Demography, climate and the environment shape the future of the petrochemical industry

The EPCA has decided to step beyond this new normal and imagine what contribution the petrochemical industry can make to “building a post-pandemic world that thrives in a closed loop, smarter, without creating divisions.” This is the theme of this year's 54th convention, which takes place between 5. and 7. October, for the first time virtually.

To mark the occasion, the professional science platform Chemical Week, owned by IHS Markit, has teamed up with EPCA to produce a special digital edition, titled “Beyond the New Normal”. It features interviews with representatives of the European petrochemical industry, who are responsibly driving the future. They are well worth reading. Our voice could not be missing in this debate, especially since we are currently implementing one of the (most) significant petrochemical development projects in Europe. The interview “Demography, climate and the environment shape the future of the petrochemical industry”, which I gave on behalf of the Group, can be found on pages 18 and 19. You will find its translation below. The interview was recorded before we declared that we would achieve net carbon neutrality by 2050.

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ADAM CZYŻEWSKI

“Integration of production is a key factor in surviving the crisis.”

“The COVID-19 pandemic has become a huge challenge for European petrochemical producers and the near future is still somewhat uncertain. However, both the foundations of the industry and the main trends taking place in it remain unchanged, especially when it comes to issues of sustainable development or environmental protection,” says Dr. Adam Czyżewski, Chief Economist at PKN ORLEN (Płock).

“The future of the petrochemical industry is shaped by global megatrends, the most important of which relate to demography, climate change and environmental protection,” says Dr. Czyżewski. “The COVID-19 pandemic has not changed these trends, nor will it change the future of the petrochemical industry. Humanity needs sustainably produced materials. Environmental and climate impact studies show that materials produced by the petrochemical industry have advantages over others, but under one universally applicable condition: once the materials have been used, they are not thrown in the garbage, but recovered for production as secondary raw materials. The crisis has led to a deep decline in demand for petrochemical materials and their derivatives. But the extent of this phenomenon was not the same in all industries of end customers,” notes Dr. Czyżewski.

“Petrochemical raw materials are so widespread that there is no industry that does not use them in its production,” he says. “Therefore, the scale of petrochemical production in the short term strongly copies GDP. The drop in demand caused by the COVID-19 pandemic did not affect the whole economy evenly. Transport suffered the most, which was reflected the automotive and aviation industries. This was soon evident in the decline in consumption of petrochemical products, which was felt most strongly by highly specialized manufacturing companies, but it is only a matter of time before the market rebounds,” says Adam Czyżewski. 

“The high drop in demand caused by COVID-19 is not permanent, because in most cases it is deferred, not lost, demand. Businesses and consumers have not given up on buying cars or traveling by plane forever. They will start buying and flying again, and a period of accumulated deferred demand will cause a boom for petrochemical companies. But before that happens, the challenging environment we are currently facing may lead to changes in the structure of the European petrochemical industry through mergers and acquisitions.”

“Before demand picks up, some petrochemical companies facing financial difficulties may decide to sell off some of their assets. Companies in a better position will be inclined to buy them mainly because the consequence of deferred demand is a postponement of investments, which leads to temporary supply shortfalls and increased attractiveness of production assets” emphasizes Adam Czyżewski. “So there are two possible responses to the change in demand associated with COVID. Some will strive to diversify the production portfolio and thus their risks. Others will focus only on their core business and strengthen their financial situation through disinvestment. Regardless of the chosen path, the basic factor that will enable the survival of the crisis is production integration.

The petrochemical sector is cyclical, although on average it is growing faster than the rest of the economy. Companies can reduce their sensitivity to the cyclical business fluctuations by adapting their product mix to changing market needs,” says Dr. Czyżewski. “In the long term, the consumption of petrochemical products is growing faster than GDP as they replace other materials due to their properties,” he adds. “Economic cycles cannot be eliminated and the operating time of petrochemical installations is calculated for decades. They cannot be adapted to the cyclical business fluctuation. It is possible and even necessary to adapt the offer of end products to the needs of customers.

