Interview with Will Beacham, Deputy Editor, Chemicals at ICIS
Will Beacham
Deputy Editor, Chemicals at ICIS
ICIS - Global chemical prices spike at fastest pace in almost 20 years as Europe faces Q2 import supply crunch.
What are the main reasons behind the sharp rise in global chemical prices in recent weeks?
The escalation of the US–Iran conflict has pushed crude and chemical markets higher by disrupting seaborne flows via the Strait of Hormuz. Supplies of naphtha – one of the main feedstocks for chemical production in Asia and Europe – have been cut off from the Middle East. As supply tightened globally, prices have rocketed. This is due in part to physical shortages and in part due to a shift in buyer sentiment where availability is now more important than price. Logistics disruption, higher freight rates and rising insurance/war-risk premiums are also increasing delivered costs, especially for Asia‑to‑Europe and Middle East routes.
How has the conflict in the Middle East affected global supply chains and chemical production?
The war in Iran and severe restrictions to traffic through the Strait of Hormuz have not only cut off supplies of most Middle East chemical exports, but shipments of feedstocks such as crude oil, natural gas and naphtha to Asia.
Asia’s export-oriented petrochemical industry is structurally short of naphtha and more than 55% of its total import demand – about 4 million tonnes a month – is met by Middle Eastern supplies, with the UAE being the top supplier, followed by Qatar and Kuwait.
Within days of the Strait closing, companies in Asia and the Middle East started issuing force majeure (FM) notices to customers, with these gathering pace in the days since 2 March to total 41 by 27 March.
Why is Europe particularly vulnerable to a potential supply shortage in the second quarter?
The Suez Canal route from Asia and the Middle East to Europe effectively closed since late 2023 when Houthi rebels started attacking shipping in response to the war in Gaza. Since then, most container ships and chemical tankers have diverted around the Cape of Good Hope. This journey takes around a month. As the Straits of Hormuz have been closed since the Iran war broke out at the end of February, cargoes ordered before then were still arriving until roughly the end of March.
But from early April, exports from Asia and the Middle East to Europe will start to dry up. Europe relies on imports from those regions for as much as 40-50% of domestic consumption in markets such as acrylonitrile butadiene styrene (ABS), methyl methacrylate (MMA), epoxy resins, vinyl acetate monomer (VAM) and polyester fibers.
Although producers in the US are not affected by the Iran war, Europe now faces intense competition from Asia for its exports, so it is unlikely that the US can plug the gap left by the collapse in exports from the Middle East and Asia. China is also less impacted by the closure of the Strait of Hormuz as it can still source oil and feedstocks from Russia and Iran. But producers there will prioritise supply to domestic customers and the rest of Asia first.
There is also intense competition for crude oil in global markets, and Europe is not likely to be fully supplied from Q2 onwards, forcing refineries and downstream chemical operations to potentially cut operating rates. This leaves European chemical producers facing reductions in domestic supply as well as falling imports.
How are companies in Europe responding to rising costs and limited availability of chemical products?
There are two sides to discuss here – the buyer side and the seller side, and there has been an abrupt u-turn in Europe. Chronic global oversupply of chemicals – mainly driven by a huge capacity build in China - has seen increasing competition from cheap imports in Europe. This forced producers to cut prices and margins in a low demand environment. Downstream buyers were spoilt for choice with domestic supplies and imports vying for their attention.
Now the situation has reversed as a buyers‘ market has become a sellers‘ market. Analysis of chemical markets by ICIS reporters and analysts shows that in many European chemical markets, buyers are now increasingly concerned about security of supply. In some markets spot prices are heading towards record-breaking levels as producers do their best to force through price hikes to cover rocketing feedstock and energy costs as Q2 begins.
Domestic chemical producers are reluctant to ramp up depressed operating rates until they can be sure to boost margins which have been depressed by the abrupt run up in their costs.
For buyers, there are signs of panic buying as downstream industries scramble to ensure security of supply. Price is now less important than availability of product.
What role do feedstock shortages and energy prices play in the current market situation?
Across Europe, the Middle East and parts of Asia shortages of crude oil, naphtha and other raw materials are forcing chemical companies to cut production and issue force majeures. High oil prices have fed directly into spiking naphtha and other chemical building block prices. Producers have seen margins collapse and they are reluctant to increase production, even if the demand is there, until they can secure much higher selling prices. Some companies have tried to renegotiate previously agreed contracts prices, or have refused to honour them.
High gas prices are increasing the pressure on European producers which were already paying 3-4 time more for their energy than competing regions such as the US and Middle East.
Do you think the current price surge will have long-term effects on the global chemical industry? Why or why not?
Yes, it will. High crude oil, chemical and fertilizer prices will feed through to rising inflation and depress economic growth. The war could not have come at a worse time for the global economy, which has been suffering from low or stagnant growth in the aftermath of the pandemic and the ongoing cost of living crisis.
The battle against post-pandemic inflation, which had been won in many economies, now faces upward momentum again. Not just directly through higher energy prices, but through inflated food and industrial goods.
The Middle East war will slow global economic growth, with slower demand for chemicals making the existing oversupply situation even worse in the long term.
New analysis by ICIS suggests that around 30 million tonnes of ethylene capacity will have to close globally by 2030 to balance supply and demand to a healthy operating rate rather than the previous figure of 20 million tonnes.
