Petrochemicals ‘won’t even get fleeting respite’, analysts warn

February 26, 2025, 2:15 AM

Sabic's Arrazi manufacturing site in Jubail, Saudi Arabia. Analysts say a slowdown in new capacity is needed

More margins pressure for Saudi industry
Glut of capacity coming on stream
Call for plants to be shut down

Executives and investors in Saudi petrochemicals could be forgiven for needing a break from industry news after its biggest companies report what are widely expected to be lacklustre results for the final quarter of 2024.

They won’t be getting that pause any time soon, however. Extra production capacity that was expected in 2024 is instead arriving this year, at a time when margins have already slumped to three-decade lows, analysts are warning.

Even more capacity is expected to come on stream in 2026, intensifying the pressure on margins.

“This year was supposed to be a relief year before further capacity becomes operational in 2026, but the industry won’t even get this fleeting respite,” says Yousef Husseini, director of chemical equity research at broker EFG Hermes in Cairo.

China will add the biggest chunk of new capacity, expanding its homegrown industry to become self-sufficient in ethylene between this year and 2027.

Ethylene, made from natural gas, is the feedstock for polyethylene, the world’s most widely used plastic and the Gulf’s most important petrochemical product.

Gulf petrochemicals manufacturing countries have reduced the volume of sales to China, Husseini says, and sold more to countries in South and Southeast Asia, and in Europe, where prices are higher.

Annual global demand for polyethylene is 125 million to 130 million tonnes, while production capacity is currently around 150 million tonnes. Capacity should exceed demand to allow for routine maintenance closures.

This is the worst trough in 30 years, Husseini says. “There needs to be a slowdown in new capacity additions and an increase in the shutdowns of older plants. We haven’t seen enough of these for anything to change in the near term.”

Globally, about 8 million tonnes of new polyethylene production capacity will become operational in 2025, equating to about 6 percent of demand. But demand will probably increase by only about 3 to 4 percent this year, so the extra capacity will put pressure on margins, Husseini says.

“Margins are unlikely to make any significant improvement over the next two years and instead will remain in a narrow range,” he says. “Globally, almost all producers are loss-making.”

At current margins the projected losses are manageable, but if margins fall further to unsustainable levels, there will be shutdowns, Husseini says.

European petrochemical companies have already shut some plants but these have mostly been ageing facilities already earmarked for closure.

As financial losses grow, the same companies will probably have to close newer plants, says Oliver Connor, director of Mena energy research at Citigroup in London.

Falling utilisation

“There’s recognition that things cannot continue and, although no one has pulled the trigger, it’s inevitable they will,” he says.

The inflection point when the petrochemical industry will start to rebound keeps on being pushed back, Connor says. “There’s nothing in the current makeup to indicate that Q1 this year will be a significant improvement on Q4 last year.”

In percentage terms, plant utilisation globally has fallen into the 70s, from the low 80s in the third quarter of 2024.

Husseini says: “There won’t be any meaningful increase in utilisation until 2027 at least.”

Similarly, margins will not achieve sustainable increases for at least another two years.

“Between then and now there will be moments where margins might increase for a brief time and that will cause some investors to buy into petrochemical stocks to get in early, but we’re still a few years away from margins reaching mid-cycle pricing,” Husseini says.

Saudi Basic Industries Corp (Sabic), the country's biggest petrochemicals company and 70 percent owned by Aramco, may seek to undergo a strategic review of its portfolio particularly its European assets and some of its US facilities, Connor says.

Domestically, the company is improving efficiency and cutting costs but cannot change much in terms of what it produces.

“Sabic has a core asset base and a core mid-product mix,” Connor says. “It's not like a refiner, which can switch production to other products quickly.”

This global “reset” in the petrochemical market will go on for another five years, he says. “For Sabic, it’s about positioning the company to be leaner and stronger for the 2030s, when the cycle changes.”