Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Hello and welcome to another episode of the ad Thoughts podcast.
Speaker 3: I'm Tracy Alloway and I'm Joe Wisenthal.
Speaker 2: Joe, I have a prop for today, prop episode, a
Speaker 2: visual learning aid for a podcast. I'm going to hold
Speaker 2: this up.
Speaker 3: Yeah, what is this? It looks like a magenta marker.
Speaker 2: Magenta.
Speaker 3: Yeah, it's pink.
Speaker 2: It's hot pink's it's like purplish pink. Really, Okay, color
Speaker 2: is beside the point. It is indeed a highlighter. But
Speaker 2: more importantly, it is a result of a complex petrochemicals
Speaker 2: supply chain.
Speaker 3: You're right, it Isgenda is more purplish. I don't know.
Speaker 3: I always thought it's a little bit more pinkish. But yes,
Speaker 3: you're correct, you're you're correct, You're totally correct.
Speaker 2: I didn't intend your major takeaway from this conversation to
Speaker 2: the different maga.
Speaker 3: Okay, but yes, you're right. And without advanced chemicals of
Speaker 3: all sorts and oil and all that, you would never
Speaker 3: have the plastic shell of the marker, and maybe even
Speaker 3: some aspects of what gives it color when you draw
Speaker 3: on something.
Speaker 2: All right, So what is this plastic casing actually made
Speaker 2: of this is a.
Speaker 3: Pop quiz that I definitely have no idea. Okay.
Speaker 2: It starts from.
Speaker 3: Yeah, crude oil, yeah that okay.
Speaker 2: Yeah, so crude oil distilled into.
Speaker 3: Keep going naphtha, naphtha, right, naphtha.
Speaker 2: And then naphtha is this is a hint cracked into
Speaker 2: ethylene or propylene. Yeah, we've actually done yeah, okay, and
Speaker 2: then it gets polymerized, yeah, into polyethylene, right, and then
Speaker 2: it gets chopped up into tiny little plastic pellets, which
Speaker 2: are I know, you know this one. What are they
Speaker 2: called the little plastic pellet? One of my favorite words.
Speaker 3: Go on, nerdles, nerdles. I remember all of this from
Speaker 3: that episode that we did nerdle the.
Speaker 2: Building blocks of highlighters and lots of other plastic products,
Speaker 2: which isles. Okay. So the reason we bring this up
Speaker 2: is obviously there's a situation in Iran. The Straight of
Speaker 2: Horror Moves is still closed. We're recording this on March
Speaker 2: twenty fourth, and we're starting to see a lot of
Speaker 2: the disruptions in the oil market start to I guess,
Speaker 2: ripple out into other petrochemicals.
Speaker 4: Right.
Speaker 3: And someone asked this on a twinter the other day,
Speaker 3: and they were like Joe, or is the higher price
Speaker 3: of oil gonna impact the price of plastics? And I
Speaker 3: was like, I would be very surprised if it didn't.
Speaker 3: I mean, I don't really know for sure, but it
Speaker 3: would be very weird. It would be hard for me
Speaker 3: to imagine a scenario in which the key input doesn't.
Speaker 3: The thing that I am very curious about, and you
Speaker 3: described a sort of sequential chain of industrial processes from
Speaker 3: the oil to the nerdles, and of course when we
Speaker 3: did the episode, so one of the things that we've
Speaker 3: talked about is that there is a gap between the
Speaker 3: price of some of these end products and the implied
Speaker 3: price of crude oil. So crude oil, I don't know
Speaker 3: exactly where it is right now at this moment that
Speaker 3: we're recording it, but it's shot up, but these end
Speaker 3: products have shot up even more. And our guest Rory
Speaker 3: Johnson had a really good explanation, which is that the
Speaker 3: refineries do not want to shut down, and so they're rationing.
Speaker 3: They're slowing their input, their input because it is very
Speaker 3: costly to shut down and ever restart should they ever
Speaker 3: run out, which is a prospect given that we're seeing
Speaker 3: a volumetric decline and the amount of oil available in
Speaker 3: the world. What I'm curious about, in which I don't
Speaker 3: know the answer, is whether this applies to all of
Speaker 3: the different processing steps along the way, which is is
Speaker 3: there this sort of even greater price impact because the
Speaker 3: entities that do all these sequential industrial processes are slowing
Speaker 3: down because the shutdown and restart process is costly for
Speaker 3: them as well. Well.
Speaker 2: I would say the added complication with a lot of
Speaker 2: petrochemicals is we are in fact seeing some closures already.
Speaker 2: So in Asia, we've had a few crackers, as they're
Speaker 2: called Asian crackers, start to shut down their production and
Speaker 2: basically declare force measure, and so we are seeing fewer
Speaker 2: petrochemicals get made in places like Japan and South Korea.
Speaker 2: I think the question we're kind of inching towards is
Speaker 2: whether or not this is just going to be a
Speaker 2: question of price, you know, prices for plastics go up,
Speaker 2: or an actual supply shortage in the sense that maybe
Speaker 2: you just can't get certain types of plastics or packaging.
Speaker 2: And one other thing I would just add, I think
Speaker 2: in the post COVID environment, an underappreciated driver of inflation
Speaker 2: at that time was the cost of packaging. That's right,
Speaker 2: because we did see the cost of plastics go up.
Speaker 2: And if you think about what you're buying at a
Speaker 2: grocery store, like, Okay, it's a bunch of carrots, but
Speaker 2: it's also a bunch of carrots in a plastic and.
Speaker 3: A plastic bag completely or jar or whatever. And I
Speaker 3: would say in a lot of the cases of food
Speaker 3: stuffs in particular, you're mostly paying for the entire supply
Speaker 3: chain and the packaging of it. The actual food value
Speaker 3: is almost dirt cheap if nothing. And so yeah, and
Speaker 3: are we just going to get outright shortages? What other
Speaker 3: ripple effects? I don't think we have any idea. Probably
Speaker 3: one of these things that compounds the longer this war
Speaker 3: enclosure goes on.
Speaker 2: Many questions that we have, all right, well, I am
Speaker 2: happy to say we do, in fact have the perfect
Speaker 2: guests to talk all things petrochemicals. We're going to be
Speaker 2: speaking with Philip Gertz. He is the chemicals and oil
Speaker 2: analyst over at BNEF and a guy who lives and
Speaker 2: breathes polymers, hopefully not literally.
Speaker 3: Not breathed, hopefully not breathes polymers.
Speaker 2: All right, Philip, thank you so much for coming on
Speaker 2: a lauds.
Speaker 4: Thank you very much, Tracy and Joe and sounds are
Speaker 4: we set introduce me with living and breathing polymers. But
Speaker 4: I'll take it. I'll take it for sure.
