Oil Shock Hits Plastics in First Sign of Demand Destruction
(Bloomberg) -- Stratospheric oil prices are flowing through into the plastics industry with producers reducing activity as profit margins collapse, a first sign of the demand destruction that may spread to other sectors.
Several Asian operators of plants that make the petrochemicals used as the building blocks for everything from children’s toys to car interiors have cut processing rates to as low as 80%, said five traders at these companies. The facilities, known as crackers, typically run at or near full capacity.
The soaring price of crude and question marks over the supply of oil-derived naphtha -- a popular feedstock in Asia -- from Russia are challenging the economics of producing plastics in crackers in South Korea, Taiwan and Malaysia, said the traders who asked not to be named as the information isn’t public. The problems are an early indication of the difficulties Russia’s invasion of Ukraine may create for industries that rely on raw materials.
As much as 15% of Asia’s naphtha imports come from Russia and the Black Sea and Baltic regions, according to industry consultant FGE. Many petrochemical plants have paused purchases from Russia, and are hesitant to buy crude from anywhere at such high levels, given that their finished products won’t be ready for around six weeks or so. Expensive freight rates are adding to the problem and causing companies to cut activity now rather than risk massive losses.
“The situation is very foggy for crackers in Asia,” said Armaan Ashraf, a senior analyst at FGE. It’s a “big risk” to buy naphtha when crude is at $130 a barrel, he said, adding that profit margins are going to stay poor for at least a month.
Profit margins from products including ethylene and propylene -- which are used to make plastics -- were already weak and have shrunk further since Russia’s invasion of Ukraine.
The premium for prompt naphtha deliveries to Asia over contracts another month out is more than $30 a barrel, compared with less than $10 in early January. The so-called backwardation is another indicator of anxiety over the extremely tight supply situation.
Taiwan’s Formosa Petrochemical Corp. is running crackers at its Mailiao plant at 80% to 85%, three of the traders said. Lotte Chemical Titan Holding Bhd. has cut run rates at its facility in Malaysia to below 90% and plans to reduce them further if market conditions deteriorate, while Hanwha Total Petrochemical Co., Lotte Chemical Corp. and LG Chem Ltd. in South Korea have lowered processing by 10% to 20%, the traders said.
A Lotte Titan spokesperson didn’t answer several phone calls seeking comment, while the other companies didn’t immediately respond to emails.
The cost of producing ethylene from naphtha was $1,200 to $1,300 a ton in Asia last week, but it was fetching only around $1,200 in the market before shipping, according to IHS Markit, part of S&P Global. “The crackers aren’t making money,” said April Tan, an associate director at IHS.
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