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The future of plastics: trends and disruptions shaping
this cornerstone of the ME petrochemicals industry
Theo Jan Simons, Partner McKinsey & Company
The future of plastics – proposed agenda
FuturePast Present
6.1
35
213
Plastics versatility has made them the cornerstone of modern society
951965 70 75 80 0585 200090 10 15 2018
Plastic production
volumes MTA
World population
Bn
Consumption
kg per capita
CAGR
1965-2018
6.3%
4.6%
1.6%
58
450
7.7
Source: Geyer et al 2017, Worldometers, Plastics Europe
Global plastic volumeIndexed to 1965
3.3
5
17
Plastic consumption per industry
MTA, CAGR
Source: McKinsey analysis
Construction Transportation Packaging Electronics
5% 4% 14% 8%
xx% CAGR
13
41
20151990
3x
6
18
1990 2015
3x 4
129
20151990
32x
2
16
1990 2015
8x
Plastics have successfully substituted other materials across a range of industries and applications
Growth and margin outlook less promising going forward
PE margin evolution2
in Real (2018) USD/tonGrowth1
GDP multiple
1.0
2011-20 2021-302000-10
1.5
1.3
350
300
240
2000-10 2011-20 2021-30
1 Based on the growth in the base chemical demand (methanol, ethylene and propylene) and the real GDP (2018)
2 Using the steam cracking margin in Asia as the representative for the industry, the inflation rate for 2021-30 is assumed at 2.1%
SOURCE: IHS Markit, World bank, McKinsey analysis
10
Factors affecting growth and margin outlook
• Many products and applications maturing
• Mature technologies reaching end of learning curve
• Demand side disruptions
• Supply side disruptions
EBITDA from using ethane as
feedstock instead of in power plants
Share in value pools created
between 2008 and 2018
Value creation from use of
advantaged feedstock
Share of advantaged
feedstock in value creation
~50%
3x
Reduction of CO2 emission using
Ethane relative to other feedstocks
Impact on CO2 emission
(40-60)%
Advantaged feedstock has created significant value for petrochemicals and upstream/midstream companies
Source: McKinsey Chemicals Insights, IHSM, EIA, IPCC
1998Advantaged share
Volume
Value pool
USD bn
Source: McKinsey Chemicals Insights, IHS
18
7%
140 160 180
1,000
040
1,500
20 120600 80 100
500
ROA1EU ChinaME ROWNA
Over the past 2 decades, advantaged feedstock grew significantly
1 Rest of Asia 2 Oil price $ 13
Ethylene Cash Cost
USD per ton
Advantaged feedstock
Non-advantaged feedstock
Demand
Source: McKinsey chemicals Insights, IHS
42
9%
1400 1200
160100
500
80 18040
1,500
60
1,000
20
ROA1ROWEU NA ChinaME
Advantaged share
Volume
2008
Value pool
USD bn
Over the past 2 decades, advantaged feedstock grew significantly
1 Rest of Asia 2 Oil price $ 97
Ethylene Cash Cost
USD per ton
Advantaged feedstock
Non-advantaged feedstock
Demand
42%
88160 180
1,000
0
500
60 800
1,500
20 40 120100 140
EUNA ROWME China ROA1
Advantaged share
Volume
Advantaged feedstock
Non-advantaged feedstock
Demand
2018
Value pool
USD bn
Over the past 2 decades, advantaged feedstock grew significantly
Source: McKinsey chemicals Insights, IHS
1 Rest of Asia 2 Oil price $ 70
Ethylene Cash Cost
USD per ton
Wave coming to an end with uncertainties on the future of advantaged feedstock supply
Feedstock choice of future
driven by 3 uncertainties
• NA NGL – Long term shale
gas linked volumes
• ME NGL – Ethane supply
upside from NOC push
• Competitiveness of C2C –
scale, speed of transition
Source: McKinsey Chemicals Insights, HIS, McKinsey analysis
90
0
60
30
15102005 20 2025
11
51
20
64
73
3%
13%
13%
Ethylene production from advantaged feedstock
MTA
Future of growth and value creation in Plastics
Digital and
Analytics
1
Circular
economy
Finding new
growth
Capital
productivity
2
3 4
Digital and Advanced Analytics with demonstrated potential to improve variable costs and margins
Source: McKinsey
Throughput increase – model that
guides the optimal set points for
9 operational furnaces for Feed, Coil
Outlet Temperature and Dilution steam
per hydrocarbon levels
Profit per hour increase – By
optimizing natural gas, steam, air, fuel
and purge gas flow rate through
advance analytics modelling
Demand forecasting accuracy
improvement – using over 2000
internal and external data sources,
improving demand forecasting,
providing 3 and 6 months outlook and
predicting market turning points
Predictive maintenance – model that
analyzes real-time production data
and predicts unplanned shut-downs of
PP extruder. Implemented in daily
operations it reduced annual
shutdowns from 19 to 0
+11% +4%
+20% -100%
1
Capital productivity declining with growing gaps between regions – opportunity to step up
Source: McKinsey
100
China
~200
ME
71
60