Speaker 2: We're all filled with microplastics now, right, So you're not
Speaker 2: exactly right. So I'm tempted to begin just by asking
Speaker 2: you to kind of list all the petrochemicals affected by
Speaker 2: the strait of hornes moose, sort of like Forest Gump
Speaker 2: style ethylene, propylene, polyethylene. You go on and on and on,
Speaker 2: but just broadly, why don't you tell us about the
Speaker 2: Gulf region and its role in the petrochemicals supply chain.
Speaker 4: Who right, Yeah, lot's to unpack here. So when it
Speaker 4: comes to chemicals at large, let's maybe establish three different categories.
Speaker 4: We have the feed stock, like you already pointed out, Tracy,
Speaker 4: basically you almost don't need me here. But you have
Speaker 4: the crude oil that's turned into NAFTA and liquefied petroleum gas,
Speaker 4: which are butane and propane principally ethane. Those all the
Speaker 4: feedstocks that go into the so called crackers, and the
Speaker 4: crackers turn them in what we call base chemicals. There
Speaker 4: are technically six major based chemicals that come out of this,
Speaker 4: but for the sake of today's discussion, the major focus
Speaker 4: will probably be really around ethylene propylene. If we want
Speaker 4: to get readyfins, we can talk about xylene's parasolline or butydyninge.
Speaker 4: But a lot of the really the majority of the
Speaker 4: bulk plastic that we talk about really come from ethylene
Speaker 4: and propylene, and some from parasylene. In terms of polyethylene,
Speaker 4: terreftolot or are also more commonly known as polyester. So ethylene, propylene,
Speaker 4: xyolene are turned into polyethylene, polypropylene and into polyethylene terreftolot
Speaker 4: or polyester. Now you have a wide range of really
Speaker 4: different derivative chains. Even within polyethylene, you have a lot
Speaker 4: of subcategories, and within those subcategories of other subcategories. In
Speaker 4: very simple terms, you have a three way division into
Speaker 4: high density polyethylene, low density polyethylene, and linear low density polyethylene.
Speaker 4: Doesn't matter too much, but it's good to be aware
Speaker 4: of that. When we talk about, well in analyst terms,
Speaker 4: about where the market is moving, we typically look at
Speaker 4: high density polyethylene. What's the supply demand there? Same goes
Speaker 4: for low density. Obviously they have different applications. And also
Speaker 4: within those larger buckets there are a lot of subcategories.
Speaker 4: Now you circle back to the major theme here of
Speaker 4: what's the position of the Middle East Gulf. So within
Speaker 4: those three categories, firstly, the Middle East itself is a
Speaker 4: major ex border of polyethylene, polypropylene, et cetera, et cetera,
Speaker 4: especially of polyethylene. And when I say major, let's be
Speaker 4: specific in need polyethylene polyethylene varieties. That's about twelve percent
Speaker 4: of global capacity. Production will be slightly higher thirteen fourteen percent,
Speaker 4: quite a significant chunk. To make that even more explicit,
Speaker 4: if you take those volumes, we're talking about eighteen million
Speaker 4: tons one eighth of production capacity, and Middle Eastern crack
Speaker 4: or Middle Eastern facilities typically run at very high rates
Speaker 4: ninety two hundred percent, so roughly an equivalent amount of production.
Speaker 4: If you take all of that, that's basically as much
Speaker 4: as Europe slash slightly more consumes. So it's a lot right.
Speaker 4: You have those volumes firstly being taken off the market directly,
Speaker 4: although a couple of asterisks here because technically polymers are
Speaker 4: export it differently than fuel. They're exported in a solid state,
Speaker 4: which means theoretically there should be the possibility of diversion.
Speaker 4: That's slightly easier than for oil NAFTA or oil products
Speaker 4: in general. It's big asterisk there. But if you take
Speaker 4: all of that off the market, you basically have the
Speaker 4: entirety of what Europe consumes all of the sudden disappearing.
Speaker 4: So that's step number one. Emphasis here on this goes
Speaker 4: especially again for poly ethylene varieties. Polypropylene is slightly lower.
Speaker 4: We're talking about seven ish percent of global production PVC
Speaker 4: polyvinyl chloride, which is used heavily in infrastructure, even lower.
Speaker 4: That's three to four percent styrene, which is another major
Speaker 4: value chain we're talking about against six to seven percent,
Speaker 4: so the Middle East in terms of polymers, that's really
Speaker 4: really a poly ethylene story, but not exclusively. So that's
Speaker 4: step number one, the direct polymer exports. Step number two
Speaker 4: is and that I would argue is really where you
Speaker 4: see the biggest impact is on the feed stock side. Again,
Speaker 4: this is something you can subdi into three categories. You
Speaker 4: have direct NAFTA exports. You have crude oil exports that
Speaker 4: are then turned into NAFTA amongst others, so the refineries
Speaker 4: run on it, and obviously if you have to cut
Speaker 4: refinery rates, you're also going to lose NAFTA output. And
Speaker 4: you have what's again called LPG liquified per toilum gas,
Speaker 4: which I'll just allude to well as LPG from now on,
Speaker 4: but that means probaane buttane. So we have those three
Speaker 4: they almost exclusively go to Asia. And when I say Asia,
Speaker 4: we can go into the nitty gritty details of how
Speaker 4: dependent each individual producer is exactly in those feedstock extremes,
Speaker 4: because there are quite huge differences there. But in very
Speaker 4: broad terms, polymer exports, that's twelve percent. If we take
Speaker 4: the NAFTA enough to exports and the crude oil exports,
Speaker 4: and we translate that into how much does ethylene and
Speaker 4: consequently polyethylene production would have to be cut in Asia?
Speaker 4: That's probably around fifteen to seventeen percent of global production.
Speaker 4: So that's really where the predominant hit comes from.
Speaker 3: Now it's fantastic. First of all, quick question on NAFTA,
Speaker 3: is that typically produced where the oil comes from? How
Speaker 3: like tight is that it is derived from crude oil?
Speaker 3: Is it typically right there? Or they're parts of the
Speaker 3: value chain where the oil gets shipped a long way
Speaker 3: and then the nafta is produced somewhere else.
Speaker 4: It's basically the latter, or rather it just depends right, Okay,
Speaker 4: the same as as for refineries at large, it just
Speaker 4: depends on where your refineries are located. So if you
Speaker 4: look at the Middle East for example, or let's take
Speaker 4: Saudi Saudi produces around ten to eleven million barrels of
Speaker 4: crude oil per day. But if I'm not mistaken, it's
Speaker 4: refining capacity is around anywhere betweenty three and four million
Speaker 4: barrels per day. So in that case, it refines a
Speaker 4: relatively small amount of its total production capacity.
