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March 31, 2022Petrochemicals and Polymers: Quarter One Performance
Petrochemical markets grappled intense cost pressure in the opening months of 2022 as oil prices approached record highs. World oil markets tightened abruptly as the deteriorating political climate in Central and Eastern Europe sparked widespread fears of supply disruption from Russia, the world’s leading exporter. Demand remained resilient and a widening risk premium propelled oil prices to a 13 year high approaching US$130 per barrel in early March, leaping 65 percent from the start of January. Turbulent energy markets increased volatility in the relative competitiveness of oil and gas prices, briefly restoring a wide cost advantage to propane as petrochemical feedstock.
Demand for petrochemicals showed signs of easing in many sectors, with a year of intense cost escalation challenging affordability downstream. Confidence in the global economic climate deteriorated with deepening inflationary pressure a particular concern. Global supply chains of downstream manufacturing industries faced further bottlenecks as stringent sanctions on Russia compounded disruption stemming from the COVID-19 pandemic. Production rates of leading automotive manufacturers were turned down as lean automotive supply chains faced a continued shortage of critical components and raw materials. Pressure on volumes delayed adsorption of extensive capacity expansion headed by China through 2021.
Asia
Asian petrochemical markets opened 2022 in a lengthy position after extensive capacity expansion through the second half of 2021 burdened markets with surplus supply. Demand remained subdued in the un up to the Lunar New Year holidays, with return of some COVID-19 restrictions compounding deepening cost pressure on consumers. Turbulent energy markets following the deteriorating conflict in Ukraine steepened the pace of cost escalation, with naphtha most exposed to the latest upturn in oil prices. Prices of many petrochemicals detached from continued cost pressures, with average prices through January and February little changed from quarter four. Profitability of naphtha crackers tumbled to historic lows, with margins in China dropping below variable cost breakeven as weak co-product values compounded intense escalation of naphtha feedstock costs.
Western Europe
European petrochemical markets weakened through the opening months of 2022, with supply lengthening as widespread disruption to production opening the year diminished. Demand eased as the deteriorating political climate in Eastern Europe compounded mounting concerns around inflationary pressures becoming engrained in regional economies. The deepening conflict in Ukraine led to further cost escalation as turbulent energy values passed into petrochemical feedstock costs. Naphtha prices leapt to a ten year high above US$1 000 per ton in early March after crude oil prices escalated more than 50 percent from the start of the year. Profitability dropped for a third consecutive quarter, depressing average margins to 50 percent of those achieved at the peak in the second quarter of 2021.
Demand for petrochemicals moderated as affordability concerns mounted with prices posting consecutive record highs in the opening months of 2022. The deepening conflict in Ukraine deteriorated confidence in the economic climate, compounding pressure on Euro-Zone GDP growth which had previously slowed to less than 0.3 percent in the closing quarter of 2021. Global supply chains of downstream manufacturing industries faced further bottlenecks as stringent sanctions on Russia compounded disruption stemming from the COVID-19 pandemic. New car registrations in January fell to a ten year low. A weakening Euro failed to revive export opportunities as much lower prices offered in lengthy Asian markets tested competitiveness
Petrochemical markets in Western Europe opened 2022 in a relatively tight position, with widespread disruption to production at crackers and refineries constraining availability of key feedstocks to intermediate and derivative units. Propylene supply faced particular shortage, with more than ten percent of domestic capacity idled in January. The spring maintenance season extended supply side pressures into March. Frequent import cargoes arriving from Asia, the Middle East and the United States alongside more reliable domestic production eased supply side pressures, as mounting cost pressure further impeded domestic demand.
United States
The petrochemical market in the United States was marked by good demand and tight supply in the first quarter. Demand was steady to strong during the quarter. It was tempered somewhat by typical seasonal slowdowns but was bolstered for applications such as packaging and construction. However, consumption for many petrochemicals was hindered by the ongoing semiconductor shortage, which limited production in the automotive and appliance sectors. Export demand was strong for many petrochemicals but was limited by logistical issues. Supply was tight for many petrochemicals. This was a combination of lingering outages for feedstocks and derivatives from the end of 2021 and a heavy turnaround season in the first quarter. Many supply issues were resolved as the quarter progressed.
Although some petrochemicals experienced increased margins, the majority saw margins decrease for the quarter. The NexantECA petrochemical and polymer profitability index declined by 15 percent from the fourth quarter to average 339 for January and February (1Q1984=100). However, profitability remained well above historical averages, where it has been since first quarter 2021 when the previous peak of 318 (set in fourth quarter 2014) was eclipsed.
Middle East
Cost advantage of Middle East gas continued to widen as crude oil prices escalated and feedstock costs in global markets faced pressure from escalating energy values with Russian supplies less favoured. Netbacks earned from sales in export markets were heavily capped as demand showed signs of buckling under intense cost pressure, diverging from recent extensive capacity expansion. Weakening export markets directly countered the cost benefit of domestic production built moving to a higher oil price environment, maintaining steady profitability of export business. Margins remain close to the average achieved in 2018 despite the much higher price point for crude oil.
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Quarterly Business Analysis: Global - Petrochemicals, Polymers and C1 Chemicals - Q1 2022
Quarterly Business Analysis: Middle East - Q1
The Quarterly Business Analysis provides key insight into production economics for a broad range of commodity petrochemicals, polymers and C1 chemicals. The analysis presents a review of costs, prices and margins for typical production assets, providing a valuable view of regional and value chain competitiveness and is is available for each key price setting region - Asia Pacific, Middle East, Western Europe and the United States. A quarterly report provides insightful commentary to illustrate current trends, related to recent market developments. The accompanying database is updated monthly.
About Us - NexantECA, the Energy and Chemicals Advisory company is the leading advisor to the energy, refining, and chemical industries. Our clientele ranges from major oil and chemical companies, governments, investors, and financial institutions to regulators, development agencies, and law firms. Using a combination of business and technical expertise, with deep and broad understanding of markets, technologies and economics, NexantECA provides solutions that our clients have relied upon for over 50 years.
