Market Dynamics Forecasting Methodology

Nexant has developed a proprietary simulation model of the global petrochemical industry, the ChemSystems Online® Simulator. The simulation model is used to forecast petrochemical consumption, production and trade for individual countries and trading blocks forward to 2025. The integrated simulation model includes both the market dynamics of product flows and the economics of production costs, logistics, prices and profitability. All the commodity petrochemical chains are integrated so, for example, the vinyls chain interactions with olefins and polyolefins are modelled for end-use substitution, cost integration etc.

Capacity Availability and Forecasting

The model includes a full capacity database for every petrochemical producing plant in all the global regions to generate availability of petrochemical supply. The capacity listings include the production process, the consumption factors of all raw materials, the yield of the main product and any co-products, the current capacity to produce and changes to the capacity due to expansions etc. The capacity to produce petrochemicals from existing and planned projects is continuously researched and crosschecked with industry participants. Announced new production plants and projects in the planning phase provide a guide on the likely capacity available in each region for the next five to eight years. Thereafter, new capacity is forecast based on likely investment strategies under the macro-economic scenario being considered.

End-Use Consumption Forecasting

Consumption growth of commodity polymers and other "end-use" intermediates may be related to economic activity in the consuming region. Consumption of end-use materials in the major economies is researched to determine the link between sectors of the economy and consumption. Demand for a particular polymer or intermediate can be linked to the sum of the demand into each of the end use sectors. Growth in each end use sector is made up of four additive elements:

• demand due to growth of the end use sector
  
• demand due to penetration into the sector for new applications
  
• reduction in demand due to recycling, downgauging of polymers and substitution by other materials/polymers
  
• demand due to cyclical downstream inventory changes.
  

For less developed economies, where data on individual sectors of the economy is less readily available and where the "services" sector of the economy is a much lower proportion, GDP is a fair substitute for petrochemical demand drivers. In these regions the end-use growth is driven by the four elements but applied to a single economic driver.

End Use Sector Growth

The demand due to growth in the end use sector assumes that the existing application for each polymer/derivative grows at the same rate as the end use sector. Thus, the end use sector growth forecasts developed in the "Base Case" Scenario are applied to the individual consumption figures for each polymer or derivative and each end use sector.

Penetration (New application growth)

Penetration of a polymer into an end use sector includes:

• additional demand due to substitution of other polymers and materials in existing applications
  
• development of new applications.
  

Analysis of historic demand for each sector by means of curve fitting allows a curve of overall penetration to be developed. This reflects the maturity of a product.
Penetration growth rates can be negative and are added to the growth of the end use market. A negative penetration, such as would be seen for LDPE, does not automatically mean that the growth of the polymer itself would be negative, as the end use sector growth plus inventory growth may produce a positive overall rat

Downgauging and Recycling

Downgauging of components in existing applications due to improvements in design and material performance allowing the same application to be achieved using less material leads to a drop in total demand per unit of that application. Substitution  by other materials in existing applications and recycling can also result in a reduction in consumption.

Chain Inventory

Economic cycles have an exaggerated effect on demand due to the cyclical building and reduction and inventories through the value chain. During a period of high economic growth, expectations of higher demand for finished products lead companies to build inventory at all stages in the value chain, creating additional demand for raw materials. Some value chains are complex, involving various stages of semi-finished products and frequently involve different companies, each of which will hold inventories. The opposite effect occurs during downturns, when companies tend to deplete their inventories of semi-finished products, and thus reduce their purchases of raw materials.

The effect of this cyclical inventory change is to amplify the actual changes in end-user demand, such that demand for raw materials can actually decrease in years where GDP growth slows, but remains positive.

The supply chain complexity and volume is considered when forecasting growth in end-use demand, and the volatility of growth relative to GDP attenuated accordingly.

Short-term Influences

A secondary influence on petrochemical demand during the economic cycle is a transient demand swing caused by short term pricing volatility. As demand starts to pick up buyers and sellers perceive the tightness coming to any particular product, which in turn leads to price increases. The buyer then responds to expected price increases by increasing demand above expected consumption levels in the knowledge that any purchases made above immediate consumption will be at a lower price than that required for the subsequent purchase. The reverse occurs when price falls are expected.

These transient demand swings usually occur over a few months and so do not influence annualised demand estimates. They are driven by market perception and although predictable in a short-term forecast, they cannot be realistically forecast on a long-term basis such as that used in this analysis. Consequently, the Nexant model does not consider short-term demand swings due to price fluctuations.

Monomer Consumption Forecasting

Having forecast the regional consumption for each end-use the simulation model generates global production and trade of the end-use products and the monomers and feedstocks used to produce the end-use materials. The consumption of monomers and intermediates is related directly to the regional production of the downstream derivatives.

Production and Trade Forecasting

The simulation model incorporates a detailed logistics and trade model to allow integrated forecasts of global trade balances. The trade balances use demand forecasting, capacity availability and trade drivers to forecast global supply, demand and trade.

The integrated ChemSystems Online® Simulator simultaneously develops forecasts of regional consumption, production, imports, exports and inventory changes for all commodity petrochemicals in all countries/regions forward to 2025. Analysis to 2020 is presented in the Petrochemical Market Dynamics reports.

ChemSystems Online® Simulator is used by Nexant to develop its commodity petrochemical market dynamics and profitability forecasts. It is also used by Nexant’s clients to develop their own private forecasts under license from Nexant. Please contact Nexant if you would like to evaluate the use of the ChemSystems Online® Simulator for your organisation.