Speaker 2: So to Joe's point, why do places like Japan and
Speaker 2: South Korea, why do they have, you know, crackers who
Speaker 2: are refining naptha into other polymers at all? Why does
Speaker 2: that make sense for them or is strategically important?
Speaker 4: Well, history plays a huge role. Japan, next to Europe
Speaker 4: and the US, was really one of the front runners
Speaker 4: of the petrochemical industry. And that's also why at the
Speaker 4: same time, even before all of this happened, Japan was
Speaker 4: also on the front line of losing its chemical industry.
Speaker 4: That's another topic we can get into later. But basically
Speaker 4: your question would also be, then why aren't those products
Speaker 4: exclusively produced in the Middle East and den ship the story?
Speaker 2: Why not just import them? Why even bother refining them domestically?
Speaker 4: Well, I mean it's not only a question of enough
Speaker 4: to per se, right, but Japan also needs jet fuel, diesel, gasoline, etcetera.
Speaker 4: So all of those come into one supply chain and
Speaker 4: another asterisk here is the Middle East. Again, the Middle
Speaker 4: East is also a major producer of chemicals. If you
Speaker 4: look at ethylene, for example, the largest by far, Surprisingly
Speaker 4: I don't need to turn this into a pop quiz,
Speaker 4: that's China. That's sixty one million tons of ethylene twenty
Speaker 4: five percent of global capacity then comes to US forty
Speaker 4: four million tons a data by the way, as of
Speaker 4: January twenty twenty six. Provisionally, then you have Saudi Arabia
Speaker 4: seventeen million tons, right, so you already have a huge
Speaker 4: step down here, But Saudi Arabia is the third largest
Speaker 4: producer or in terms of chemical ethylene capacity at least
Speaker 4: then you have Self Korea have thirteen million tons. So
Speaker 4: what I'm getting at here is to midd least already
Speaker 4: Saudi as an example, producers a lot has a lot
Speaker 4: of capacity. But because there are such extraordinary oil producers
Speaker 4: next to chemical producers, and the chemicals they produce locally,
Speaker 4: by the way, are largely gas derived. We can get
Speaker 4: also get into that later. But they do both right
Speaker 4: to export a lot of polymers, a lot of chemicals,
Speaker 4: but they also export a lot of products. It's probably
Speaker 4: a bigger question in terms of the overall oil supply
Speaker 4: chain why companies have chosen to also build out the
Speaker 4: refineries in Japan soft Korea a wether than all in
Speaker 4: the Middle East itself.
Speaker 3: So Tracy obviously started the conversation showing her hot pink highlight.
Speaker 2: How you learned something.
Speaker 3: But like you know, if we have to go for
Speaker 3: a while without making highlighters, or maybe we reduce the
Speaker 3: colors of the highlighters, not the end of the world.
Speaker 3: The world isn't going to come to a screeching end,
Speaker 3: et cetera. But I imagine sometimes are a little bit
Speaker 3: higher on the value chain. And so when we talk
Speaker 3: about now, though we talk about some of these other things,
Speaker 3: what end uses would you be most worried about now?
Speaker 3: Because the volume or the capacity numbers that you mentioned
Speaker 3: are pretty substantial. So again, I'm not too worried if
Speaker 3: we go for a few months without making highlighters. What
Speaker 3: are the end use cases that you're watching right now?
Speaker 3: They're like, oh, this could be a real problem.
Speaker 4: Oh you guys had podcasts on fertilizers on this stay. Yeah,
Speaker 4: that's right, it's a very similar story. My main concern,
Speaker 4: without a doubt, would be food packaging. I am not
Speaker 4: aware of any fungible products for polyethylene to be used
Speaker 4: at the same scale for food packaging as well polyethylene,
Speaker 4: so I do not know whether it is a viable alternative.
Speaker 4: Maybe there is, and I'm just ignorant about it, But
Speaker 4: to me, without a doubt, food package and packaging at large.
Speaker 4: It's very cliche to take your own topic and talk
Speaker 4: about how incredibly important it is to modern day society.
Speaker 3: But I mean, this is the complexity of modern day society.
Speaker 3: This is actually a very important point. Is a joke,
Speaker 3: and it's like everyone jokes is like, oh, what I
Speaker 3: do is the chase is the key thing holding modern
Speaker 3: day society together. They're not wrong. They're okay, podcasting, maybe not,
Speaker 3: but like they're not wrong, Like any one of these
Speaker 3: things go and the whole thing goes that was the
Speaker 3: less absolute COVID. So you're not absolutely so take the
Speaker 3: take the credit. You're at the center of the world
Speaker 3: right now. So yeah, all right, talk about food packaging
Speaker 3: and what you're worried about.
Speaker 4: Yeah, food packaging, packaging at large. I'm less worried about,
Speaker 4: let's say, infrastructure projects, right because if you take let's
Speaker 4: say high density poly ethylene and polyvinyl chloride, a lot
Speaker 4: of them go into infrastructure projects. Hence why you could
Speaker 4: see in India, for example, since twenty eighteen twenty nineteen,
Speaker 4: huge search in those chemicals demand, especially high density poly ethylene,
Speaker 4: because they were incredibly large infrastructure projects, especially on water pipelines,
Speaker 4: if I'm not mistaken, goes into that still incredibly important.
Speaker 4: But if we talk about meeting really the urgent tasks
Speaker 4: of the day, which is making sure that everybody has
Speaker 4: access to their basic needs, I find it very hard
Speaker 4: to see how value chains can be constructed or how
Speaker 4: a shortage of polyethylene or other plastics can be circumvented,
Speaker 4: especially poly ethylene near I'm concerned about because of the
Speaker 4: disproportioned impact. And we briefly touched upon Hey, if twelve
Speaker 4: percent of polymers are cut off, polymer exports from the
Speaker 4: Middle East and the feed stocks are cut off. But
Speaker 4: that's only a part of the story. There are many
Speaker 4: angles here to take overall impact obviously, without a doubt,
Speaker 4: will be sizeable. How sizable time will tell. But I
Speaker 4: cannot think of alternatives to the problem we would be facing,
Speaker 4: which is packaging, getting stuff from A to B, making
Speaker 4: sure that stuff is conserved. So if anybody knows in
Speaker 4: the audience, please let us know in the commons. Yeah
Speaker 4: to learn.
Speaker 2: So okay, on that note, what are we seeing now
Speaker 2: in terms of poly ethylene availability? So I mentioned that
Speaker 2: we have seen some crackers in Asia who have had
Speaker 2: to reduce their refining output. Are we seeing prices start
Speaker 2: to rise? Are we seeing outright shortages? What are you
Speaker 2: observing in the market so far?
