We believe the petrochemical market has entered a materially tighter phase

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Supply disruption across key petrochemical chains

The conflict in the Middle East has disrupted supply across key petrochemical chains. Ethylene availability has come under pressure, with China and Saudi Arabia among the major producers exposed to current dislocation. A similar pattern is emerging in propylene, where China and Saudi Arabia are also major market participants.

Country impact: Saudi Arabia and China

Saudi Arabia cuts output — China faces shortfalls

Saudi Arabia
Saudi Arabia, under current conditions, has had to reduce feedstock production and refined product output.

China
China remains a major buyer of Middle Eastern naphtha, condensate and methanol, and is now facing supply shortfalls in all three. Chinese refiners have had to cut naphtha production after the government required companies to reallocate refining capacity in order to prioritise domestic fuel supply and contain retail gasoline and diesel prices. At the same time, domestic LPG prices in China had reached a 12 year high by early April.

Estimated losses if the blockade continues through April:

Around 13% of global ethylene capacity and 20% of global methanol capacity are currently unavailable because they are located in the conflict zone. If the blockade of the Strait of Hormuz remains in place through the end of April, the market could lose

Ethylene:

20 – 25 million tonnes
Paraxylene

10 – 11 million tonnes
Ethylene glycol

~8 million tonnes

From oversupply to acute shortage: price surge in March

From a pricing perspective, the petrochemical market moved in March from a prolonged oversupply environment into acute shortage. In Singapore, which we regard as the main trading hub for the Asia Pacific region, naphtha prices rose to $1,000 per tonne by the end of March from $780 per tonne at the start of the month. Ethylene and polyethylene prices also doubled. Higher freight costs, driven by more expensive bunker fuel, added further pressure.

Tight supply ahead: polyethylene, polypropylene and producer consolidation

Looking ahead, we expect polyethylene and polypropylene supply to remain tight, with the first-order effects likely to be felt in construction, packaging and automotive end markets. The industry will also have to adjust to naphtha prices at or above $1,000 per tonne. With cracking spreads below zero, many small and mid-sized producers in Asia are likely to shut down, while larger players should be in a position to consolidate market share.

Chinese MTO units, which are heavily reliant on Iranian methanol, will either have to secure alternative supply or reduce operating rates. That, in turn, is likely to place additional pressure on ethylene and polypropylene availability in China.

Chinese MTO units at risk

Alternative suppliers can only cover one third of Hormuz volumes

More broadly, China, India, South Korea and Japan are likely to increase purchases of ethane, LPG and naphtha from the United States, Canada, Australia, West Africa and Russia. Even so, the combined export capacity of these alternative suppliers appears to cover only around one third of the volumes that previously moved through the Strait of Hormuz.