The late great comedian George Carlin once said that perhaps the reason why humanity was brought to earth by an all-powerful God was because he needed plastics, didn’t know how to make them himself, needed humanity to do it. It was, as he said, the answer to the age-old question “why are we here?” Plastics, Carlin responded in his God-like voice from on-high, adding the usual expletive after the comma. That’s why.
Everybody hates plastics. It’s hard to recycle. Microplastics are floating around the Pacific Ocean, eaten up by the fish we eat. But corporate investors still like them, probably because it’s not about plastics. It’s polymers – which can be found in organic materials or made synthetically from hydrocarbons as a derivative of the oil and gas industry. These polymers are made into plastics and resins and are the mother of all materials around us – from the keyboards we type on, the phones in our hands, the cars we drive, and the subway seats we sit on.
But while corporate investors see green in the polymer materials space, investors have not.
Braskem, the Sao Paulo-based petrochemical giant of Latin America, saw its first quarter profits fall by 90%. Their stock price is only doing well this past month because of industry rumors about Apollo Global Management
, a New York-based alternative assets money manager, teaming up with Abu Dhabi’s national oil company as potential suitors to buy Braskem for around $2 billion.
Saudi Basic Industries Corporation, or SABIC, dropped from the Forbes 2000 list of global corporate giants last year. Their shares year-to-date are in line with Exxon now, up just under 1%. But are down 21% over the last 12 months, slightly underperforming iPath Oil.
India’s Reliance Industries is down 4.5% year-to-date, doing a little better than oil, but not better than Exxon. But over a five-year hold, it’s returned over 165% for investors while oil is up around 35%. Reliance has been expanding its production capacity for plastics and packaging polymers to meet the rising demand in India and in other markets.
And back in Brazil, Braskem is following the trend in making these synthetic polymer materials part of the recycling initiative, meaning they are somehow a solution to environmental ruin and can help create long lasting products. Maybe there is something to love about plastics, after all.
Polymers and polymer products account for up to 30% of electric vehicle components and up to 40% of the parts in solar panels and wind turbines are almost all plastic. Semiconductor manufacturers are also buyers of polymers.
A Nov. 2022 report by market research firm Roland Berger said new technologies are rapidly changing the once boring polymer plastics space. There is a keen sense that plastics need to be easily renewable and recyclable, which is not the case today. In 2021, McKinsey & Company estimated the petrochemicals industry would invest up to $40 billion to improve plastics manufacturing.
Big chemical companies are trying to secure polymer supply and production capabilities to stay up to speed with the changing global economy and demand a more environmentally sound plastic. But globally, it’s not just a corporate competition anymore; it’s becoming a national race among leading countries. The growth of petrochemical giants, tied to key industries, fuels economic development and competitiveness overall.
In countries like China, the easy supply of polymers is imperative to its ability to continue manufacturing semiconductors and remain a global leader in solar and EV manufacturing. Between 2014 and 2019, China’s share of global plastic materials production grew from 26% to 31%. China’s polymer production is now the second behind the U.S.
Sinopec Group is one of China’s biggest. Its stock price is down 17% over the last year, versus 12% negative for the MSCI China Index. The company announced a $280 million investment in a polymer chemicals facility in April.
Petrochemicals: The Other Oil Derivative
According to a market research report by Grand View Research, the global petrochemical industry was worth $593 billion in 2021. They forecast the space to grow to $811.57 billion by 2030 at a compound annual growth rate of 3.7%.
The oil and gas sector primarily focuses on extracting and selling raw materials or converting them into fuel, mainly catering to the energy sector. In contrast, the petrochemical industry transforms oil and gas extraction byproducts into other products, such as polymers and synthetic rubber.
The Nov. 2022 report by McKinsey estimated that up to 50% of global plastics demand could also be met through recycling. This may be a nice environmental “write-off” for oil firms like PetroChina, which operates various petrochemical facilities across China and has been actively expanding its plastics line to cater to domestic and global demand.
Longer-life plastic, rather than the single-use plastics that get banned in places like California (think plastic straws, for example) are a way for some of these emerging market petrochemical companies to say they are contributing to a cleaner environment if they make these new types of materials. In theory, this might help them gain access to the capital that is focused on Environment, Social, and Corporate Governance investing themes, aka ESG.
For example, Celanese
Corporation (CE) is a plastics alternative headquartered in Irvine, Texas. They make bio-based and biodegradable polymers to address the single-use plastics issue. Their stock price decreased 30.8% over the last year, another testament to investor disdain for this sector.
The “Polymer Race” in Emerging Markets
Petrochemical companies in India, Vietnam and Turkey are increasing production of synthetic polymers, capitalizing on their domestic hydrocarbons resources and growing local markets to achieve self-sufficiency, according to a report by McKinsey.& Company published in February 2022.
The Berger study estimated that the petrochemical industry can contribute $300 billion to India’s GDP and create 3 million direct and indirect jobs by 2025, meaning it is a sector the government will want to protect, including from Western policymakers who still push for “net zero carbon” goals. There is pressure by European-based activist investors to get Western companies like Coca-Cola
to seek plastic alternatives, as this May 3rd letter signed by investment firms Rockefeller Asset Management and Norway’s Nordea Asset Management shows. This ads to the political risk of plastic producers, especially those based in the U.S. like LyondellBasell. They have polymer manufacturing plants in Texas, Ohio, Indiana and New Jersey, to name a few. Their shares are currently oversold based on its Relative Strength Index. The stock is down over 20% in the last 12 months, 24 months and five years.
Some companies are doing okay by investor standards.
LG Chem, a South Korean petrochemicals company, is up 33.5% over the last year. South Korea accounts for 14% of the MSCI Emerging Markets Index.
Year-to-date, investors in plastics companies have mostly outperformed oil.
Countries that succeed in localizing their polymer industry will receive a huge economic advantage. China is big. As is Brazil here.
The global, publicly traded petrochemical companies in the emerging markets have been beaten up for so long, maybe the opportunity risk is too great to ignore.
Besides George Carlin’s early 90s routine that incorporated God and plastic, Dustin Hoffman’s 1967 classic “The Graduate” has a scene shot at the poolside where his character, Benjamin Braddock, is advised by an older gentleman named Mr. McGuire: “I just want to say one word to you. Just one word. Are you listening? Plastics. There’s a great future in plastics. ‘Nuff said. That’s a deal.”