Speaker 4: So I would kick this off by saying that everything
Speaker 4: happens with a significant delay, and especially now, voyages from
Speaker 4: the Middle East Gulf to South Korea Japan take about
Speaker 4: eighteen to twenty five days, and while we're kind of
Speaker 4: now entering that period. So if you look at crude
Speaker 4: oil imports that went to South Korea, for example, you
Speaker 4: could see them still spiking in the second week of March,
Speaker 4: just because a lot of ships departed in late February,
Speaker 4: whether or not in anticipation of this happening, but there
Speaker 4: is a spike in the second week of March, so
Speaker 4: on a physical side, to me, it seems we have
Speaker 4: seen comparatively little impact yet I think most of this
Speaker 4: will really materialize around early April, and from there on
Speaker 4: it gets worse pretty quickly. Also one importance note here,
Speaker 4: and people can again pitch in in the comments, but
Speaker 4: polyethylene markets are relatively opaque when it comes to the
Speaker 4: exact availability. So we talk a lot about run rates
Speaker 4: even demand. Right, One very cliche topic that's regurgitated a
Speaker 4: lot is demand in Europe is lookwarm. But if you
Speaker 4: look at apparent demand, which is trade plus some production
Speaker 4: run rate assumptions that are reasonable and based on company statements,
Speaker 4: you see that demand is pretty stable. So my point
Speaker 4: here is that demand, how much is consumed in the
Speaker 4: first place, is a relatively obscure topic in the world
Speaker 4: of polyethylene and plastics, because if you look at what
Speaker 4: polyethylene consumption means, you have a lot hundreds thousands per
Speaker 4: market of small plastic converters. They take those pellets and
Speaker 4: they turn them into usable plastics. And to me, it
Speaker 4: seems that data collection there may not be as well
Speaker 4: developed as for let's say, oil refiners. Or maybe I'm
Speaker 4: just ignorant about it, but that's been my observation so
Speaker 4: far in the industry that demand numbers are hard to
Speaker 4: get by. So, circling this back to where we're at
Speaker 4: right now, three four weeks into this scenario, i'd be
Speaker 4: careful with any concrete data points you're seeing, or any
Speaker 4: general statements about demand being down, about supply being cut
Speaker 4: force measures. For sure, we've seen an incredible high amount
Speaker 4: of statements of production being cut. We can also get
Speaker 4: into the details of which markets how much. But if
Speaker 4: you look at across Asia, you've had about thirty to
Speaker 4: forty crackers probably that have made statements in one way,
Speaker 4: shape or form quite often though that just pertains to
Speaker 4: production curtailments and not per se a full shutdown or
Speaker 4: force measures, meaning that they cannot guarantee that they can
Speaker 4: supply their contractors with whatever the contract stipulates. Very long story,
Speaker 4: slightly less long. So far, my take is the impact
Speaker 4: has been relatively limited on the material front, we have
Speaker 4: seen price increases by the way, especially on the NAFTA
Speaker 4: front in Asia, but I would be very surprised if
Speaker 4: this does not deteriorate very significantly over the next two
Speaker 4: to three weeks.
Speaker 3: By the way, I genuinely wasn't sure about this. There
Speaker 3: is polyethylene futures the trade on the dally On Commodity Exchange.
Speaker 3: We have quotes on this. You could see they're traded
Speaker 3: in lots of five metric tons so in USD and
Speaker 3: in the beginning of the year it looks like they
Speaker 3: were trading at around nine hundred and twenty five dollars
Speaker 3: for five metric tons of polyethylene. Now around thirteen hundred dollars,
Speaker 3: so the price has already surged massively. I'm curious though,
Speaker 3: like when we think about the market for some of
Speaker 3: these chemicals that you track, how much is it sort
Speaker 3: of open liquid markets versus long term contracts, et cetera,
Speaker 3: that you know, sort of dark prices that the public
Speaker 3: would never see because it's an arrangement between a producer
Speaker 3: and a specific buyer, et cetera, versus more clearing house model.
Speaker 3: Like talk to us about pricing transparency that we have
Speaker 3: in this market.
Speaker 4: Ooh yeah, I love it. Just quick disclaimer here, there's
Speaker 4: subtopics that I know more of and our topics that
Speaker 4: I know less about. This falls into the category of
Speaker 4: the latter. But to my understanding, when it comes to
Speaker 4: prices and contracts in the polymer markets, the vast majority
Speaker 4: is stipulated by our contracts, although they're typically relatively short
Speaker 4: lived on a monthly quarterly basis. That's observation. I may
Speaker 4: be wrong, and in terms of the spot market, they're
Speaker 4: relatively small, but the spot market is real. But the
Speaker 4: spot market is usually where you see those price distortions
Speaker 4: firstly showing up right, And when it comes to the
Speaker 4: first three to four weeks, especially, this week has been
Speaker 4: relatively This week actually had quite a phenomenon because I
Speaker 4: just checked the prices an hour ago and I was
Speaker 4: surprised by polyethylene in East Asia apparently stagnating over the
Speaker 4: past week, which to me, either something is wrong with
Speaker 4: the prices that I was looking at or some of
Speaker 4: my theoretical underpinnings are slightly off. So I'm curious about
Speaker 4: that for the next couple of days.
Speaker 2: Last weeks, didn't that happen during COVID as well? Wasn't
Speaker 2: there a big arbitrage between like polyethylene prices in Europe
Speaker 2: and the US versus Asia. There seem to be these
Speaker 2: regional differences one hundred percent.
Speaker 4: It depends on which part of the value chain you
Speaker 4: look at and whether you're looking at margins, which is
Speaker 4: what most companies are really curious about, right, how much
Speaker 4: profit can I actually make out of this versus prices. So,
Speaker 4: if you talk about polyethylene prices, for example, they're comparatively
Speaker 4: low in Asia compared to Europe. The US is also low,
Speaker 4: but the US also only pays a fraction of deproduction
Speaker 4: costs because US is ethane or gas based, Asia and
Speaker 4: Europe are largely NAFTA based. And the reason, by the way,
Speaker 4: it is an important asterisk, almost going into a side tentionineer,
Speaker 4: but it's very common within our industry to talk about
Speaker 4: how ethane gas based production is more competitive, is cheaper.
Speaker 4: But one of the principal reasons why this is the
Speaker 4: case is because you only need one point two tons
Speaker 4: of ethane to produce one ton of ethylene, whereas if
Speaker 4: you produce ethylene vi enofta, you need about three point
Speaker 4: two tons of nafta. So you just need a lot
Speaker 4: more feed stock, and obviously you get a lot of byproducts.
Speaker 4: But then for NEFTA ranking in Europe and Asia, their
Speaker 4: competitiveness also hinges a lot on what the price movements
Speaker 4: are of those byproducts.
Speaker 3: Just as a side note, by the way, I'm looking
Speaker 3: at the European naphtha swap of this trades in the
Speaker 3: NYMEX that is at eight hundred and forty two dollars
Speaker 3: per metric ton right now, but that was around four
Speaker 3: hundred and ninety six at the beginning of the year.
