INSIGHT: Global energy shortage pushes chem-price normalisation to 2022

Author: Joseph Chang

2021/09/28

NEW YORK (ICIS)--It is not a normal year. The growing global energy shortage, which could quickly become a crisis by winter, threatens to spike chemicals and polymers prices or, at the very least, keep them elevated through year end and into early 2022.

Wave after wave of global supply disruptions, from rolling COVID-19 restrictions from the Delta variant, the US deep freeze in February and Hurricane Ida in August, and container shortages and logistics constraints causing extended lead times, has led to shortages in basic commodities all the way down the chain to semiconductors and finished goods like appliances.

Throw in the emerging global shortage in energy – from oil, to natural gas, to coal – and the subsequent surge in prices, and everything is now completely ‘out of whack’.

Brent crude oil topped $80/bbl on Tuesday for the first time in almost three years, while US natural gas prices have doubled year-to-date to over $5/MMBtu.

GLOBAL NATURAL GAS SHORTAGE
The front-month ICIS Dutch TTF (Title Transfer Facility) benchmark for global natural gas prices surged to a record $27.43/MMBtu at the close on Tuesday after a mid-day high of over $29, from just over $7/MMBtu at the start of the year.

Source: LNG Edge

The mid-day rise came as Russian gas flows had dropped by more than half into Germany’s Mallnow compressor station on the Yamal-Europe pipeline. Europe has seen reduced gas flows from Russia as the recently completed Nord Stream 2 pipeline awaits certification.

Europe and Asia are increasingly drawing on US natural gas in the form of liquefied natural gas (LNG). US LNG exports account for around 10% of natural gas production, while overall gas exports including via pipeline are nearly 20%.

“The US is doing all it can to help cool European and Asian prices. LNG exports are running full throttle, or as full throttle as unplanned outages will allow,” said Barin Wise, vice president - feedstocks and fuels at Chemical Data (CDI), part of ICIS.

“What is transpiring in Europe and Asia does not change the US balance. Inventories are below the five-year average by about 230bcf [bn cubic feet], which is noteworthy, but not alarming,” he added.

The market is concerned about the severity of the coming winter, said Wise.

Exacerbating any chemicals and polymers tightness will be the scramble among buyers to stock up further – the natural response to expectations or even fears of higher crude oil and natural gas prices heading into the winter.

Thus, prospects for lower chemicals and polymers prices amid a return to normal seasonal patterns of weaker demand in Q4 appear to be off the table.

SHORTAGES IN THE CONSUMER REALM
The overall shortage theme is spilling over into the consumer realm. In the UK, there has been panic buying of groceries and fuel amid warnings of shortages caused by another key shortage – that of labour, including truck drivers. The UK is preparing the army to deliver fuel and planning to grant temporary work visas to foreign truck drivers.

In the US, mega retailer Costco recently brought back purchase limits on toilet paper, bottled water and cleaning supplies amid supply chain challenges, including truck driver shortages. Costco, along with other retailing giants Wal-Mart and Home Depot, have taken to chartering their own containerships to ensure enough supply.

Another surge in consumer buying of essentials spurred by a fear that supplies could run out would put further strain on already stretched supply chains.

The Port of Los Angeles, the largest port in the US, is facing an unprecedented logjam. Even as dozens of containerships gather offshore, the port has yet to extend to 24-hour operations because of a shortage of trucking capacity to move the containers inland.

What the global supply chain desperately needs is for US consumer buying to slow down. The overall US economic growth outlook is being revised downward, but so far, retail sales have continued strong.

ETHYLENE, HDPE MARGIN ANALYSIS
Despite relatively elevated chemicals prices, margins are getting squeezed. The US remains in the most cost competitive position versus Europe and Asia, largely because of its use of ethane feedstock from local natural gas, which is still much cheaper than crude oil.

US versus Europe ethylene margins

Source: ICIS Margin Analytics

US spot ethylene margins from ethane feedstock are under $640/tonne as of 24 September, down from a mid-July peak of over $1,000 tonne. Northwest Europe ethylene margins from naphtha feedstock have fallen to below $500/tonne. Meanwhile, Northeast Asia ethylene margins from naphtha are much lower, at around $150/tonne, according to ICIS Margin Analytics.

US versus Asia HDPE margins

Source: ICIS Margin Analytics

For polyethylene (PE), the largest ethylene derivative, US spot margins for high-density PE (HDPE) are still holding relatively steady at well over $1,400/tonne. This compares to steadily declining Northwest Europe margins at around $1,000 tonne and Northeast Asia margins at essentially zero.

The impact of the surge in natural gas prices on US chemicals margins is being blunted by the simultaneous rise in crude oil prices, which is generally keeping global chemicals prices aloft. The crude-oil-to-natural-gas ratio, currently at about 16x, is worth watching.

As a rule of thumb, a ratio of 7x and higher points to the US retaining its global cost advantage in chemicals production, according to Kevin Swift, former chief economist at the American Chemistry Council (ACC).

Additional reporting by Ruth Liao

Insight article by Joseph Chang

Thumbnail image shows oil pumpjacks. Image by Shutterstock