100
1990 05 2018
1 Referenced to the capital investment for a cracker in North America 2 Strategic, Financial (value creation), Sensitivities, Alternatives, Risks 3 Integrated optimization of
Scope and CAPEX (Full economics)
Construction DesignEquipment
China – ME comparisonIndexed China=100
CAPEX evolution1
Real (Indexed 2018=100) Improving capital productivitySelected levers
• Portfolio optimization2
• Project Value Improvement3
• Planning & Performance management (PPM)
• Re-use, modularization, Design to Value (Procurement)
• Lean Construction
• Digital Twin
2
Today, the bulk of used plastics is not recovered or processed effectively
Source: UNEP 2018, Boucher & Friot 2017, World Bank 2018, Jambeck et al 2015, Plastics Europe
Macro-plastics entering
marine biosystem 8-13
Unmanaged land-based
waste ~50
Plastics ending in landfill ~85
Plastics with
suboptimal recovery ~80
Plastics effectively
recycled~45
1-3Microplastics entering
marine biosystem
System loss
Recovery and Re-use
Current plastic destination post use, 2018 in MTA
Challenges with
existing waste split
• Consumers not educated on their contribution to effective system
• Lack of general waste management systems (formal or informal)
• Waste has low value hence low incentive to collect
• Lack of infrastructure and recycling technologies
• Recycling economics challenging relative to virgin
3
A range of recovery processes and technologies are available to recover valuable hydrocarbons
Source: McKinsey analysis
Incineration Thermal
(Pyrolysis/
gasification)
Chemical
(hydrolysis/
hydrocracking)
Mechanical
or chemical
(solvent-based)
Dis-assembly /
re-assembly
Refurbish/Re-
manufacture
Monomer
recycle
Feedstock
recovery
Demand
reduction
Energy
recovery
Polymer recycling
Olefins,
MonomersPolymers
Raw
materials
Compoun-
ding
(optional)
Brand
Owners
Consump-
tionEnergy ConvertersProduct chain
Process type
Recovery type
3
Plastics recovery options differ in their impact characteristics – a portfolio of solutions will be needed
1. Alignment with Brand-owner sustainability pledges – Reducing materials and waste (52%); Recyclability of materials (48%); Increasing Recycled content
(44%); Increasing bio/waste based content (21%); 2. Reduction of the amount of CO2 emitted per ton of plastic; 3 Attractiveness compared to virgin
Source: McKinsey analysis
High impactLow impact
Potential uptake
Percent
Attractive
economics3
Improvement of
carbon footprint2
Meeting sustainability
pledges1
<10
~25
Low
<10
Low
~25
Monomer recycle (e.g., PET, PA)
Energy recycle
Bio-polymers
Reduce, Re-furbish, Remanufacture
Polymers based on renewable
feedstocks (drop-in)
Polymer recycle
Feedstock recycle (Pyrolysis) ~25
3
1 000
0
1 500
500
2016 2020 2025 2030 2035 2040 2045 2050
By 2050, the majority of the petrochemical value chain will be affected by an increase in plastics recovery
Global polymer demand 2016-50 from waste recovery
MTA
COALITION FOR CHANGE4
Source: McKinsey plastic waste stream model
1 Actual growth after demand reduction, assuming global GDP growth of 3.1% (IHS);
2 IHS forecast, demand if current IHS projections until 2027 for plastic growth continue through to 2050;
3 Mechanical recycling limited by downcycling and applicable materials, monomerization limited by applicability to condensates only, pyrolysis limited by likely rise in input costs;
4 We modeled 3 different scenarios in addition to BAU, with Coalition for Change (CfC) being the most ambitious one with the most drastic global change in plastics recovery rate and waste mgmt
Polymer to GDP growth1
Share of total
Demand reduction2
205032018
Mechanical recycling 3012
Recycled monomers 7~ 0
Pyrolysis 22<1
Virgin liquid feedstock 4187
Total 100100
1.0x1.2x
3
Source: McKinsey analysis
There is still a significant room for plastics to substitute other materials in many sectors
~6,000
~2%
Plastics Total
~15%
Plastics Total
~400
~20%
Plastics Total
~600
~4%
Plastics Total
~650
Construction & Infra Transportation Packaging Heavy industries
• Polymer concrete
• Plastic tiles
• Composites
• Glass replacement
• Secondary packaging
• Plastic pallets
• Piping and poles
• Turbines
4
Material consumption per industry, 2017 MTA
The future of plastics – changing models for growth
and value creation
FuturePast Present
Compete with
conventional
materials
Compete with
conventional
feedstock
Compete with
conventional
thinking
Suggested management actions
• Double down on targeted innovation areas
• Acquire new talent and capabilities
• Make bold moves in resource allocation
• Create strategic partnerships across value chain
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