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An early reflection of Russia-Ukraine crisis on petchem industry

by Esra Ersöz -
  • 25/02/2022 (08:43)
Eastern Europe has been facing one of the severest security crises in decades. The Russia-Ukraine conflict has already triggered a rally in crude oil and gas markets as well as a big dose of uncertainty, adding to the already high inflationary pressure on global commodity markets.

The news of Russia’s military operation in Ukraine pushed global oil benchmarks $6-7/bbl higher, with Brent futures nearing $105/bbl on the intra-day sessions. Natural gas prices in Europe spiked 30% daily to hit a 2-month high on Thursday, while European coal for next year gained as much as 13%.

This will definitely find a reflection on the downstream chain in the petrochemical industry, some of which has already been visible. Bewildered by the developments, players concur that it is too early to make a proper analysis of the recent situation. But, here are four big questions that need answers:

1-Will crude oil and natural gas supply be hindered?
2-Will soaring energy costs and resultant inflationary pressures weigh on downstream demand?
3-To what extent will sanctions affect trade with Russia?
4-What is the importance of Russia in polymer trade?

Will crude oil and natural gas supply be hindered?

Russia is Europe’s largest exporter of energy, natural gas, and hard coal. The continent depends on Russia for more than a third of its gas supply via Ukraine.

Although Russia assures to keep its gas supplies abroad “uninterrupted” and Russian gas exporter Gazprom PJSC said Thursday its flows to Europe via Ukraine were normal, fuel supplies in Europe -- which is already in the midst of an energy crunch -- are at further risk due to potential disruptions.

In terms of prices, the bullish scenery is, needless to say, here to stay, as analyzed here.

Will soaring energy costs and resultant inflationary pressures weigh on downstream demand?

The spike in energy prices will evidently have knock-on effects on production, especially in Europe, which will dent the recovery of trade from the Covid recession.

European petrochemical players are widely concerned about steeply higher utility costs. “Converters may have to lower their run rates to cope with tremendous gains in power and gas costs," said a manufacturer in Italy.

Several manufacturers are also fretting over the shift in demand from plastics to other raw materials while some think that weaker consumer confidence and fragile economies may stymie the upcoming high season for their applications.

To what extent will sanctions affect trade with Russia?

The sanctions imposed on Russia are mostly on banks and individuals. Plus, Russia is not excluded from the SWIFT international payment system used by banks, as this would make payments for Russian gas supplies impossible and lead to a halt in supplies with consequences for European consumers.

Thus, players in the petrochemical industry widely think that trade from and to Russia may not take a heavy knock, so long as the conflict does not escalate further. If they remain as they are now, several players are pointing to the Iran case. “Iran is a bigger exporter of PE than Russia, and sanctions have little impact on Iranian PE exports,” a big trader in Singapore argued.

Players in Turkey - a primary address for Russian polymers - also think that some disruptions in trade with Russia may occur as financial processes may take longer than usual. Nonetheless, they say, "Supply levels are not likely to be affected much when we consider smooth imports from Iran despite years of sanctions on the country."

What is the importance of Russia in polymer trade?

Russia is undoubtedly not as strong in polymer exports as in oil, gas and coal. However, statistics suggest that Russia exports around 2.4 million tons of polymers per year, which is not a small volume.

China and Turkey stand out

PE makes up half of Russia’s overall polymer exports while PP stands for 30%. Their major destination is China for PE and Turkey for PP. As for PE, %50 of their export is to China, 9% to Kazakhstan and 4% to Turkey. Regarding PP, Turkey has a 23% share, standing at the top of the list. Poland and Belarus followed with respective shares of 15% and 12%.

Market players argue that Russia will maintain its exports to China and Turkey, even if some market share is lost in sales to Eastern Europe. Some even opine that Russian PP and PE may show up in these regions at competitive prices in case of stock pressure amidst narrower alternatives for exports.

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