Speaker 3: So all of these different chemical polymers that you're talking
Speaker 3: about massive spikes obviously in the Big spike obviously since
Speaker 3: the start of the war. What does it mean when
Speaker 3: force measure is declared? What is that actually entail?
Speaker 4: You tell me, no, it depends a lot. Usually, again,
Speaker 4: we like to talk a lot in certain terms. I
Speaker 4: think a force measure colloquially is implied to mean, oh,
Speaker 4: production is fully cut. It kind of depends. So to
Speaker 4: give you one concrete example, OK, one, what chemicals in
Speaker 4: China has, amongst otter is two very large crackers two
Speaker 4: point two million tons in two total in Yuantai, Shandong region,
Speaker 4: hopefully not butchering the pronunciation too much. They declared force
Speaker 4: measure for their supplies to the Middle East. So I
Speaker 4: looked at this and I was what does this mean?
Speaker 4: So you dig further, try to find something specific. The
Speaker 4: only thing I could find publicly announced is they're declaring
Speaker 4: force measure on their supplies to the Middle East, which
Speaker 4: to me was very interesting because in the first place,
Speaker 4: very few Chinese producers are suppliers to the Middle East
Speaker 4: of certain chemicals in the first place. So the bottom
Speaker 4: line here being that when you read force mature, at
Speaker 4: least that's what I'm doing. If I don't find anything specific,
Speaker 4: it's a big question mark, and I usually assume it
Speaker 4: means reduced run rates. Question is then also by how
Speaker 4: much kind of a floor for a lot of crackers
Speaker 4: is fifty to sixty percent of their total capacity? Below that,
Speaker 4: it quite often is said it gets uneconomical. But it
Speaker 4: is a big question mark to me at least.
Speaker 3: So this came up in the context of jet fuel.
Speaker 3: But the sort of the implied barrel price of jet
Speaker 3: fuel is higher than what a barrel of oil is
Speaker 3: trading for right now because of this dynamic where there
Speaker 3: are finers are running slow because it's costly to actually
Speaker 3: have to straight up shut down. Can you talk about
Speaker 3: that in the context of some of these chemicals. Does
Speaker 3: the same phenomenon apply that it is a very costly
Speaker 3: business choice to actually shut down the refinery? And do
Speaker 3: we see a widening spread between where the price of
Speaker 3: oil is right now in the implied price of oil
Speaker 3: by the end product price.
Speaker 4: Yeah, that's a great question. If I'm not mistaken. The
Speaker 4: spread has increased a lot over the past three weeks. Okay,
Speaker 4: both in Europe and in Asia, but especially NAFTA price
Speaker 4: in Asia have searched. So here the following hypothesis. To me,
Speaker 4: it seems based on what we've talked about earlier, how
Speaker 4: chemicals are used, with a lot of it going into packaging.
Speaker 4: And let's define actually how much. So polyethylene consumes about
Speaker 4: sixty to seventy percent of ethylene, which again is the
Speaker 4: main product that we're getting from NAFTA cranking. So let's
Speaker 4: just say close to more than a half of NAFTA
Speaker 4: in one way, shape or form is used for polyethylene
Speaker 4: and those type of chemicals that are used for hankeraging.
Speaker 4: So half of it is pretty much dictated ish by
Speaker 4: the packaging sector own reality is more complicated than maybe
Speaker 4: we can cut it to one third or so. It's
Speaker 4: a huge chunk right away. And to me, again, dead
Speaker 4: sector seems pretty non fungible. It's very hard to really
Speaker 4: destroy a lot of demand within an industry. If we
Speaker 4: talk about jet field des on gasoline, on the other hand,
Speaker 4: we can introduce Carlos Sundays, we can introduce or people well,
Speaker 4: at the end of the day, if flight tickets just
Speaker 4: become too expensive.
Speaker 3: Side to another flights this period.
Speaker 4: So to me, it seems that diesel gasoline and jet
Speaker 4: fuel have more wiggle room for demand destruction. Thanta, That's
Speaker 4: my current hypothesis. And again maybe I may be proven
Speaker 4: wrong on that, because it's also the first time for
Speaker 4: me being in such a scenario, and I mean for
Speaker 4: all of us in a way. But so when it
Speaker 4: comes to the spread between crude oil and AFTA for
Speaker 4: both Asia and Europe, my expectation is that, well, the
Speaker 4: argument seems to be very strong that death will increase
Speaker 4: over the next week's potentially months enough. A big question
Speaker 4: also that I'm just throwing into the room is how
Speaker 4: viable is it for refiners to actually shift more toward
Speaker 4: NAFTA production, both from an economical and just engineering perspective, right,
Speaker 4: because within the industry we often talk about those things
Speaker 4: as a given NAFTA production is kind of fixed, which
Speaker 4: to an extent is true, but also not true at
Speaker 4: a certain point. And maybe there are some chemical engineers
Speaker 4: here that note is better than I do. But at
Speaker 4: a certain point, it may even become feasible to switch
Speaker 4: some road fuel production toward NAFTA production if in the
Speaker 4: demand destruction on gasoline becomes stronger.
Speaker 2: Enough to I want to go back to you mentioned
Speaker 2: China for a second, and I remember seeing headlines about
Speaker 2: China's petrochemical boom and worries about a glut in the market,
Speaker 2: and I think some of those headlines were like two
Speaker 2: months ago, Yeah, can China pick up some of this production?
Speaker 2: I assume it's getting some naphtha from I would guess
Speaker 2: Russia or Iran at this point, Like what's going on there?
Speaker 3: Yeah?
Speaker 4: Big question? Short term? No, short term minus if you
Speaker 4: would have a lot of production within refined be shifting
Speaker 4: away from gasoline to NAFTA minus de scenario, And again
Speaker 4: I don't know how technically feasible that is. Or economically
Speaker 4: for a lot of refiners. But other than that, I
Speaker 4: don't see any possible way where you could compensate for that, right,
Speaker 4: because let's be specific, So we're talking about again assuming
Speaker 4: a full disruption here we talk about roughly seventeen to
Speaker 4: eighteen million tons disappearing from the Middle East. We talk
Speaker 4: about South Korea, Japan, so major Asian players, to be specific,
Speaker 4: we have South Korea first, Japan, Taiwan, Singapore, India, Thailand
Speaker 4: and Malaysia and Indonesia. Those I think should be eight. Now,
Speaker 4: if you take them together, they probably have an ethlene
Speaker 4: production capacity of around forty five million tons ISH. So
Speaker 4: China and them together is about one hundred million tons,
Speaker 4: China sixty million, those others about forty million together. Out
Speaker 4: of this forty million depending on again what happens, but
Speaker 4: probably weren't thirty million. You could potentially discard is it.
