Petrochemical producers in Europe and Asia are facing significant challenges as a result of a global glut in supply. Years of capacity expansion, particularly in China, combined with high energy costs in Europe, have severely depressed profit margins for two consecutive years. This has led many firms to adopt survival strategies, including asset sales, plant closures, and retrofitting facilities to utilize cheaper raw materials like ethane instead of naphtha.
The ongoing weakness in the petrochemical sector poses a concern for the global oil industry, which relies on petrochemicals to sustain profits amid declining demand for transportation fuels due to the energy transition. Major producers are expected to consolidate their ethylene and propylene capacities, as oversupply is anticipated to persist for several years, driven by new plants coming online in the Middle East and China.
Consultancy Wood Mackenzie estimates that about 24% of global petrochemical capacity could face permanent closure by 2028 due to weak margins. Eren Cetinkaya from McKinsey & Company predicts that the current downturn will extend beyond the typical five to seven years, largely due to the extensive capacity build-up in China.
Asian producers are particularly vulnerable, grappling with falling domestic demand and a drastic oversupply from new production facilities. Mitsui Chemicals highlighted that since 2022, the business environment has deteriorated due to these factors.
While European profit margins are expected to improve slightly to around $300 per ton in 2024, this still represents a 30% decline from two years ago. In contrast, U.S. propylene margins are projected to rise by 25% to about $450 per ton, benefiting from an abundant supply of cheaper domestic feedstocks derived from natural gas liquids.