Implications for Global Chemicals – Asian Chemical Connections

By John Richardson

GEOPOLITICS IS, I believe, only one aspect of a crisis facing the chemical industry, which is deeper and more complex than anything we have faced before.

Intensive crisis management to get us out of first-order effects is essential. I also see the need to immediately begin building new business models that will allow companies to take advantage of a very different economic, social and political environment that will emerge from this crisis.

Ukraine-Russia and the gas supply crisis facing Europe, the subject of remarkable analysis by the energy and chemical teams of ICIS, are in the spotlight at the moment in geopolitics.

Russia holds natural gas ‘boost’

Before reviewing CIHI’s analysis, it is important to consider some of the key findings from the mainstream media.

The Economist, in this July 14 articlewrote: “As Mr. Putin understands only too well, gas is a market in which Russia holds the whip.”

The magazine said Russia’s economy would collapse without oil exports which averaged 10% of the country’s GDP over the previous five years.

This is why Russia has gone to great lengths, and above all successfully, to break the Western embargo on crude, when Russia could do without gas exports which represented only 2% of its GDP. , said The Economist.

Among the good news last week, the Nordstream 1 gas pipeline, which supplies Russian gas to Germany via the Baltic Sea, was returned to service after a shutdown for maintenance.

There were fears that maintenance would be extended, or even that the pipeline would remain closed for the long term.

But the FinancialTimes writes in this July 22 article: Russia has resumed gas supplies through a critical pipeline to Europe, but German officials have warned of potential further disruptions, accusing Moscow of using its energy exports to ‘blackmail’ Europe .”

Pipeline gas flows remain 60% below normal levels, raising concerns that, combined with high demand for air conditioning due to the very hot summer, Europe will struggle to adequately replenish gas storage. gas before winter.

“Struggling European fertilizer and petrochemical producers could be the first to cut gas usage as political pressure mounts to save supplies ahead of a tough winter,” wrote Aura Sabadus, ICIS Senior Gas Reporter. , in this ICIS Insight article.

“While Russia, Europe’s biggest gas supplier, limited exports to less than a quarter of its deliveries two years ago and could stop them altogether amid its political standoff with the EU, Brussels has now issued guidelines to reduce demand by 15% between August 1, 2022 and March 31 in all member states,” she added.

Policymakers recommended voluntary cuts but said they would become mandatory in the event of a supply emergency jeopardizing the security of the bloc, she added.

The EU’s demand reduction proposals, published on July 20, indicate that the industrial sector could be the priority target for major reductions, with three sectors – glass, ceramics and chemicals – consuming half of the sector’s total.

In Germany, according to another article of July 14 of The Economist, industry accounted for 37% of Germany’s gas consumption, a third more than the EU average, not including the gas-fired electricity it took from the grid. Until recently, Germany received more than half of its gas imports from Russia.

The risks for the European chemical industry

With a share of 15%, the chemical industry is Europe’s leading industrial consumer of natural gas.

But so far, “on the petrochemical side, there have been no reports of production stoppages or reductions, but producers are making detailed rationing plans, especially in Germany, where the chemical industry and pharmaceutical uses about 140 TWh per year, or about 15”. % of Germany’s gas consumption,” Aura wrote in the same ICIS Insight article.

This includes the gas-fired electricity needed to power chemical plants and the gas directly needed to generate steam and power furnaces. The gas is also a raw material for making chemicals such as methanol.

Fortunately, the very few ethane crackers in Europe are supplied either by North Sea ethane or by imports from the United States.

And European naphtha crackers have more options to replace Russian naphtha and oil that is no longer flowing to Europe. Transporting oil and gas around the world is much easier than transporting natural gas.

But refineries and chemical complexes obviously cannot operate without electricity. They also cannot operate without gas to make steam and electric ovens etc.

Back to Germany and more precisely to the chemical giant, BASF.

The BASF site in Ludwigshafen is the world’s largest integrated chemical complex owned by a single company. The site accounts for approximately 4% of Germany’s total natural gas demand.

BASF told ICIS it will have to shut down if the gas supply collapses by more than half for an extended period.

A BASF spokesperson said: “If supply were to drop significantly and permanently below 50%, we would have to close the production site while maintaining the necessary safety standards. The deciding factor here is how long a natural gas supply freeze will last for Russia and how quickly Germany can come up with alternative solutions.

The company uses approximately 60% of the natural gas it purchases to produce energy and approximately 40% as feedstock to produce important base chemicals.

Speaking on a ICIS Think Tank PodcastNew Normal Consulting president Paul Hodges said restarting a complex petrochemical site could take two to three months.

If petrochemical sites are forced to close, this will affect the availability of raw materials in important value chains such as automotive, construction and electronics. A disruption in industrial production would dampen economic activity, putting downward pressure on GDP growth.

If Russia were to stop all gas flows, eurozone GDP growth could fall by 3.4 percentage points with inflation of 2.7 percentage points, UBS said in analysis cited by The Economist in his July 16 article.

Chemical producers can substitute natural gas for other fuel stocks, such as coal, but this will only be possible on a small scale.

Chemical plants typically have the ability to reduce operating rates to 60% of rated capacity, beyond which shutdowns are required.

Conclusions for global chemicals

The graph above, taken from the ICIS supply and demand database, tells us that in terms of equivalent global demand for three of the major chemical constituents, we expect Europe to rank third in 2022.

Northeast Asia in first place includes China and Japan, South Korea and Taiwan. The equivalent demand is the consumption of benzene, ethylene and propylene in all downstream derivatives.

If you want the actual numbers in millions of tonnes and you’re not a subscriber, contact me and I’ll tell you how to subscribe to the database.

In percentage terms, we expect Europe to account for 15% of global benzene equivalent demand this year, 12% of ethylene equivalent demand and 13% of propylene equivalent demand.

With China in the midst of a severe economic downturn, chemical and polymer exporters have been monitoring the crisis in Europe since Russia’s invasion of Ukraine in late February.

Large exporters of polyethylene (PE) and polypropylene (PP) – located in the Middle East, South Korea, Thailand, Singapore and the United States -. continue to discuss whether the power cuts will force Europe to import larger volumes than expected.

Europe is a major importer of high density PE (HDPE), linear low density PE ((LLDPE) and polypropylene (PP), but is a net exporter of low density PE (LDPE).

Global PE and PP companies face the additional challenge of significant new capacity additions in China, South Korea, the United States and Malaysia in 2022.

Other exporters of ethylene, propylene and benzene derivatives are following developments in Europe very closely, in the hope that larger than expected European imports will offset weak trade with China.

But we have to take into account the destruction of demand in Europe due to rising inflation, mainly the result of high energy costs.

Monomer derivatives that go into hard-goods applications such as automobiles, electronics, appliances and housing are most at risk – major expenditures that are in danger of collapsing.

But in a wealthy economy like Europe, single-use finished product applications are less likely to be affected than end-use markets for durable goods.

In other words, if major power outages and gas shortages occur, the biggest opportunity for exporters appears to be in the resins that go into single-use plastics.

Another important aspect of this ongoing crisis is the potential loss of income for European producers. As mentioned above, restarting a complex petrochemical site can take two to three months.

The chart below shows the top five European producers of ethylene, propylene and benzene as a percentage of total European capacity in 2022.

The ICIS supply and demand database allows users to explore each company’s production market share.

As I said at the start, intensive crisis management is essential for the chemical industry to weather the first-order effects of the complex and, I fear, long-lasting crisis we face.

ICIS is here to support the chemical industry in any way we can to help your businesses cope with the immediate impact of events, as we also support the creation of new business models essential for long-term prosperity.

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