The big issue for petrochemicals has become the loss of end-use demand in all the value chains. Initially, yes, ethane-based ethylene derivatives producers will see their margin advantages over their naphtha-based competitors widen. But we are in uncharted territory as inflation is at multi-decade highs, and could go higher if the Russia-Ukraine situation pushes crude well beyond US$ 100/bbl.
Polyethylene, of course, is heavily used in food packaging so perhaps its consumption will be a little more shielded than the petrochemicals and polymers that go into durable goods. But, as we said, this crisis is unprecedented.
We also have to consider:
- The extent to which petrochemicals production could be affected in Hungary, Slovakia, Czech Republic, Poland and the former East Germany by any Western sanctions on Russia’s Druzhba oil pipeline. The ICIS data forecast that for 2022, 2.79m tonnes of ethylene (11% of total European capacity) and 2.34m tonnes of propylene (12% of total European capacity) are reliant on refineries located along the Druzhba pipeline. While some alternative sources of crude oil could be sourced, it is unlikely normal levels of operations could be maintained.
- How European production might be affected by any further interruption in European gas supplies as Russia supplies 40% of Europe’s natural gas. Russia has already cut gas supplies to Europe via Ukraine by two-thirds since January.