By John Richardson
WHEN THE MARKETS get tough, the tough have to go. It will not be easy to estimate what might be the higher-than-expected European import levels of petrochemicals during the rest of 2022.
But against the backdrop of a China that may even be in recession in the first half of the year, with its prospects for recovery in the second half of this year looking very fragile, the extra effort needed to estimate changes in European trade flows is very , very useful.
I will go further. Forecasting changes in European trade flows country by country and product by product with reasonable accuracy – then reacting ahead of the competition with a reallocation of volumes towards Europe – could be the difference between success or failure in 2022.
Let me give you an example – at European level only – of the additional revenue that could be generated by a single product by a major exporting country.
I will then touch on the areas I think you need to focus on in order to get a sufficiently accurate picture of Europe’s import needs in 2022.
What has of course raised the prospect of greater European import demand are the shortages of energy and petrochemical raw materials resulting from the conflict between Ukraine and Russia.
Saudi Arabia, LLDPE and the $116 Million Opportunity
The table above is going to be wrong because it involves a lot of assumptions. But in terms of the magnitude of the potential opportunity – in, as I said. one product and one country – that seems fair to me.
Let me explain how the chart was calculated.
Saudi Arabia’s 2021 linear low-density polyethylene (LLDPE) sales revenue assumptions for both regions are based on imports multiplied by ICIS C4 LLDPE average film prices in 2021 in North West Saudi Arabia. Europe (NWE) and China.
January-February data from China’s Customs Department suggests that China’s total LLDPE imports for this year could fall to 4.9 million tonnes from 5.6 million tonnes in 2021.
If you add our estimate of local production to net imports, you get a demand growth of 2% and a local operating rate of 87%. But China’s growth could turn negative this year as it runs its factories a little harder once the logistical issues that caused steep rate cuts pass.
Consider a demand growth of minus 2% with operating rates of 89%. That would leave this year’s imports at 4.1 million tonnes when an export estimate, based on January to February data, is also included.
Local capacity in 2202 should increase by 11%, guaranteeing a further increase in self-sufficiency. Capacity increased by 20% last year.
Assuming that Saudi Arabia earns the same percentage of this smallest import total as its percentage share in 2021 (18% – the second highest individual percentage), China would import 732,587 tonnes from Saudi Arabia in 2022, compared to 992,227 tons in 2021.
Multiply 732,587 tons by the average Chinese C4 LLDPE film price in January-March this year to get an estimate of Saudi China’s revenue in 2022.
Saudi Arabia accounted for 12% of total European imports of 5.2 million tons in 2021. Assume that European imports in 2022 increase by 30% compared to last year to reach a total of 6.7 million tons .
Let’s say then that Saudi Arabia repeats its 2021 share of Europe’s total imports – 12%. Europe would import 834,878 tons from Saudi Arabia in 2022 against 642,214 tons last year.
Multiply that higher ton total by the average NWE C4 film price in January-March 2022 and you get an estimate of Saudi Arabia’s revenue in Europe this year.
A sharp increase in European revenues would more than offset a sharp decline in sales returns from China, resulting in a net gain in 2021 for Saudi Arabia over last year of $116 million. .
But that assumes Saudi Arabia only gains the same market share in Europe in 2022 as it did last year. With a good enough forecast for European imports, Saudi Arabia could push for a bigger market share.
One of the great temptations of Europe versus China is much higher European prices on tighter supply and stronger demand. This has been the case since the first quarter of last year.
The variables to take into account to assess European imports
I know I suggested last week that weak European petrochemical demand could outweigh losses in energy and petrochemical feedstocks, leading to little or no increase in imports.
It remains a scenario. But if someone suggests to you that he has a clear view of European demand, I will disregard his opinion.
We live in such a complex consumer environment – which has been the case since the start of the pandemic – that no existing demand forecasting model works.
As I suggested last week, in the absence of such a model, task your sales teams with gathering as much anecdotal evidence as possible from your customers and your customers’ customers.
Perhaps demand for single-use plastics will be more robust than I assumed in my downside scenario last week, even as demand for discretionary goods declines due to higher inflation and further market disruptions. the supply chain.
Meanwhile, European production vulnerabilities center on the fact that the region historically sources about 50% of its naphtha from Russia, about a third of its oil and about 40% of its natural gas.
Dependence on Russian natural gas is higher in some countries – for example, around 55% in Germany.
Europe is reducing its dependence on Russian energy due to the Ukraine-Russia conflict.
Our ICIS pricing team reports that most European buyers are already avoiding buying Russian naphtha – and from May 15 almost all contract and cash purchases of Russian equipment will be stopped.
The availability of sufficient supplies of naphtha from alternative sources (the Middle East and the United States are the other major exporters) depends in part on petrochemical production levels in Asia.
Margins for crackers and polyolefins in North East Asia (including China) and South East Asia have been negative for several months. Margins have hit record lows recently due to soaring raw material costs and weak demand. This has led to deep operating cuts, especially in China.
The rate cuts could result in the export of spare barrels that would otherwise have been exported to Asia (Asia is a major importer of naphtha) to Europe.
But we must also take into account the factors that shape the markets for petroleum products as we try to assess how much non-Russian naphtha will be available for European petrochemicals.
China has reduced its gasoline and diesel export quotas for 2022 to maintain a sufficiently supplied local market. This tightened Asian markets for petroleum products and would have led to more naphtha blended into gasoline.
As for the capacity of European refiners to supply more naphtha to local petrochemical players, this will again depend on the values of incorporation of naphtha in gasoline.
The mixture of naphtha in gasoline increased in the first quarter of this year as coronavirus restrictions were lifted and people drove more.
Mixing has since dropped, but CIHI expects mixing to resume from mid-May/early June barring unforeseen events. This is when the next European driving season is due to take place as Europeans take their holidays.
As always, however, we must not overlook the role of liquefied petroleum gas (LPG) in relation to naphtha prices. The usual drop in demand for LPG for heating in spring and summer has increased the competitiveness of LPG as a petrochemical feedstock compared to naphtha.
I have not yet analyzed the impact on European petrochemical production of the reduction in Russian oil purchases.
On natural gas, the EU has set itself the target of cutting supplies from Russia by two-thirds over the next 12 months.
But Tom Marzec-Manser, head of gas analysis at ICIS, believes – as he explains in this ICIS podcast – that power cuts in Europe are unlikely due to cuts in Russian gas supplies. .
Power outages could of course shut down refineries and petrochemical plants.
Soaring electricity and naphtha costs are putting pressure on the margins of European crackers. Reductions in cracker exploitation rates could also create room for more imports. The ICIS margin chart below shows how European cracker margins briefly dipped into negative territory in early March before recovering strongly.
Conclusion: every market anecdote will help you
Another piece of the puzzle is the lack of Russian imports of PE and polypropylene (PP) into Europe. While Russian polyolefin surpluses play a small role in the global picture, they are more significant for some countries in Europe.
Our ICIS supply and demand database will show you country-by-country European dependence on Russian resins in 2021.
As for the missing naphtha piece of the puzzle, it’s extremely, extremely complicated. it may even be impossible to accurately predict how much additional naphtha from non-Russian sources will be available for Europe, but we have to try.
What helps us better understand the supply of naphtha is this video from Ajay Parmar, ICIS Oil and Naphtha Analyst.
Each market anecdote on the situation of petrochemical raw materials in Europe from our team of ICIS writers will also help you get closer to an integrated vision of the future.
Like I said, it’s hard to get started, because consider: China is normally the largest import market for polyolefins in the world with Europe in second place, but maybe, just maybe, these positions will be reversed in 2022.