Speaker 4: Don't quote me on that exact number, but just to
Speaker 4: give a ballpark, right, I don't see any possible way
Speaker 4: how you could compensate for that. You have some wiggle
Speaker 4: room because some cracking facilities were operating at lower rates.
Speaker 4: You can compensate there in the US especially, But if
Speaker 4: you assume, for example, that the US was running at
Speaker 4: about eighty five percent before and they would go all
Speaker 4: the way up to ninety five hundred percent now, so
Speaker 4: ten to fifteen percent difference. That's about four to six
Speaker 4: million tons added. So that's basically one tenth of what
Speaker 4: more one eighth of what would be lost in the
Speaker 4: most extreme scenario. And when it comes to China, the
Speaker 4: thing is that those crackers are large projects. They take time,
Speaker 4: and the world at large had an incredible, incredibly large
Speaker 4: pipeline for twenty twenty six, which is ironic and which
Speaker 4: is why I emphasized polyethlene so much, because the amount
Speaker 4: of projects like World Skill projects that are very well
Speaker 4: covered and no uncertainty about whether they would come online
Speaker 4: or not until now there were set to come and
Speaker 4: now they seem largely either off the table or a
Speaker 4: big question mark. So I don't see anyway in the
Speaker 4: short term to compensate for such an extreme shortfall if
Speaker 4: that were really to manifest to the utmost extent.
Speaker 2: That's a really good example of how these short term
Speaker 2: disruptions can linger for years and years and years. Okay,
Speaker 2: one other question on trying to fill the gap in
Speaker 2: supply what about recycling existing plastics. I mean, we've been
Speaker 2: told for years and years and years the world is
Speaker 2: a wash in plastics. Like, okay, let's do something with that.
Speaker 4: Yeah, that's an excellent question. I don't see why recycling
Speaker 4: should not get a major boost from this. If this
Speaker 4: persists to me, that seems like a very reasonable solution.
Speaker 4: There are obviously a lot of asterisks where recycling as
Speaker 4: its own fair share of complications in terms of having
Speaker 4: to firstly distill the different types of streams. You also
Speaker 4: need production facilities for this, which also again needs time
Speaker 4: to be built. I'm oddly unaware of the existing utilization
Speaker 4: rate or of the utilization rates of existing recycling facilities, but.
Speaker 2: Which tells you something about the importance of recycling intromic
Speaker 2: chemical analyst career.
Speaker 4: But yeah, exactly right, it's very much under fringes. I
Speaker 4: very peripherally aware of it. But when I think about
Speaker 4: recycling facilities that I read on more anecdotally, they're usually
Speaker 4: in the range of a couple of tens of thousands
Speaker 4: to maybe one hundred thousand tons per year of production capacity,
Speaker 4: which compares to a world scale cracker that's usually one
Speaker 4: to two million tons. Right, so that's an order of
Speaker 4: magnude lower. That's said, if you look at the total
Speaker 4: share of global polymers that are in circulation that come
Speaker 4: from recycling, I find it hard to give an exact number,
Speaker 4: but maybe one tenth or so because it depends on
Speaker 4: the substream. And again it's not my forte per se.
Speaker 4: It's a reasonable amount, and I could definitely see, especially
Speaker 4: within the timeframe of a couple of months, that this
Speaker 4: would gather a lot of speed or it would become
Speaker 4: priority to fill some gaps somewhere. But again it probably
Speaker 4: falls short very significantly from really fixing the problem.
Speaker 3: When we did a recent episode about natural gas, one
Speaker 3: of the winners, at least in the short term was coal,
Speaker 3: and that contries that can't get natural gas, they're gonna
Speaker 3: turn to coal for energy, And you see coal prices
Speaker 3: creeping up. What about cold liquefaction? And in the short
Speaker 3: or medium term, I mean, you could turn coal into oil.
Speaker 3: The Germans did that during World War Two and that's
Speaker 3: still a thing. Can that in the medium term be uh,
Speaker 3: just derive our plastics from coal?
Speaker 4: Medium term? Sure, but I don't think medium term is
Speaker 4: the problem here. Yeah, if we define medium.
Speaker 3: Yeah, I guess right, right, that's not gonna help us,
Speaker 3: right if we but like you know, if we say,
Speaker 3: like you know, this is gonna re shape, like you know,
Speaker 3: like the longer that this goes on, and we don't
Speaker 3: know how long that this is going to go on,
Speaker 3: could call at some point in the short to medium
Speaker 3: term be part of the solution for the origin of
Speaker 3: our plastic beautiful question.
Speaker 4: I think the bigger questionnaire is well twofold. Firstly, if
Speaker 4: this continues, will it reshape how the global chemical industry works?
Speaker 4: And the second part is maybe have you already reached
Speaker 4: that point? Because I think even if things were to
Speaker 4: quote unquote normalize, whatever that may mean right now, I
Speaker 4: think one major problem that we face is that the
Speaker 4: perceived risk of passing through the strait of hormoos has changed,
Speaker 4: and a lot of Asian producers were already on the
Speaker 4: cusp of closing their business, and by a lot of
Speaker 4: means South Korea, Japan, Taiwan, Singapore, especially if you take
Speaker 4: them together we talk about soufth Korea has thirty million tons,
Speaker 4: Japan six million tons, Singapore and Taiwan both three to
Speaker 4: four million tons, so collectively close to thirty million tons.
Speaker 4: It's a lot. Not all of it was said to
Speaker 4: be closed, but to me, if I looked at the fundamentals,
Speaker 4: it seemed reasonable to assumed that by twenty thirty, about
Speaker 4: thirty to fifty percent of this could disappear.
Speaker 3: So wait, sorry, why very long story short?
Speaker 4: Because the overcapacity that was in the pipeline, especially for polyethylene,
Speaker 4: was so severe that the case was very hard to
Speaker 4: make for some units to stay in business.
Speaker 2: Right.
Speaker 4: My hypothesis here is that what's happening currently their increased
Speaker 4: perception of risk through the strait of harmons for an
Speaker 4: industry in a market that was already perceived to be well,
Speaker 4: really going downhill pretty much could really lead a lot
Speaker 4: of facilities to just close down over the next couple
Speaker 4: of months quiet, and I would be very surprised if
Speaker 4: that does not happen. Then the question becomes what happened? Well,
Speaker 4: two questions here, firstly, what happens afterward if things indeed normalize,
Speaker 4: and then secondly, for the entire pipeline that exists for
Speaker 4: the next four to five years, A lot of it
Speaker 4: was also in Asia or the Middle East and hinged
Speaker 4: on feedstocks coming from the Middle East, what happens to
Speaker 4: that and to go full circle here into your cold quest,
Speaker 4: that's something I looked into and that I wondered. So
Speaker 4: to put it into perspective, China right now has sixty
Speaker 4: million tons of ethylene capacity. Roughly fifty million tons of
Speaker 4: this is oil or gas based, so it comes from cracking.
