McKinsey Energy Insights, the global energy market intelligence and analytics arm of McKinsey & Company, has launched its Global Downstream Outlook to 2035. The report reveals that a wave of new refinery capacity, led by greenfield projects in Asia and the Middle East, is expected to negatively affect global hub refining utilisation as early as 2022, more than offsetting the near-term upside from IMO 2020 implementation.
In 2020, McKinsey expects that IMO 2020 implementation, and the resulting change in bunker fuel specification, will boost margins and utilisation globally. However, the growth will be short lived as the shipping industry adapts by installing scrubbers, and refiners increase production of very low sulphur residual fuel oil and add conversion capacity. By 2023 at the latest, McKinsey forecasts that the market will reflect the long-term trend of rising overcapacity due to slowing growth in global demand and continuing expansion of refineries, especially in Asia. Europe will see the greatest volume downside, with light product demand starting to fall in 2021 and utilisation hit by a strong wave of capacity additions in Asia, the Middle East, and Africa. However, all regions will experience lower margins and profitability.
“Refining capacity over the next five to six years will reduce hub refining utilisation in Asia and Europe, making marginal configuration more complex. We’ll see a boom in refining capacity growth in Asia over the next year, which will hit European hub utilisation particularly hard,” says Tim Fitzgibbon, Senior Expert at McKinsey. Despite this challenging outlook for refining, the industry should remain sizable for decades to come, with significant pockets of profitability in some regions at some points in the cycle.
The report highlights that post 2025 the Asian refining market will continue to expand as a result of growing product demand in some countries and capacity additions focused on meeting local demand despite excess capacity in nearby markets. It is also expected that to meet naphtha demand and take advantage of growing very-light crude supply, China will add two, 300-Kb/d condensate splitters by 2025.
The Global Downstream Outlook to 2035 covers the demand outlook, the impact of MARPOL and provides a detailed report on pricing and margins.