Europe petchems producers aim to pass on higher costs as natgas pushes electricity prices

Author: Heidi Finch

2021/09/30

LONDON (ICIS)--European petrochemicals producers will aim to pass on their higher input costs to customers in coming months as high natural gas prices filter down to electricity bills.

Unlike in the fertilizers industry, where production curtailments have already been announced by several companies due to the high price of natural gas - a key feedstock for the sector - output cuts are not yet on petrochemicals companies’ plans, sources said.

The global jump in natural gas costs due to short supply and high demand will affect the petrochemicals industry via electricity prices, as Europe’s lack of raw materials makes the region highly dependent on imports of gas to produce a large portion of its electricity.

PRICES UP – EVEN MORE
Earlier in the year, petrochemicals prices posted highs as global supply chain woes pushed logistics costs through the roof, but a recovering economy made the price rises manageable for buyers, able to pass on high costs onto consumers.

However, a second spike in input cots within a year may be too much to take on by consumers, who could decide this time not to buy at all; that, in turn, could cause a reduction in activity in downstream sectors, ultimately slowing down the recovery.

The outlook within petrochemicals is mixed; some sources said that output cuts are not on the horizon if higher prices can be passed on in coming months.

"We are a huge energy consumer, so the spike in gas and electricity has impacted our cost base – that is very clear. This [higher electricity prices] is an additional element [and] it will also impact the supply side,” said a source in a large European caustic soda producer.

“It may not be economical to produce certain volumes. It comes down to supply/demand. We are following up very closely, whether it still makes sense to produce at this cost. There is a general reason to go for an increase, not only for caustic soda but also for PVC [polyvinyl chloride]. We are not applying a surcharge for energy.”

Sources mentioned some caustic soda producers could be aiming for at least three-digit price increases for contractual deals in coming months.

One European caustic soda buyer said it had not started discussions with its suppliers yet for the fourth quarter, adding: “It is quite early to start talking, but it is fair to say there is a reason for price increase – energy and gas prices are going crazy.”

This buyer mentioned the Europe-wide shortage in truck drivers as its biggest concern now, a situation which this week became a flashpoint in the UK as petrol stations ran empty due to heavy demand and a lack of deliveries.

“A driver was about to load to serve one of our sites [in the UK], the driver tested positive for COVID-19, and it took half day to get an alternative truck driver, so our production had to close down for a few hours,” said the source.

A trader in the Spanish caustic soda market said its negotiations with customers were ongoing and forecast that producers would be unlikely to cut output unless forced by customers reluctant to take on higher prices.

“They won’t cut production; they will increase the price. If customers don’t accept, they will cut production, they don’t want to take on the energy costs," said the trader.

Another source at a Spanish caustic soda producer said that output cuts in the sector were unlikely but conceded high electricity prices are putting a lot of pressure in the sector’s input costs.

“We have to analyse [potential higher prices] it with our customers. Of course, a price is not only set by the seller, but by both seller and buyer,” the source added.

Chlorine-derivative PVC is widely used in the petrochemicals-intensive construction industry, one sector which sources said is already delaying projects across the board, as the woes only add up to earlier supply chain woes and labour shortages.

However, one epoxy resins supplier said that the order pipeline from the construction industry was strong because some buyers are fearing even higher prices in the future, which was keeping demand unabated due to their willingness to stock up.

On the other hand, a buyers of epoxy resins and titanium dioxide (TiO2), widely used in the construction-linked paints and coatings sector, said many construction projects are delayed due to higher cost inflation.

 SLOWING RECOVERY
The eurozone economy, including its largest member, Germany, is posting booming demand across the board as consumers seek to spend the savings accumulated during the pandemic.

However, the supply chain woes were already putting a dent in the capacity of companies to meet that booming demand.

The latest spike in energy prices could only add to the woes – higher prices could be met with a retreat as consumers’ disposable income would not rise as fast as prices.

It seems certain, in any case, the recovery will be slower than expected just a few months ago.

Front page picture: A worker checks a natural gas pipeline in Ukraine, a key transit country for supplies to west Europe; archive image
Source: Sergey Dolzhenko/EPA/Shutterstock

Focus article by Heidi Finch and Jonathan Lopez