Speaker 4: Ten million tons comes from coal okay slash methanol. Side
Speaker 4: note here also that because how it works is that
Speaker 4: coal is converted to methanol, which is then converted to
Speaker 4: ethylene or propylene. Methanol is also imported from the Middle East,
Speaker 4: so that could also cut into that production there. But
Speaker 4: when it comes to coal, it would need a really
Speaker 4: huge push. So now we have ten million tons of ethylene,
Speaker 4: we have another roughly three to four million tons in
Speaker 4: the pipeline because China has been revitalizing that already before
Speaker 4: the war. But the push again would be extremely significant.
Speaker 4: You would be talking about basically three to four fold
Speaker 4: quadrupling the sector over the next couple of years, right,
Speaker 4: which in theory could happen, especially for a country such
Speaker 4: as China, which has proven in the past time and
Speaker 4: time again that it's very much capable of completely reva
Speaker 4: being industries. But it would be a big push. I
Speaker 4: think what's more likely to happen is three things. So firstly,
Speaker 4: renewed again also depends obviously on how long the supplying
Speaker 4: disruption is, but I think we're well on our way.
Speaker 4: I think one renewed interest in the Western hemisphere, using
Speaker 4: Western hemisphere here more broadly, because I would say for
Speaker 4: the US there's also a couple of asterisks in terms
Speaker 4: of the political environment where that is not considered to
Speaker 4: be too volatile. That out of the way, though, if
Speaker 4: you talk about chemicals and the potential there, there was
Speaker 4: a significant slowdown because of this overcapacity. But US producers
Speaker 4: right now are having a heyday, and even if this
Speaker 4: does not continue for a long time, I think again
Speaker 4: that this heightened risk, or this heightened perception of risk
Speaker 4: at hormos, really shifts a lot of production potentially to
Speaker 4: the US. So I'd be surprised if you would not
Speaker 4: see a lot of renewed interest in US ethane, in
Speaker 4: US chemicals.
Speaker 2: Yeah, this was going to be my next question. Actually,
Speaker 2: So I'm looking at a chart right. This is going
Speaker 2: back to the beginning of our conversation. So this is
Speaker 2: a chart of sensitivity of different oil or fuel products
Speaker 2: to demand destruction.
Speaker 3: I'm cheating, like on an exam. You can't see it.
Speaker 3: I'm in the studio. I'm leaning over and looking at
Speaker 3: Tracy's Lovetimes like I needed to get a look at it.
Speaker 2: So it actually it has now, JP Morgan, Yeah, so
Speaker 2: it has. You know, jet fuel is pretty sensitive because,
Speaker 2: as we were talking about earlier, if the price of
Speaker 2: jet fuel goes up, flights tend to get curtailed. It
Speaker 2: also says that NAPA is pretty sensitive. And one of
Speaker 2: the reasons NAPA apparently is sensitive is because if prices
Speaker 2: for NAP that go up, then petrochemical plants can substitute ethane,
Speaker 2: which it seems we're starting to see. I'm also reading
Speaker 2: a Bloomberg sty I'm doing my research for this episode. Wow,
Speaker 2: we're in the middle of the episode. But regardless of that,
Speaker 2: there's a Bloomberg story that saying that US producers of
Speaker 2: polyethylene are buying more ethylene to make plastics. What's the
Speaker 2: substitutability of ethane versus naphtha? Because you touched on this earlier,
Speaker 2: but I really want to drill down on this point.
Speaker 4: Not very high. Okay, So two things here I realized
Speaker 4: I like making a lot of lists without completing them.
Speaker 4: But maybe you can get full circle on the other
Speaker 4: topics later. But on this two things. So first is
Speaker 4: just technical substitution. So the furnaces that are used for
Speaker 4: ethane and NAFTA, they're pretty different in a lot of
Speaker 4: ways that they're configured, So switching between those two is
Speaker 4: pretty difficult, very specifically. One major problem is the type
Speaker 4: of products that you get from both, right, So if
Speaker 4: you crack ethane, you principally only get ethylene in notable amounts,
Speaker 4: Whereas if you crack n after you get ethylene, you probolene,
Speaker 4: you get butted eye, and you get.
Speaker 2: Benzy byproducts you mentioned earlier.
Speaker 4: Exactly right, and they need to be separated. And there
Speaker 4: is a whole post this cracking section for that that
Speaker 4: just vastly differs for enough to cracker versus ethane. I
Speaker 4: think one common point of confusion is, so you have
Speaker 4: three major oil or gas EATUX streams, you have NOFTA,
Speaker 4: you have LPG and ethane, And I would group LPG
Speaker 4: and ENOUGHTA as being more together than alpg and ethane,
Speaker 4: despite the fact that LPG and ethane are colloquially kind
Speaker 4: of referred to as being gas based, but LPG also
Speaker 4: gives a lot of byproducts, so the substitution possibility there
Speaker 4: is higher than for ethane. And also if you just
Speaker 4: look at the practicality of it, they're comparatively outside of
Speaker 4: the US and the Middle East, they're not that many
Speaker 4: crackers that use ethane, and if they use ethane, they
Speaker 4: typically fully use ethane, not exclusively. There are some exceptions,
Speaker 4: such as I think the one Hua Chemical Untie cracker
Speaker 4: that I mentioned earlier one of those actually runs partially
Speaker 4: on ethane partially on NOFTA. But typically if a cracker
Speaker 4: fully runs on ethane, it fully runs on ethane, whereas
Speaker 4: for a lot of NAFTA crackers they play around with
Speaker 4: the LPG share depending on the price movements.
Speaker 3: I've learned a lot from this conversation. I would be
Speaker 3: lying if I didn't say that. You know, I'm gonna
Speaker 3: have to go back and look at what some of
Speaker 3: these things are whatever, But just to help me we
Speaker 3: conceptualized with some of these things are. I remember from
Speaker 3: a Liberation day the trade fights in twenty twenty five.
Speaker 3: One of the few things that the US exports to
Speaker 3: China in mass other than soybeans, is ethane. I don't
Speaker 3: know what is it? Can you just explain that? Why
Speaker 3: do we have a lot of extra ethane? Why does
Speaker 3: China need to get it from a lot of US?
Speaker 3: And what does it go into?
Speaker 4: It all depends on what we mean by a lot.
Speaker 4: That's a very relative term.
Speaker 3: I wouldn't know that about half of all US exports
Speaker 3: of ethane, which is extracted from US shell guests, which
Speaker 3: probably explains why we have a lot head to China.
Speaker 3: So they what's the deal with that?
