By John Richardson
GEOPOLITICS IS, I believe, just one aspect of a crisis facing the chemicals industry that is deeper and more complex than anything we have faced before.
Intensive crisis management to get us through the first-order effects is essential. I also see the need to start immediately on building new business models which will enable companies to take advantage of a very different economic, social and political environment that will emerge from this crisis.
Front mind right now in geopolitics is Ukraine-Russia and the gas-supply crisis facing Europe, the subject of some outstanding analysis from the ICIS energy and chemicals teams.
Russia holds the “whip hand” in natural gas
Before I review the ICIS analyse, it is important to consider some headline conclusions from the mainstream media.
The Economist, in this 14 July article, wrote: “As Mr Putin understands all too well, gas is a market in which Russia holds the whip hand.”
The magazine said that the Russian economy would collapse without oil exports that on average had been worth 10% of the country’s GDP during the previous five years.
This was why Russia had gone to great and mainly successful lengths to break the Western crude embargo, whereas Russia could live without gas exports that only accounted for 2% of its GDP, said The Economist.
Some goods news last week was that the Nordstream 1 pipeline, which supplies Russian gas to Germany via the Baltic Sea, came back on-stream following a maintenance shutdown.
There had been concerns that the maintenance would be extended, or even that that the pipeline would remain shut for the long-term.
But the Financial Times wrote in this 22 July article: “Russia resumed gas supplies through a critical pipeline to Europe, but German officials warned of further potential interruptions, accusing Moscow of using its energy exports to ‘blackmail’ Europe.”
The pipeline’s gas flows remain 60% below their normal levels leading to concerns that, combined with high air-conditioning demand because of the very hot summer, Europe will struggle to adequately replenish gas storage before the winter.
“Embattled European fertilizer and petrochemical producers may be the first in line to cut gas consumption as political pressure is mounting to save supplies ahead of a difficult winter,” wrote Aura Sabadus, ICIS Senior Gas Reporter, in this ICIS Insight article.
“As Russia, Europe’s largest gas supplier, has been limiting exports to less than a quarter of its deliveries two years ago and may stop them altogether amid its political stand-off with the EU, Brussels has now issued guidance to reduce demand by 15% between 1 August 2022 – 31 March across member states,” she added.
Policymakers had recommended voluntary reductions but said that they would become mandatory in case of a supply emergency jeopardising the bloc’s security, she added.
EU proposals for demand reductions, released on 20 July, indicate the industrial sector may be priority target for major reductions with three sectors – glass, ceramics and chemicals – consuming half of the sector’s total.
In Germany, according to another 14 July article from The Economist, industry accounted for 37% of Germany’s gas consumption, a third more than the EU average, not including the gas-fired electricity it drew from the grid. Until recently, Germany received over half its gas imports from Russia.
The risks for Europe’s chemicals industry
With a share of 15%, the chemicals industry is the largest European industrial consumer of natural gas.
But so far, “on the petrochemicals side, there have been no reports of shutdowns or production reductions, but producers are making detailed plans for rationing, particularly in Germany, where the chemicals and pharmaceuticals industry uses about 140 TWh per year, or about 15% of Germany’s gas consumption,” wrote Aura in the same ICIS Insight article.
This is through the gas-fired electricity needed to power chemicals plants and gas directly required to generate steam and power furnaces. Gas is also a feedstock to make chemicals such as methanol.
Fortunately, the very few ethane crackers in Europe are supplied either by ethane from the North Sea or via imports from the US.
And Europe’s naphtha crackers have more options to replace the Russian naphtha and oil that no longer flows to Europe. Moving oil and gas around the world is an awful lot easier than transporting natural gas.
But refineries and chemicals complexes cannot obviously run without electricity. Nor can they operate without gas to make steam and power furnaces etc.
Back to Germany and specifically the chemicals giant, BASF.
