COLUMN-Trump tariffs force much-needed petrochemicals contraction: Bousso

By Ron Bousso

LONDON, Aug 27 (Reuters) - U.S. President Donald Trump's trade wars are nudging the global plastics industry toward a painful but necessary restructuring to address acute overcapacity that has kept the industry’s profits in a prolonged slump.

Demand for plastics – from packaging and manufactured goods to solar panels and car parts – is expected to grow sharply in the coming decades as middle classes grow in large economies, particularly in Asia. This means more oil demand.

Consumption of petrochemical feedstocks – oil-derived products such as naphtha, propane and ethane – accounted for 95% of total oil demand growth between 2019 and 2024. Creation of these plastics building blocks is forecast to rise by 2.1 million barrels per day between 2024 and 2030, reaching 18.4 million bpd, according to the International Energy Agency.

Given this growth, petrochemicals’ share of total oil consumption is expected to increase from 15.8% in 2024 to 17.4% by 2030, offsetting declines in demand for transportation fuel.

It is therefore no surprise that oil and gas majors including Exxon Mobil XOM.N, Saudi Aramco 2222.SE and the UAE’s Adnoc have invested heavily in petrochemicals, betting that rising demand for feedstocks will counterbalance the impact of electric vehicles on fuel consumption.

China has also ramped up domestic production to boost petrochemical self-sufficiency. In the U.S., meanwhile, there has been a surge in cheap ethane production and thus petrochemical plants thanks to the shale boom that began in the early 2010s.

GROWING PAINS

Rapid petrochemicals production growth since 2022 has created a severe imbalance between supply and demand, putting heavy pressure on margins. Benchmark Chinese PDH margins, known as cracks, have been deeply negative for most of the past two years. Benchmark naphtha cracks have also turned negative in Asia, Europe and the U.S. in recent months.

As a result, chemical producers worldwide have suffered a collapse in earnings.

South Korean petrochemical producers LG Chem and Lotte Chemical posted losses in 2024. U.S. producer Dow Inc cut its dividend last month after reporting a second-quarter loss. Dow and German rival BASF BASFn.DE both cut full-year guidance, citing added pressure from global trade wars.

Unfortunately for the sector, petrochemical overcapacity is expected to worsen. Supply is projected to exceed demand by 20–25% by 2030 as new plants come online, according to the Institute for Energy Economics and Financial Analysis.

In short, the industry is in need of tightening.

A CRISIS NOT WASTED

Trump’s tariff might do just that.

South Korea’s petrochemical industry – one of its top five export sectors and the backbone of its car and electronics industries – was hit hard after Trump announced 25% tariffs on imports from the Asian country on April 2.

The tariffs were delayed and later reduced to 15% after a trade deal last month, but first-half revenue from South Korean petrochemical exports to the U.S. still fell by more than a fifth year on year, ING said in a note.

The South Korean government, which has long urged the sector to restructure, responded by pushing 10 companies to cut annual naphtha-cracking capacity by 2.7 to 3.7 million metric tons, roughly a quarter of the country’s annual capacity of 14.7 million tons.

In Europe, the petrochemicals sector’s distress has been compounded by high energy costs since the 2022 energy crisis, prompting plant closures in France, Germany and Britain. Dow said in July it will shut three sites in Germany and the UK.

The weaker demand outlook because of the trade wars only adds to the pressure on plants.

Crucially, China is reportedly considering an overhaul of its vast chemicals sector, targeting closure of ageing, loss-making plants as part of an “anti-involution” campaign, a buzzword for curbing destructive competition that erodes profit.

Of course, cleaning up China’s petrochemical industry is likely to face resistance from local officials and will be dwarfed by new capacity additions, but any reduction would be welcome respite to the global market.

LONG PATH

The rapid expansion of petrochemical capacity, especially in China, has far outpaced demand growth, creating one of the worst crises in the sector’s history. Shrinking this bloated sector – and thus boosting profits – is likely to be a long process.

Shell SHEL.L CEO Wael Sawan said last month that the “incredibly long” trough in the chemicals sector could persist for some time.

So while Trump’s trade policies may feel like yet another painful blow, they could serve as the wake-up call the petrochemicals industry needs.

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