A surge in gasoline prices has caused a shortage of chemicals that are also used to produce goods like car parts and pharmaceutical products, placing further pressure on costs for manufacturing essential items.
This year’s rise in oil prices has already increased the costs for so-called petrochemical feedstocks, which are produced from a derivative of crude. But a strong appetite for the chemicals among makers of gasoline has intensified the competition for these key building block materials.
Benzene, derivatives of which are used to make rubber, nylon and pharmaceutical products, surged to a record-high of $1,900 per tonne in Rotterdam last month, before easing off to $1,780 at the start of July, according to ICIS, a commodity data firm. Other chemicals such as toluene and xylene, which are used in plastic packaging and textiles, have also spiked to the highest since records began in the 1980s in recent weeks.
Petrol prices are sitting near historic peaks despite crude oil trading well below the all-time high that it reached in 2008. For example, UK petrol and diesel prices have soared to new heights with unleaded hitting 191.4p in June, above last year’s average of 133p, according to the RAC.
Brent crude prices have slid from more than $120 a barrel to $100 a barrel in the last month, a fall that petrol prices are expected to follow with a lag, but refined products availability is likely to remain restricted.
Global supplies became extremely tight because of a shortage of refinery capacity in the US and Europe caused by closures during the height of the pandemic and uncertainty about Russia’s ability to get its diesel and other products to market following western sanctions.
Despite the recent fall in crude prices, petrochemical analysts say that sky-high petrol prices have incentivised refiners to use higher value chemical feedstocks on an unprecedented scale to make gasoline. “It’s like using cream instead of milk to blend into your coffee,” said Zubair Adam of ICIS.
That has added to the upward pressure on prices of petrochemical feedstocks that tend to follow oil’s price movements.
Passing on the increased input costs poses a challenge for petrochemical producers such as divisions of Royal Dutch Shell and TotalEnergies, Germany’s BASF and Covestro and Saudi Arabia’s Sabic when demand for some goods are falling as consumer spending comes under pressure from inflation.
Steve Jenkins, vice-president of chemicals consulting at Wood Mackenzie, said refineries and petrochemical producers prioritise their fuel businesses over production of chemical feedstocks. “A refiner is there to make fuel. What’s the difference of not getting fuel on the forecourt and the price of a plastic bottle going up a fraction?,” he said.
The challenge of having higher feedstock input costs comes on top of the extremely high price of natural gas in Europe, which has doubled in a month and is relied on to process oil into chemicals at huge complexes.
Sriharsha Pappu, global head of chemicals at HSBC, said that chemical producers, which use petrochemical feedstocks in their production processes, usually benefit from inflation, but were suffering from the rising costs and recent downturn in consumer confidence.
“The worst thing you can have is demand rolls over and supply is still an issue, so you have a margin squeeze,” he said.
Covestro said that “we are of course experiencing higher volatility and macroeconomic price increases” for oil derivatives such as benzene, toluene and propylene but added that “prices are currently below the highs seen in spring”.
It added that it largely passes on price increases to customers when demand for its chemicals are high, but it was difficult to assess the degree to which the increase in cost of end products made using its supplies are attributable to its own price hikes.
The pricing pressure is not being felt universally for all chemicals. Mike Boswell, chief executive of Plastribution, a UK distributor, acknowledged the squeeze on “aromatic” chemicals but said there was a glut of propylene, a byproduct of refining with many applications — a stark reversal of shortages during the pandemic when fuel demand slumped.
“It’s a tale of two halves,” he said. He predicted that petrochemical producers would reduce production to match demand, adding that “we’ve reached the peak and looking at a soft landing in terms of pricing”.
Hakan Bulgurlu, chief executive of Arçelik, a Turkish appliances manufacturer, shared optimism on cost pressures easing after a near 25 per cent increase in polymer prices year-on-year in the first half of 2022.
“Over the past six months, surges in energy and oil prices increased costs in the petrochemical industry. This brought on price increases in polymer and derivative products,” he said. “Under pressure from inflationary tides and recession forecasts, demand tightened recently, strengthening expectations for a downtrend in prices in the coming months.”
Tesco and Heinz recently settled a dispute over price increases after the British supermarket temporarily withdraw its staples.
But Jenkins said that more cracks will show in supply chains over cost pressures. He expects more pressure from high petrochemical costs for fast fashion companies such as Zara owner Inditex, Uniqlo and H&M and consumer goods groups because of the razor-thin margins of the supply base.
“There isn’t enough fat in the system margin-wise for these cost pressures to be absorbed,” he said. “The fact that you have public squabbles between brand owners show this pressure is real.”
Source: Economy - ft.com
