Skip to main content

The domino effect: part one

Hydrocarbon Engineering,

Much has been written and talked about the oil price collapse and the impact it is having on global macroeconomics and the oil sector, both upstream and refining. The new oil price scenario is also having a profound effect on the petrochemicals sector, but with very different impacts when one deaverages per value chain and per geography.

Petrochemicals companies operate indeed in a globalised world, where products trade internationally and prices are set on the basis of regional netbacks. However, the economics and dynamics are very different, and the effect of the oil price decline is also proving to differ significantly depending on three critical dimensions: region, business model and specialty component within a company's portfolio.

Varying outlooks: short versus long term

In the short term, the effect has been mixed for petrochemical producers. As oil prices were coming down rapidly so were the prices of petrochemicals, as they are linked to the oil prices to varying degrees. This in turn had a short term, temporary double dip impact on petrochemical producers:

  • Clients of petrochemicals companies held on purchase orders to ensure they would benefit from expected lower product prices, thus slowing down short term demand as they drew on their own inventories.
  • The value of product inventories of petrochemicals producers collapsed as companies had to account for the mark to market, with a compounding effect given the ballooning inventories due to the first point above.

The above two factors, in general, put significant downward pressure on the margins of petrochemical companies, especially those more exposed to spot purchases. This impact was however, to a certain degree, compensated by two other counteracting factors that increased margins:

  • Adjustments in product price usually lags the change in feedstock price due to contract specificities and the bandwidth of price adoption clauses between buyers and sellers. So the full impact of feedstock cost reduction may not yet have been factored into product prices and consequently the results of petrochemicals companies.
  • Reduction in prices of specialty product grades was lower compared to the feedstock price decline meaning that companies with greater share of specialties in the portfolio were able to withstand the volatility better compared to more commodity players. As the overall demand drives remain intact, the spreads have partially increased.

The impact on companies has been very different depending on the region, business model and share of specialties in the portfolio. While (largely commodity) companies such as SABIC and SIPCHEM experienced significant drop in EBITDA margins in 3Q14 - 4Q14 compared to the previous year, specialty players such as Dupont, BASF and Celanese experienced higher margins. Companies such as LyondellBasell, which is more naphtha based, experienced significant (short term) uplift in 1Q15 as naphtha prices declined more dramatically than product prices. This effect is however expected to be short lived.

In the long term however, Boston Consulting believes the aggregate effect is positive for all petrochemical companies, as lower oil prices will have a net positive effect on global GDP growth. International agencies such as the World Bank or the International Monetary Fund (IMF) expect a positive impact of 0.7 - 1.0%.1 In turn, stronger GDP growth will accelerate demand for petrochemicals. Past experience shows that every percentage points of GDP growth brings approximately 0.8 - 1.1% of petrochemicals demand growth.

On the supply side, a question mark comes as some of the planned megaprojects might see delays2; especially those sponsored by national oil companies (NOCs). Governments still require cash for the social policies and dividends from their NOCs are a key source of fiscal revenues. As a result, while NOCs are more cash strapped, they might be forced to delay, not necessarily cancel, some of these megaprojects. A similar story applies to international oil companies (IOCs), as they need to ensure sufficient cash flow to sustain large investments to continue replenishing their oil and gas reserve base and maintain production levels, while providing their shareholders with the expected dividends. For instance, Qatar Petroleum and Royal Dutch Shell scrapped this year their plans to build a US$6.5 billion petrochemical plant in the State of Qatar. Thus, on the supply side the effect will be, if anything, positive for current producers.

In short, Boston Consulting believes that an environment of lower oil prices is thus, as a general norm, more beneficial for the petrochemical sector, both from the demand side and as well as from the supply side dynamics.

Read part two of this article here.

Written by Udo Jung, Jaime Ruiz-Cabrero and Asheesh Sastry, The Boston Consulting Group. This is an abridged version of an article taken from the July 2015 issue of Hydrocarbon Engineering.


  1. Refer to World Bank (March 2015) and IMF (World Economic Outlook April 2015).
  2. See Hydrocarbon Engineering, December 2014; 'Taking an holistic view', Jaime Ruiz-Cabrero, Udo Jung and Asheesh Sastry.

Read the article online at:


Embed article link: (copy the HTML code below):