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Deepening Red Sea bottleneck rattles markets; how does it reflect on polymers?

by Esra Ersöz -
  • 25/12/2023 (09:31)
It was around mid-December when the security concerns first broke out upon the attacks on commercial vessels in the southern Red Sea. Throughout last week, right before the Christmas holidays, the crisis deepened, sending a jolt of alarm across the globe about supply chain disruptions. Surging freight rates for container shipments have ensued, which also buoyed the sentiment in polymer markets and encouraged sellers to seek price hikes.

Is this another flash in the pan, or is it here to stay?

That’s the question everybody is looking for an answer to.

On December 19, many shipping companies including Switzerland-based MSC, German Hapag-Lloyd, Taiwan’s Evergreen, Danish Maersk China’s OOCL, Korean HMM and French CMA CGM announced that they started to reroute their vessels around the Cape of Good Hope to avoid the threat in the Red Sea, through which the Suez Canal is reached. This has raised lead times by about two weeks and lifted transportation costs, needless to say.

Although some industry experts think that operations should continue reasonably well given the alternative routes and plenty of excess capacity available, and freight rates are unlikely to spike to the extreme highs seen during the Evergreen congestion in the Suez Canal back in 2021, nobody is sure of the duration and extent of this crisis.

Which routes have taken a knock?

The Suez Canal, the shortest shipping route between Europe and Asia, accounts for about a sixth of global traffic. Accordingly, the shipments from Asia and the Middle East to Europe, Türkiye and North Africa have been directly hit.

CNBC speculated about freight rates as high as $10,000 per 40-foot container from Shanghai to the UK late last week, suggesting a five-fold increase on a weekly basis. Traders in Türkiye also speculated that freight rates from South Korea to Türkiye are changing between $2500 and $6000 per 40-foot container, although the rates were at around $1600 only in the prior week.

However, both Freightos and Drewry , who publish weekly indexes for container shipping, have not confirmed such levels in mainstream routes yet. Drewry reported 15-16% weekly increases from China to West and South Europe, while Freightos raised its index for China- West Europe route by 11% and China-Mediterranean route by 6% this past week.

Shipments from the Middle East to Asia will also be hampered with some exporters already quoting increments of $100-130 on shipping freight costs. Truck rates, which can be cited as an alternative to shipping freight for nearby destinations, are also being quoted as more than double in the Middle East.

From the US to India as well as from India to Europe and Africa, shipping rates are also thrown into disarray. Some jump in rates from India to US East Coast from approximately $2000 per 40-foot container to $7000 per 40-foot container were speculated again.

When it comes to the least affected routes , the transpacific and Atlantic should theoretically be intact by the Red Sea crisis; however, both global benchmarks raised their weekly indexes for China/East Asia-US routes, too.

Crude oil rebounds after 7 straight weeks of price declines

This disruption in the supply chain has first found a reflection on oil markets, where a 3% recovery was seen this past week, after posting a cumulative loss of around 20% since mid-October. Having hit their lowest since June, futures rallied, with Brent flirting with the $80/bbl threshold recently.

Crude oil markets have grappled with ebbing demand throughout 2023. Although OPEC+ has constantly cut production to shore up the market, their efforts have been countered by the soaring production from the US and elsewhere. The demand outlook remains skittish, meanwhile, for 2024, with both the International Energy Agency (IEA) and the US Energy Information Administration (EIA) estimating a slowdown in demand growth.

IEA forecasts a slump of 1.2 million barrels per day while EIA’s estimated slowdown is relatively smaller at around 510,000 barrels per day for next year.

Reflection on polymers: Sellers are encouraged to seek price hikes

The news has not stirred much concern in Asian markets while Türkiye, Europe, North Africa and India were almost at a stalemate last week, with sellers feeling reluctant to make offers amidst ambiguity. However, it is also evident that they were emboldened to seek price hikes for the coming weeks in a bid to reflect the possible supply disruptions both from Asia and the Middle East.

Asian markets have shown limited response so far

The Asian markets have been juggling a multitude of problems including slower demand and growing supplies for quite some time. PE markets both in China and Southeast Asia cautiously rebounded last week after almost two months, finding support from energy markets and PBOC’s strategic cash injection rather than the speculative increases in freight rates.

Although this recovery was not widely followed by other polymers particularly PP across the region, the sharp drop in local polyolefin stocks in China was worth mentioning for this past week.

Asian markets may feel the impact of this freight crisis particularly in polyolefins, where the Middle East has a large share as an import supplier. Unless the crisis is solved, any disruption from the Middle Eastern supply to China may help propel prices higher for PP and PE while the other polymers may find an indirect boost of this situation from oil prices.

Türkiye prepares for a bullish market in January

The news rattled the markets in Türkiye this past week as supply concerns were triggered. In PP and PE markets, demand showed a visible improvement for prompt or nearing cargoes. Buoying purchasing activity has been jittery over possible delays in deliveries of previously secured cargos as buyers wanted to benefit from multi-month low import prices in early December.

Unlike for China and Southeast Asia, the disruption in the Red Sea and Suez Canal means a lot for Türkiye given its dependence on imports from both the Middle East and South Korea. According to ChemOrbis Stats Wizard, Saudi Arabia is the top supplier of Türkiye for all polymers, with South Korea following as the second, albeit with a volume of half of Saudi Arabia in 2023.

Therefore, - if the crisis is sustained – the Turkish market may face bigger fluctuations in the coming term as its dependence on imports is more critical. Plus, Turkish markets already lack premium over China, which will evidently encourage sellers to seek larger price hikes in a bid to improve margins.

Europe is already sidelined for holidays, but it will inevitably suffer

This deepening of the bottleneck has coincided with the start of long Christmas and New Year holidays in Europe. Players have not raised much concern yet, thus. However, considering that South Korea and the Middle East are also major import suppliers in the region, Europe will also experience the burden of rising freight costs.

Global demand is not strong enough for big price hikes

Rather than an improvement in downstream demand, polymer prices, along with many other commodities, may be propelled higher by speculation. This may lead to big price swings in an environment on which economic challenges have already been taking their toll.

As underlying demand is already fragile, rapid price hikes may possibly push buyers away from the market, not to mention the renewed inflationary pressures this situation will create in the medium term.
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