Risky business: Petrochemicals industry faces overcapacity, disappointing growth

Key findings

The global petrochemicals industry appears to have entered an extended period of financial underperformance driven by its deeply lopsided fundamentals. Overbuilding of production capacity and a disappointing long-term outlook for demand growth cloud the industry’s outlook. Long-term investors should take note.

The problems facing the industry abound. Prices for basic chemicals, intermediates, and polymers have fallen from highs seen over the last decade. Compressed margins impair the economics of production facilities. Credit analysts call for the closure of factories on the higher end of the cost curve. Major players like Shell are now seeking to divest almost-new production facilities that only a few years ago were portrayed as flagship assets. In the case of Shell, prolonged construction paired with a troubled start-up delivered an over-schedule and over-budget facility that faced a vastly weakened market.

Industry analysts are sounding a clarion call to alleviate the overbuilding. When S&P Global Energy convenes the World Petrochemical Conference in 2027, it will be under the unambiguous theme of “Build resilience, not capacity.” Investor confidence now hinges on whether the industry can move with purpose and speed to correct its missteps.

The petrochemicals industry is no stranger to cyclicality, as efforts to balance supply and demand have long proven elusive in a crowded, competitive landscape. The growth drivers of the late 2000s and 2010s—particularly the boom of construction and industrial production in China—appear unlikely to be repeated. In the meantime, the industry faces rising risks from geopolitical fragmentation, disruptions to global trade, rising competition from bio-based polymers and recycling, and the legal exposure as inquiries into the impacts of microplastics continue.

The industry’s headwinds have weighed on its equity performance, with stock prices posting disappointing gains for several years. One must look back to the 2000s and early 2010s to find the last time that the petrochemicals industry outperformed world equity markets for a sustained period. Financial returns at the time were significant, with Forbes describing a 2007 merger of petrochemical producers as the “greatest deal in Wall Street history.” We are now in a different era where the industry’s future is unlikely to resemble its past. Investors must decide whether the potential rewards outweigh the risks.

This report begins with a microcosm of the industry’s trouble: the story of Shell’s Monaca ethylene and polyethylene complex in western Pennsylvania. The next section reviews the equity market performance of petrochemical companies. The following section describes the industry’s investment cycles, the growth drivers of the 2000s and 2010s, and the capacity additions that followed. Next, it presents key risks facing the industry. Institutional investors should exercise discretion and perform conservative underwriting of any potential investments in the petrochemicals industry. It concludes with a review of investors’ options for limiting exposure to the industry across a portfolio’s asset classes.