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Plastic resin industry on another bumpy ride: War-driven energy hikes

by Esra Ersöz -
  • 15/03/2022 (08:34)
Having grappled with the pandemic in 2020 and major supply chain woes in 2021, the petchem industry is this time buckling up for another bumpy ride given rocketing energy hikes. Players across the globe are gripped by ‘very high costs’ and relentless supply limitations on one hand, and growing concerns over a possible demand destruction on the other.

A brief look at the past two years

It was early 2020, when the pandemic first hit the markets across the globe. It was also a historic moment when crude oil prices traded in negative territory in April 2020. By the second half of the year, polymer markets started to improve in line with the end of full lockdowns and this rebound was extended well into next year.

In 2021, the pent-up demand was accompanied by major production issues at petrochemical plants, particularly in the US and Europe. Container crunch and shipping crisis also unfolded, adding fuel to the rally in polymer prices. Many polymers hit their all-time highs in major regions. Disregarding some corrections, prices remained largely elevated for the most part of last year.

What is different this year?

Russia’s full-scale invasion of Ukraine took a heavy knock on markets and shifted paradigms as of late February. Discussions regarding an embargo on Russian crude imports sent shockwaves through global markets and oil futures surged to their highest since 2008 for the week starting March 7. Brent oil rallied even higher to top $140/bbl after the US announced a ban of Russian fossil fuels on March 8, although this was followed by the biggest daily swings of 30% last week, the largest in two years, and another 5-6% slump to around $105/bbl this week.

The record-breaking energy prices including crude oil and natural gas have found reflection on the full chain of the downstream petrochemical industry. Monomer/polymer producers have been applying energy surcharges and started cutting run rates recently, while converters - particularly in non-essential sectors - are now lowering polymer consumptions.

“Industry players are between the devil and the deep blue sea. Demand is fading due to hammered margins across the production chain. On the other hand, prices have no room to come down due to soaring costs. Plus, supplies remain limited because of lower operating rates and persisting shipping problems. As uncertainty reigns, increasingly more players are feeling baffled.”

Supply: Already under heavy strain

These energy spikes have also come at a time when the markets have already been suffering from supply chain disruptions, caused by the pandemic.

Market experts see no respite ahead in sky-high freight rates from Asia, particularly China. Although they are no longer rising and have come off their peaks to some extent since mid-September, they are expected to remain elevated for the foreseeable future, considering the recent lockdowns in China, sharp energy hikes and the worsening shipping snarls due to the Russia-Ukraine war.

This is the main reason why the polymer industry is not feeling the impact of the long-awaited new capacities of PP and PE in China across the globe, although a large part of them have already come onstream. Even players in South East Asia have been complaining about limited imports due to rising shipping costs, let alone the ones in Europe.

As for the US, freight rates have not witnessed astronomic hikes from this destination, unlike the case in China. Nevertheless, polymer exports from the US have been underperforming since 2021 - despite its huge capacity to flood the markets - due to the crippled production and covid-crimped supply chain including backlogs at ports and labor shortages.

On top of the already strained supply chain, petchem producers in Asia have started to slash their operating rates in order to avoid production with negative margins. Producers in the Middle East and Europe are also considering following suit, with some already taking action. Some others prefer to shut their plants for maintenance in an attempt to manage supply.

Demand: Growing inflation sparks worries

Buying interest has recovered in certain polymer markets as buyers were out to secure cargoes with the fear of being caught by further price hikes. Nevertheless, players share a common concern about a possible destruction in demand given growing inflation across the board, as increasingly more businesses are taking a hit.

Many plastic manufacturers are fretting over the consequences of the rising inflation for their businesses, with the Russia-Ukraine war injecting more uncertainty to markets. Converters working for the construction, automotive and household goods industries have already started to feel the pinch, while the packaging industry is still faring better.

In a bid to combat inflation risks, the Fed has already made its intention clear to start "carefully" hiking interest rates as of March. Although the ECB left the door open to an interest rate hike before the end of 2022, players are skeptical about whether these attempts will be enough to cool inflation as quickly as expected in the midst of the risks posed by the war in Europe.
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