INSIGHT: Easing in supply chains could signal further problems for Europe’s chems sector ahead

Morgan Condon

02-Dec-2022

LONDON (ICIS)–Easing supply chain disruption has given petrochemical producers in Europe some respite in the wake of recent crashing demand. But the smoother flow of product could lead to further destabilising of market fundamentals, rather than providing balance to the market.

As new orders in Europe have subsided, this has given room for producers to catch up with backlogs, smoothing out extended lead times, and allowing congested bottlenecks to dissipate.

While this has been some help in the short-term, the likelihood is that diminished appetite for materials could eventually disrupt logistics, as deliveries slow down to match need.

“What we see in comparison to the situation a couple of months ago [is that] supply disruptions have eased up, but is that really a good sign?” asked Dorothee Arns, Director General of the FECC, the trade body representing chemical distributors in Europe.

“On the one hand yes, but the cause is declining demand due to inflation, exploding energy prices. Costs of living are eating up peoples’ income, they don’t have as much to spend anymore, which means that there is a negative signal within it.”

DIRECT IMPACT ON CHEMICALS MARKETS
A change in trading behaviour appears unlikely to impact all chemicals markets equally, as much will depend on the size of the order.

Some feedback from the polyols and isocyanates markets indicates that there could be a problem with transportation of these materials, as there are not enough iso-tanks in Asia, although the issue is not yet widespread.

A shortage in iso-tanks would have a sweeping impact on liquids that need transporting. But this typically affects the market when buyers are unable to secure a larger volume cargo, and consequently opt for tanker space that can be quickly discharged into trucks in Europe.

As wider downstream demand has dropped, European manufacturers have run down stocks rather than secure materials at higher prices.

In turn, producers of some chemicals have capped output if they have been unable to shift material at price that covers expenses.

This has led to a dependency on imports for some products, leading to increased rates for transatlantic chemical tankers. Those seeking smaller volumes are recording higher increases than buyers for higher-volume cargoes to account for the shortfall in inventories.

For other products such as polyethylene terephthalate (PET), length in the market for Europe has been driven by the availability of competitively priced imports.

This glut of excess material could be exacerbated by buyers opting for bulk container shipments as freight rates from Asia decline, rather than smaller volumes on a shared break-bulk vessel.

WIDER IMPACT
Looking ahead to the coming year, the 15% increase in the toll for vessels coming from Asia via the Suez canal to Europe led to a suggestion that imports in the titanium dioxide (TiO2) market could give domestic producers an advantage on pricing.

Shippers will be further challenged by revisions to regulations from the International Marine Organization (IMO) which come into effect at the start of 2023, in a bid to cut greenhouse gas (GHG) emissions.

Logistics problems have spread beyond shipping, with the shortage of truck drivers in Europe still hampering the flow of materials.

Truck driver availability, particularly in the south of Europe remains challenging for the bisphenol A (BPA) market, and strike action in other regions could then result in a slowdown for shipping.

Beyond Europe, demand in China remains largely dormant, as lockdowns implemented to contain the spread of COVID-19 have muted economic output.

With the Lunar New Year holidays in January 2023, any pick-up in appetite may be delayed until after the festivities.

A return to normal market activities in line with seasonality is not a given, however, as sentiment will continue to be governed by China’s pandemic policies.

“Then there are structural issues which remain. The new normal is that China is still locking down and there is not any visible review of their strategy to deal with COVID-19 in sight. Someday this will change, and the question is, what will happen then?” said Arns.

As higher prices drive buyers to the side-lines distribution will slow to fall in step with demand.

While some breathing room has enabled the return of healthier trade flows in Germany, as well as in the wider eurozone, this is does not indicate a healthy balance of market fundamentals.

Beyond this, it could even lead to further bottlenecks if widespread demand returns suddenly, but persistent economic pressures indicate that the chemicals industry could stay weak for some time.

“After the pandemic there was a big catch-up effect: people wanted to have their previous lives back including spending money. I do not think that it will be the same early next year; because of inflation I would expect demand to stay low in the new year,” stated Arns.

Front page picture: Containers in the Port of Antwerp, Belgium; archive image
Source: Zuma/Shutterstock 

Insight by Morgan Condon

Infographic by Yashas Mudumbai

Additional reporting by Zubair Adam, Marta Fern, Heidi Finch, Jane Massingham, Caroline Murray, and Nel Weddle

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