Global chemical supply, demand threatened by Middle East escalation, says ICIS

Middle East

Military action leading to the 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, says ICIS Chemical Business deputy editor Will Beacham.

The US killing of General Qasem Soleimani, head of the Iranian Revolutionary Guards’ overseas forces, on January 3, threatens to further stoke up tensions in the Middle East.

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Iran retaliated on January 8 with missile strikes against US forces in Iraq.

Beacham indicates that 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 considerable proportion of chemicals are transported through the Strait.

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

This accounts for 38% of total global net exports among all the regions that are in net export positions.

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

“For chemical markets already in oversupply, such as polyolefins, isocyanates and MEG, any supply shock from the Middle East will have less of an 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.”

Beacham indicates that oil prices spiked 5% to more than $70/bl following the US attack and Iran’s response before dropping back slightly; and that 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.”

MARGINS UNDER THREAT

According to Richardson, ethylene and polyethylene variable cost margins for naphtha-based crackers in northeast Asia fell throughout 2019 and in December hit minus $90/t, 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.

That unusually, benzene spreads were also below $100/t 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 notes.

International eChem chairperson Paul Hodges is, meanwhile, 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 says.

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 any threat to the Strait of Hormuz will 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 CEs 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.

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