For petrochemicals, recession is here
Production is slashed as consumers reduce unnecessary spending to tackle high inflation
As far as the petrochemical industry is concerned, the recession is here.
Consumers faced with inflation have reduced spending on unnecessary goods such as toys, clothes and iced coffee made and packaged with plastic. Retailers, meanwhile, have offered blowout sales to get rid of excess inventory.
Now, petrochemical companies are slashing their production to match waning demand. Dow, the world’s largest chemical company, said last week it is reducing global production of polyethylene, used in packaging, by about 15 percent. Meanwhile, Houston-based Westlake Corp. is halting production of styrene — used in rubber and food containers — at its facility in Lake Charles, La.
The cutbacks are the beginning of a recession washing ashore for chemical-makers in Texas, analysts said.
“Investors to some degree still have been debating: Are we going to have these conditions?” said Aleksey Yefremov, a senior chemicals analyst at Keybanc, the first of several firms to downgrade stocks for petrochemical companies over the past week. “My point: We already have them.”
The moves that petrochemical companies are making are temporary responses to warehouses filling with flexible plastics such as coffee cup lids and to-go containers. It’s a sign, analysts say, that consumers are cutting back.
It marks another major shift since the pandemic turned the world economy upside down, snarling supply chains and forcing retailers to order massive amounts of product to have things on their shelves to sell to people flush with cash they were no longer spending on vacations, for example. Now, vacations have resumed, consumer spending is returning to normal
and the supply of consumer goods is outpacing demand.
According to the Bureau of Economic Analysis, consumer spending, which had been increasing month after month, nearly flattened in July as inflation took a toll. Nearly half of low-income consumers, for example, are worried about having enough money to pay bills, according to an August analysis from Deloitte.
Consumer spending online, a major driver of plastic packaging, fell by $400 million in July from the previous month to just under $74 billion, helping to bring down prices, according to Adobe Digital Insights. Clothing and electronics prices dropped in July and August after more than two years of consecutive monthly increases — further evidence that demand is falling.
“Wavering consumer confidence and a pullback in spending, coupled with oversupply for some retailers, is driving prices down in major online categories like electronics and apparel,” Adobe Vice President Patrick Brown said in the firm’s consumer report last month.
When consumer spending falls, so does demand for polyethylene — a soft plastic used to package most products. Polyethylene demand tends to closely mirror gross domestic product, said Chris Mudd, a chemicals analyst and managing director for Chiron Financial, a Houston-based energy investment banking firm.
“The writing on the wall is we’re heading into a recession that results in a slowdown of demand for a broad range of products,” Mudd said, pointing to two consecutive quarters of declining GDP. “What big companies will do is try to be responsible and slow down their production ahead of that so they don’t have a bunch of chemicals sitting in warehouses somewhere.”
It is inevitable that Houstonbased chemical giant LyondellBasell will reduce plastics production, analysts said — if it hasn’t already. (The company wouldn’t comment for this story.)
Prices for polyethylene and polyvinyl chloride, or PVC, are backing off highs reached as the pandemic drove historic demand for online ordering, consumer goods and materials used in housing construction, Yefremov said. Those markets are now cooling.
Just as demand for flexible plastics is softening, new polyethylene plants are coming online, contributing to oversupply. Shell is preparing to launch a new polyethylene facility in Pennsylvania and Bayport Polymers is expected to open a new polyethylene facility in Bayport this year.
Declining demand is even more evident in China, where the economy continues to be shaken by new COVID-related lockdowns, and in Europe, where soaring energy costs are making everything more expensive and cutting deeply into consumer budgets, Yefremov said.