil,” he says. “Our civilization is built of plastic, because it is the best material we know. Its flexibility of applications drove the development of petrochemicals.”

Plastics’ durability in combination with the linear production model—manufacture, sell, use, discard—“led to a plastic disaster,” Adam Czyzewski says. “The solution to the problem is not to give up plastic, but to produce it in a closed cycle, a circular economy,” he says.

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