Global chemical supply, demand threatened by Middle East escalation.

I just got a report from Will Beacham, Deputy Editor, ICIS Chemical Business.

As the threat of further military action in the Middle East looms large – disruptions in the Strait of Hormuz could seriously impact the global trade in chemicals and oil products.

For chemical markets already in oversupply, such as polyolefins and isocyanates, any supply shock from the Middle East will have little impact. For others, such as Low-density PE (LDPE), where 68% of global net exports – 3.1m tonnes – come through the Strait, supply risk is far greater.

The attached analysis from Will Beacham, Deputy Editor, ICIS Chemical Business looks at the products that are heavily exposed to disruptions and the knock-on effects for the world’s already fragile manufacturing economy.

Here the full report issued by Will:

Global chemical supply, demand threatened by Middle East escalation

By Will Beacham, Deputy Editor, ICIS Chemical Business

Military action leading to closure of the Strait of Hormuz between Iran and Saudi Arabia could seriously disrupt global trade in chemicals and oil products, with a knock-on effect for the world’s already fragile manufacturing economy.

The US killing of General Qasem Soleimani, head of the Iranian Revolutionary Guards’ overseas forces, on 3 January 2020 threatens to further stoke up tensions in the Middle East. Iran retaliated on 8 January with missile strikes against US forces in Iraq.

The Strait of Hormuz is an important shipping lane, linking Middle East oil and chemical exporters to the rest of the world. More than 20% of global petroleum liquids and a significant proportion of chemicals are transported through the Strait.

According to ICIS senior consultant, Asia, John Richardson, quoting ICIS Supply & Demand database forecasts for polyolefins exports in 2020, this includes 4.1m tonnes of Middle East high-density polyethylene (HDPE) production due to be exported via the Strait.

This accounts for 38% of total global net exports amongst all the regions that are in net export positions – where exports are higher than imports.

Supply risk is greater in linear low density polyethylene (LLDPE) where 51% of global net exports – 4.7m tonnes – appears to be exposed. Low-density PE (LDPE) is most at risk, with Middle East exports via the Strait accounting for 3.1m tonnes of net exports, 68% of the global total.

Other important products heavily exposed to disruption to shipping in the Strait of Hormuz include monoethylene glycol (MEG), ethylene and methanol.

In an all-out war scenario the Strait could close completely, cutting off regional chemical exports for a prolonged period. A lesser conflict could lead to periodic disruption to traffic through the Strait.

For chemical markets already in oversupply, such as polyolefins, isocyanates and MEG, any supply shock from the Middle East will have less impact as capacities elsewhere can be ramped up in response. This happened after the attack on a Saudi Arabian oil processing facility in September 2019 which cut feedstock supplies to regional chemical facilities.

This chart shows the most potentially impacted chemicals in terms of percentage of global production capacity.

chart

Oil prices spiked 5% to more than $70bbl following the US attack and Iran’s response before dropping back slightly. They remain well above levels prior to the incident.

Higher oil prices act as a brake on consumer spending, so any sustained hike is likely to hurt global economic growth. The manufacturing economy is already fragile, with purchasing managers indices in negative territory for the US and Europe.

Business and consumer sentiment soured during 2019 as the US-China trade war deepened and growth slowed in major economies. This is likely to be hurt further by any Middle East conflict.

For Rhian O’Connor, lead analyst, Market Demand Analytics, ICIS, the main impact on petrochemicals is sentiment.

“The demand side remains very weak for manufactured goods with pessimism high and investment low. The potential for conflict will further dampen global producers desire to invest. Higher raw material prices will thin margins as producers struggle to pass this through the chain. Any consumer price increases could soften end market demand, at a fragile time.”

MARGINS UNDER THREAT

According to Richardson, ethylene and PE variable cost margins for naphtha-based crackers in northeast Asia fell throughout 2019 and in December hit minus $90/tonne, the lowest since ICIS records began in 2000. Higher oil prices would squeeze these further whilst demand is suffering because of increased US supply to the region.