Companies can make improvements throughout the petrochemical chain, shorten the distance to the end customer and increase the flexibility and range of applications of their products, e.g. by enabling their recycling,” says Adam Czyżewski. “The petrochemical industry will slowly start to operate according to a ‘product as a service’ and ‘material as a service’ model. This is crucial for the control of petrochemical products throughout the entire value chain and is a prerequisite for the existence of a closed loop economy,” he emphasizes.

“Global megatrends, not the COVID-19 crisis, will determine how petrochemical companies shape their product portfolios, although the potential for diversification is not unlimited,” says Czyżewski. “The world needs materials and hydrocarbons are well-suited to their production, so the petrochemical industry will continue to develop and enter individual industries, such as construction, with offering of new materials,” he adds. “Moving up the value chain is necessary and beneficial. However, the entire industry cannot be reformatted to produce the highest value-added products. Someone has to produce basic petrochemical raw materials. Here, too, there is room for profound technological change. The tendency leads to universality and adaptation to recycling.

Environmental issues do not pose a deadly threat to the petrochemical industry given the nature of the products it produces. In addition, it can play a key role in the process of transforming the economy towards sustainable development and closed loop economy through increasingly innovative and advanced products,” says Adam Czyżewski.

“The problem is the growing number of people who need to provided basic necessities of life. This is associated with an increase in demand for various materials that need to be made from something. Crude oil, which is being eliminated from transport, is perfect for this, because it is in abundance,” he adds. "Also, the materials made from it have a wide range of applications, both existing and completely new. They also have less impact on climate change than other materials. There is simply a need to focus on innovations that fit the concept of a closed-loop economy. This is a challenge for the petrochemical industry, as it is for other industries involved in the production of materials.

One effect of the pandemic on the European petrochemical industry is likely to be the emphasis on local production,” explains Dr. Czyżewski. “The temporary freeze of the economy has highlighted the weakness in some petrochemical supply chains and revealed the region's dependence on imports of certain essential products.”

“I think that the 'just in time' production model will be complemented by a ‘just in case’ model, which will increase the attractiveness of the close proximity of production assets. This creates huge opportunities for the petrochemical industry in Europe,” he emphasizes. “PKN ORLEN does this by increasing the production of products for which our region is a net importer, which is a basic prerequisite for our Petrochemical Development Programme. Our goal is to provide customers with convenient cooperation with a reliable, local and regional supplier of petrochemical raw materials. Our investments will be the cornerstone for the development of the chemical industry in Poland and throughout Central and Eastern Europe.

Now the industry also understands better the importance of close and trustworthy customer relationships and maintaining a strong financial and logistical position for maintaining supply chains,” says Adam Czyżewski. “We are convinced that sometimes the quality of the supplier is as important as the price of the goods,” he says. “Reliability and good financial standing in times of a pandemic proved crucial to the business continuity of many companies. The pandemic has shown that the distribution and warehousing infrastructure is much more important than previously assumed and that we should invest in strategic logistics assets.”

"Plastics will continue to play a key role in Europe, also because of their versatility and the possibility of adapting to individual needs,” explains Dr. Czyżewski. “I don't think Europe should approach plastics dogmatically and see them as the embodiment of evil,” he added. “Our civilization is built on plastics because it is the best material we know. The flexibility of their applications has driven the development of petrochemistry.

But their durability combined with a linear production model (produce, sell, use and throw away) led to a plastic disaster,” says Adam Czyżewski. “The solution to the problem is not to give up plastics, but to produce them in a closed cycle, within a circular economy,” he concludes.

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[1] The European Petrochemical Association (EPCA) is an international non-profit organization (based in Brussels) and is the main European business network for global petrochemical companies. EPCA takes care of more than 700 member companies from 54 different countries, with a total turnover of more than 4.7 billion Euros. With more than 50 years of experience, EPCA acts as a service provider to its member firms. EPCA organizes events in Europe and offers its members around the world the opportunity to meet industry leaders and selected external stakeholders and monitor changes in the international market, including technological and societal trends. EPCA also helps members find their way around certain topics that form the basis for the sustainable development of the global petrochemical industry.

​Author: Adam B. Czyżewski, chief economist of PKN Orlen