Europe chemical prices to rise as Russia-Ukraine war pushes energy costs higher

LONDON (ICIS)–European chemicals prices have been settling at record highs this week as the war in Ukraine intensified and the trend could be set to continue.

The prospect of ever-increasing energy costs has weighed heavily on Europe’s chemicals industry.

One aromatics trader said: “The sky’s the limit if things get worse” as supply across the value chain remains in jeopardy.

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RECORD HIGH PRICES
Earlier crude surpassed recent highs, with Brent futures topping out over $113/bbl, a high since June 2014, on the back of concerns about supply.

This has led to European naphtha prices reaching new record levels, with the biggest one day rise since September 2019, reflecting dynamics on the Asian chemicals market earlier on Wednesday.

Cracker margins started to feel the squeeze in December due to higher energy costs, which led to olefins producers capping output, but producers have come under further pressure following Russia’s invasion of Ukraine.

This drove ethylene and propylene March contracts settlements to also hit new highs as a way to recoup margins from persistent demand for contractual volumes, but prices in Europe remain high compared to other regions.

Aromatics contract prices have also been driven by cost pressures.

While the styrene March contract price showed less volatility, and only climbed to the level met in May 2021, this was driven by higher benzene and crude prices.

Already price increases have started cascading down the value chain, with ethylene oxide (EO), acetone and acrylonitrile (ACN) among products already mirroring the upstream increases in recent contract settlements.

OUTLOOK
With no end to the conflict in sight, geopolitical volatility and potential impacts of sanctions on Russian oil and naphtha are keeping pressure on chemical pricing.

Discussions for polyolefins volumes are at an increase in line with the monomer movement, with some grades also factoring in a premium above the March contract level.

As planned cracker maintenance shutdowns are continuing in Europe, some sources indicated that this may be extended in the face of upstream pressures.

Russian naphtha supplies represent around half of naphtha consumed in Europe; further sanctions would further drain supply and potentially cause prices to continue escalating.

Spot demand for propylene had previously been tepid, but enquiries have taken an uptick as players in central and Eastern Europe need to supplement volumes.

Previously, material would have been supplied by the Kalush cracker in Ukraine – which is currently closed due to the imposition of martial law in the country – and Russian exports, hampered by logistics constraints, as well as buy-side hesitancy in case sanctions are imposed.

Propylene output from some refineries fed by oil from the Druzhba pipeline could also be at risk.

Even if sanctions are not directly applied, supply could also be challenged, with one styrene trader raising concerns about rail-tank cars from Russia passing through Finland.

While the flurry of benzene trading that took place in the immediate aftermath of the invasion last week dimmed after the March contract settled, the Ukraine invasion and potential for further disruption remain in focus.

“That is a big climb, though it might just start here,” said one styrene trader, referring to recent gains in the styrene contract.

“I am holding my breath hoping someone will pour water on the fire, as it seems all are adamant to pour oil on the fire.”

Focus article by Morgan Condon

Additional reporting by Fergus Jensen, Shruti Salwan and Nel Weddle