By John Richardson
SUPPLY CHAIN EFFICIENCY was something we took for granted. They buzzed in the background, making petrochemicals one of many globalized industries where products and services crossed borders almost seamlessly. We didn’t have to think about supply chains because they worked so well.
But with the wonderful benefit of hindsight, tensions were building long before the pandemic and the Ukraine-Russia conflict.
The geopolitical relationship between the United States and China has become a threat due to Mike Pence’s landmark speech in 2018. The then US Vice President’s speech highlighted the shift in US policy towards dealing with China as a geopolitical competitor rather than a partner. There was and still is bipartisan support for this new approach.
Other constraints include a shortage of American truck drivers which first appeared in 2018 and the precision programmed railway in the United States, which was first developed in 1993. This reduced spare capacity on US railroads. The tight supply of railcars is one reason that US polyethylene (PE) exports may not be as strong this year as expected.
The container shipping industry has undergone a major consolidation after years of heavy losses. This has left us very vulnerable to disruptions in the delicate balance of having enough containers in the right places at the right times, and containers coming in and out of all major ports on time.
As the rest of this article is primarily about Europe, over-reliance on Russia for oil, naphtha and natural gas was another problem that had been growing for many years – in hindsight.
Due to disrupted supply chains, with no immediate relief in sight, we are in the realm of petrochemical demand destruction, as I will now discuss using European polypropylene (PP) as an example.
Nice netbacks if you can get them
In the old normal, when international and domestic logistics worked very well, the chart above would have been very actionable on its own.
Soaring North West Europe (NWE) injection grade PP price premiums over CFR China injection grade PP prices in February 2021 would have driven major exporters – the Middle East , South Korea, Singapore, Thailand and India, etc. – easily transfer more volumes to Europe . This would have closed the window very quickly, bringing NWE spread premia back to historic levels.
But that hasn’t happened partly because of the tightness of the container market – and also because of slowing Chinese growth and plenty of new capacity in China and South Korea.
European PP imports in 2021 are up 9% year-on-year as things get tough. Overseas producers who managed difficult supply chains were able to offset China’s weaker growth – and Europe remains a key destination this year.
But the rise in PP imports in 2021 must be seen in the context of a 5% rebound in growth following the 6% contraction in pandemic-related consumption in 2020 compared to 2019. Import growth , in this context, seems quite modest to me.
The Ukraine-Russia conflict left thousands of truckers stranded. Semiconductors were already in short supply before the conflict due to the surge in demand resulting from the pandemic. The supply has since tightened.
“The Ukrainian companies, Ingas and Cryoin, account for about half of the world’s neon production, which is essential for lasers used in chip manufacturing. Ingas, based in the besieged city of Mariupol, and Cryoin, based in the port city of Odessa, have ceased operations due to the conflict,” wrote the IPS Review in this article from the end of April.
Ukraine also has a thriving auto parts industry, including the crucial production of wire harnesses.
“New vehicle sales in Europe fell for the 10th consecutive month [in April) as the industry remains mired in supply-chain crises that are stoking record inflation and threatening to put off car buyers,” said Automotive News Europe in this 18 May article.
New-vehicle registrations in the EU, Britain and the European Free Trade Association fell 20% year-on-year in April, the steepest decline this year, according to the European Automobile Manufacturers’ Association.
Rail freight between Europe and Asia has been disrupted by the conflict. Three weeks ago, BMW and Audi suspended auto shipments by rail to China and switched to alternative routes.
“Europe’s high-cost position relative to the rest of the world has already been damaging for some export derivatives [of propylene] for quite some time and the production of other derivatives is limited by material shortages caused by logistical problems or the Ukrainian conflict,” wrote Nel Weddle, Olefins editor for ICIS Pricing in Europe in her latest report. price assessment.
Specifically in European PP, our pricing editors Vicky Ellis, Ben Lake, Linda Naylor and Samantha Wright, wrote in their latest pricing report that the automotive industry remains a “big hole” in demand with consumption of durable goods generally weak.
Even packaging demand has been reported by market players to be in decline, which confirms my anecdote from a supermarket manager in the Midlands region of the UK.