Unusually, benzene spreads were also below $100/tonne for six months in 2019.

“Higher oil prices will act as a tax on the economy, reduce economic growth and make life worse for petrochemical producers. I think that is probably the bigger story than any interruption to supply,” he added.

International eChem chairman Paul Hodges, is concerned about the additional uncertainty that this development will create for the chemical industry.

“Companies are already worried about the downturn in margins caused by the slowdown in the global economy, the rise of protectionism and the relatively high cost of oil,” he said. The risk now is that worries over availability lead to a period of higher prices caused by panic buying, and that these can’t then be passed through to end-users due to softening demand.”

He believes that any threat to the Strait of Hormuz would almost certainly plunge the global economy into outright recession, given the likely impact on oil market supply and prices.

With the conflict unlikely to be resolved quickly, Hodges urges chief executives to focus on contingency planning rather than just assuming they can rely on ‘business as usual’, particularly with the International Monetary Fund already warning that the global economy is in a “precarious” position.

By Will Beacham, Deputy Editor, ICIS Chemical Business

 

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Una risposta a “Global chemical supply, demand threatened by Middle East escalation.

  1. un riassunto in italiano:

    L’azione militare che ha portato alla chiusura dello Stretto di Hormuz tra Iran e Arabia Saudita potrebbe interrompere seriamente il commercio globale di prodotti chimici e petroliferi, con un effetto a catena sulla già fragile economia manifatturiera del mondo.

    L’uccisione da parte degli Stati Uniti del generale Qasem Soleimani, capo delle forze d’oltremare delle guardie rivoluzionarie iraniane, il 3 gennaio 2020 minaccia di allentare ulteriormente le tensioni in Medio Oriente. L’Iran ha reagito l’8 gennaio con attacchi missilistici contro le forze statunitensi in Iraq.

    Lo stretto di Hormuz è un’importante rotta marittima che collega gli esportatori di petrolio e prodotti chimici del Medio Oriente al resto del mondo. Oltre il 20% dei liquidi petroliferi globali e una percentuale significativa di prodotti chimici vengono trasportati attraverso lo Stretto.

    Per i mercati chimici già in eccesso di offerta, come poliolefine, isocianati e MEG, qualsiasi shock di approvvigionamento dal Medio Oriente avrà un impatto minore poiché le capacità altrove possono essere aumentate in risposta. Ciò è accaduto dopo l’attacco a un impianto di lavorazione del petrolio dell’Arabia Saudita nel settembre 2019 che ha tagliato le forniture di materie prime agli impianti chimici regionali.

    Il grafico mostra le sostanze chimiche potenzialmente più colpite in termini di percentuale della capacità di produzione globale.

    L’aumento dei prezzi del petrolio fungerà da imposta per l’economia, ridurrà la crescita economica e peggiorerà la vita dei produttori petrolchimici.

    Il presidente internazionale di eChem Paul Hodges, è preoccupato per l’incertezza aggiuntiva che questo sviluppo creerà per l’industria chimica.

    “Le aziende sono già preoccupate per la flessione dei margini causata dal rallentamento dell’economia globale, dall’aumento del protezionismo e dal costo relativamente elevato del petrolio”, ha affermato. Il rischio ora è che le preoccupazioni sulla disponibilità portino a un periodo di prezzi più alti causati dall’acquisto e che questi non possano quindi essere trasmessi agli utenti finali a causa dell’ammorbidimento della domanda “.

    Ritiene che qualsiasi minaccia allo Stretto di Hormuz avrebbe quasi sicuramente fatto precipitare l’economia globale in una vera e propria recessione, dato il probabile impatto sull’offerta e sui prezzi del mercato petrolifero.

    Poiché è improbabile che il conflitto si risolva rapidamente, Hodges esorta i dirigenti a concentrarsi sulla pianificazione di emergenza piuttosto che supporre che possano fare affidamento su “affari come al solito”, in particolare con il Fondo monetario internazionale che già avverte che l’economia globale è in una “precaria” posizione.

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