BASF’s Ludwigshafen site is the world’s largest integrated chemical complex owned by a single company. The site accounts for around 4% of total German natural gas demand.
BASF has told ICIS that it will have to shut down if gas supply collapses by more than half for a sustained period.
A BASF spokesperson said: “If supply were to fall significantly and permanently below 50%, we would have to shut down the production site while maintaining the necessary safety standards. The decisive factor here is how long a supply freeze from Russia would last in terms of natural gas and how quickly Germany can come up with alternative solutions.”
The company uses about 60% of the natural gas it purchases to generate energy and about 40% as a raw material to produce important basic chemicals.
Speaking on an ICIS Think Tank podcast, New Normal Consulting chairman Paul Hodges said it can take two to three months to restart a complex petrochemicals site.
If petrochemical sites are forced to close, this will affect availability of raw materials down important value chains such as automotives, construction and electronics. Disruption to industrial production would dampen economic activity, putting downward pressure on GDP growth.
If Russian were to stop all gas flows, Eurozone GD growth could fall by 3.4 percentage points with inflation by 2.7 percentage points, said UBS in analysis quoted by The Economist in its 16 July article.
Chemicals producers can substitute natural gas for other fuel stocks, such as coal, but this will only be possible on a small scale.
Chemicals plants typically have the flexibility to lower operating rates to 60% of design capacity, beyond which shutdowns are necessary.
Conclusions for global chemicals
The above chart, from the ICIS Supply & Demand Database, tells us that in terms of equivalent global demand for three of the major chemicals building blocks, we expect Europe to rank third in 2022.
Northeast Asia in first place includes China and Japan, South Korea and Taiwan. Equivalent demand is the consumption of benzene, ethylene and propylene into all the downstream derivatives.
If you want the actual numbers in millions of tonnes and you are not a subscriber, contact me and I can tell you how to subscribe to the database.
In percentages, we forecast that Europe will this year account for 15% of global equivalent benzene demand, 12% of ethylene equivalent demand and 13% of propylene equivalent demand.
With China in the middle of a severe economic downturn, chemicals and polymers exporters have been eyeing the crisis in Europe since the Russian invasion of Ukraine in late February.
The big exporters of polyethylene (PE) and polypropylene (PP) – located in the Middle East, South Korea, Thailand, Singapore and the US -. keep discussing whether power cuts will force Europe to import bigger volumes than had been expected.
Europe is a major importer of high-density PE (HDPE), linear-low density PE ((LLDPE) and polypropylene (PP,) but is a net exporter of low-density PE (LDPE).
The global PE and PP businesses face the added challenge of large additions of new capacity in China, South Korea, the US and Malaysia during 2022.
The other ethylene, propylene and benzene derivatives exporters are following events in Europe very closely, in the hope that stronger-than-expected European imports will compensate for weaker trade with China.
But we must factor in Europe’s demand destruction from rising inflation, mainly the result of high energy costs.
Most at risk are the monomer derivatives that go into durable goods applications such as autos, electronics, white good and housing – big-ticket spending that is likely to see a collapse.
But in a wealthy economy such as Europe, single-use finished-goods applications are less likely to be affected than durable goods end-use markets.
In other words, if major power cuts and gas shortages do take place, the biggest opportunity for exporters seems likely to be in the resins that go into single-use plastics.
Another important aspect to this unfolding crisis is the potential loss of revenues for European producers. As mentioned above, it can take two to three months to restart a complex petrochemicals site.
The chart below shows the top five European ethylene, propylene and benzene producers by percentage shares of total European capacities in 2022.
The ICIS Supply & Demand Database allows users to drill down to market shares of production by each company.
As I said at the beginning, intensive crisis management is essential for the chemicals industry to get through the first-order effects of the complex and, I am afraid, long-lasting crisis that we are confronting.
ICIS is here to support the chemicals industry in any way we can to help your businesses weather the immediate impact of events, as we also support building new business models essential for long-term prosperity.