He previously reported weak sales of a “two-for-one offer” for an offer “of chocolate biscuits made by the brand owner. The cheaper unit packs of supermarket own brand, or white label biscuits , were selling better – the opposite of at the height of the pandemic when confectionery sales volumes exploded.
While demand for single-use PP packaging is negatively affected by record inflation – primarily the result of rising energy costs due to Europe’s dependence on Russia – the European activity of the PP could be in great difficulty.
Around 30% of global PP demand would be represented by flexible and rigid packaging applications, including 10% in the automotive sector and 10% in household goods.
There may be other factors behind the latest European PP import data other than simple demand. But note that year-on-year in the first quarter of 2022, European imports of PP fell by 12% to 2.2 million tonnes.
Supply chain disruptions set to continue
Pat Gelsinger, CEO of Intel, Told CNBC April 29 that he expected the global semiconductor shortage to last until 2024.
“The European Union has unveiled a 210 billion euro ($221 billion) plan to wean itself off Russian oil and gas,” reported CNN May 18.
“Presenting its ‘REPowerEU’ plan on Wednesday, the European Commission said it would try to cut Russian gas consumption across the bloc by 66% by the end of this year – and break its dependence completely before 2027 – by saving energy, finding renewable alternatives and accelerating the transition to renewable energy”, CNN added.
In other words, disruptions in European energy supply, accompanied by high costs, could last for several more years.
A quick resolution to the Ukraine-Russia conflict seems unlikely. Even when the conflict is finally settled, deep divisions between Russia and Europe could persist. A return to the old geopolitical status quo seems unlikely.
Focusing only on 2022, our base case for European PP demand in 2022 implies a growth of 5% compared to 2021. See the graph below which also details consumption since 2019.
If, for the sake of argument, demand in 2020 were to decline by 6% – as in 2020 compared to 2019 – this year’s consumption would be 1.1 million tonnes lower than our base case.
As always, this is not a suitable alternative scenario, but it provides an estimate of the magnitude of the risks in the world’s second largest PP market, behind China.
“Supply chain challenges resulting from the COVID-19 pandemic and Russia’s invasion of Ukraine could lead to a potential cumulative loss of €920 billion in gross domestic product (GDP) in the euro area by 2023″, wrote Accenture in a report released yesterday, at the World Economic Forum in Davos, Switzerland.
Supply chain disruptions caused by the pandemic cost the eurozone €112.7 billion in lost GDP in 2021, the report continues.
“Before the war, lack of material supply, logistics breakdowns and inflationary pressures were already undermining the economic rebound in Europe, with resurgent demand and overwhelming preemptive hoarding of supply chains,” Accenture said.
Russia’s invasion of Ukraine has worsened the situation, with a protracted war potentially costing further GDP loss of up to €318 billion in 2022 and €602 billion in 2023, with inflation reaching 7.8 % in 2022 before declining in 2023, the management consultancy said. .
Conclusion: Making supply chains more local and sustainable
The chances of the world returning to the old, fully globalized supply chains seem slim to me. Europe and all other regions must therefore focus on localization. We are already seeing this through, for example, the construction of new semiconductor capacities in the West.
In the case of Europe’s petrochemical industry, the answer is environmental sustainability as public and legislative pressure to reduce carbon emissions and recycle plastic increases. Greater environmental sustainability could translate into greater economic sustainability through less dependence on imports.
The movement of hydrocarbons across borders carries great geopolitical risk, as we have discovered since the end of February. Plastic recycling can be a national or regional industry due to the negative environmental impact of moving plastic waste over long distances.
If chemical recycling can be significantly scaled up, the processes could consume a lot of local European plastic waste, displacing imports of resins. Pyrolysis oil from chemical recycling plants could be turned in large volumes into quality feedstock for European naphtha crackers.
It should be pointed out, however, that the production of high-quality recycled plastic granules made of polyethylene terephthalate (PET) is increasingly crossing borders.
The short and medium term challenges for European petrochemicals are significant, I fear, as we are going through a very difficult period of adjustment. But in the long term, the future looks bright for producers capable of reinventing their business models.