Speaker 4: Yeah? So firstly, that mainly comes because the US is
Speaker 4: a very large producer of shell gas, which yields a
Speaker 4: lot of ethane LPG. And because the US has will
Speaker 4: basically exceed it in its LPG ethane production what it
Speaker 4: domestically needs, it has started to export a lot and
Speaker 4: that's still ongoing. We still have some new terminals coming
Speaker 4: up in twenty twenty six and beyond it will increase
Speaker 4: the capacity for LPG and ethane to be exported. But
Speaker 4: the reason why I answered this question skeptically initially is
Speaker 4: because if you look at a total volumes you talk
Speaker 4: about China, if I'm not mistaken, in twenty twenty five
Speaker 4: imported around five or six million tons of ethane and
Speaker 4: you can make one around five to six million tons
Speaker 4: of ethylene from that, which is about ten percent of
Speaker 4: China's production capacity, right, So is that a lot kind
Speaker 4: of ishi?
Speaker 3: So there's kind of a lot relative to US industry,
Speaker 3: but it's not really a lot of the grand scheme
Speaker 3: of how much China is using and produced.
Speaker 4: And even for the US, this is probably if we
Speaker 4: convert this into into barrels per day, it's probably around
Speaker 4: two hundred to three hundred thousand barrels per day, which
Speaker 4: is which.
Speaker 3: Even this article I'm saying says about half of all
Speaker 3: US exports of ethane go to China, which means this
Speaker 3: is just a fraction of total ethane production.
Speaker 4: In the US exactly. Okay, So that's I think the
Speaker 4: entire ethane story is relatively if I can use the
Speaker 4: word over hyped, because I think if you just re
Speaker 4: read the articles, it seems like there's a huge wave
Speaker 4: of new ethane crackers in Europe and in Asia, et cetera.
Speaker 4: But if you really double down on which facilities they are,
Speaker 4: and in Europe it's one, it's project.
Speaker 3: Yeah, the ethane hype ends now.
Speaker 4: I think, by the way, by the way, you guys
Speaker 4: to actually finish one of my lists. Because I was
Speaker 4: mentioned earlier how there are two points on us and
Speaker 4: ethane and how much flexibility there is there. I think
Speaker 4: another thing is just production volumes dead goes up, but
Speaker 4: it goes up steadily. To me, it seems very unlikely
Speaker 4: that production could search by that much that you could
Speaker 4: really substitute for any notable amounts. So that's the second
Speaker 4: point on ethane substituting for NEFTA. There's just there are
Speaker 4: limited supplies for now that can go up, but also
Speaker 4: that takes time.
Speaker 2: I have an informal gauge of how bad things are,
Speaker 2: and it's the sort of cocktail party question type thing.
Speaker 2: But you know, when we're going out and speaking to
Speaker 2: people now as a petrochemicals analyst, how many people are
Speaker 2: starting to actually get very interested in the future of
Speaker 2: plastics and maybe get very worried when they talk to you.
Speaker 4: Both To assume I go out and speak to people,
Speaker 4: we'll stop there, no pooh, I think the conversations have changed.
Speaker 4: I mean more on an informal note here, right, because
Speaker 4: I've been in the industry for four years, Like I
Speaker 4: mentioned oil more broadly, two years in petrochemicals, two years
Speaker 4: during the first two years, and maybe that was also
Speaker 4: more than sidegeist. Back then twenty twenty two to twenty
Speaker 4: twenty three, a lot of the conversations were about the
Speaker 4: morality of working as an oil analyst. But now a
Speaker 4: lot of that has dissipated, Or maybe I just don't
Speaker 4: talk to those people anymore. I'm not sure, but I
Speaker 4: think nowadays, people, to my observation, approach those questions a
Speaker 4: lot more practically, and a lot of people are well
Speaker 4: about petrochemicals. I think a lot of people are more
Speaker 4: curious about the baseline understanding of how the industry works,
Speaker 4: if they're curious at all, right, because I mean, quite frankly,
Speaker 4: for a lot I strugg I talk to people from
Speaker 4: time to time, but very rarely actually about petroc chemicals.
Speaker 4: Also because it takes kind of a baseline denominator to
Speaker 4: get into it, and I feel that you need to
Speaker 4: bombard the counterparty with a lot of baseline information to
Speaker 4: kind of get to an interesting point, to which I'm like,
Speaker 4: they're probably also not that interested in.
Speaker 3: Then well, I have one last question, which is just
Speaker 3: tell us about the next several weeks and what are
Speaker 3: you looking out for and how bad could it get?
Speaker 3: And what is the time frame for that? Give us
Speaker 3: your sort of outlook and telling clients they ask how bad?
Speaker 3: What's going on? And let's suppose we none of us
Speaker 3: know when the war's going to end. It could we're
Speaker 3: recording this March twenty four at nine fifty three am.
Speaker 3: It could end by the time this episode comes out.
Speaker 3: But let's just say we don't know the war's going
Speaker 3: on in a month. Supposed how what are.
Speaker 4: We looking at? Still one asterisk there, whether the war
Speaker 4: continues or not, which we talk about and buyingary terms.
Speaker 4: It does not mean that the strait of her moves
Speaker 4: will become accessible again. That's just important to So that's
Speaker 4: when I look over the next weeks or months. Again,
Speaker 4: I usually abstain from giving any political commentary, but to me,
Speaker 4: as an analyst, just looking at baseline assumptions over next
Speaker 4: weeks or months, the assumption that the strait of her
Speaker 4: moves will become passable again, to me is very hard
Speaker 4: to make. So that's my first really major takeaway, at
Speaker 4: least when I look at my own forecast outlooks, which
Speaker 4: partially have become completely obsolete, I need to overhaul, but
Speaker 4: I'm very inclined to make that assumption, still waiting for
Speaker 4: a couple of days weeks to see how things develop.
Speaker 4: But that's my first really major thing that I just
Speaker 4: find the argument that the strait of her moves that
Speaker 4: things returned to normal in terms of shipping incredibly hard
Speaker 4: to make. So point number one. Now, when it comes
Speaker 4: to chemicals, firstly spread between NAFTA and crude oil, especially
Speaker 4: in Asia, I expect to search, especially to search in
Speaker 4: early April. The reason being because Asia still has to
Speaker 4: tap into its inventories naught to inventories. They're not a lot,
Speaker 4: but they can can cover a little bit of ground.
Speaker 4: We again still have to see the impact of the voyages.
Speaker 4: I think we've just bought that time. We're now entering
Speaker 4: the phase where you really see more material shortages. I
Speaker 4: think all of that will peak in early April, and
Speaker 4: then again technically depends on what happens next. That's point
Speaker 4: number one. Point number two, what I'm really looking out
Speaker 4: for is any announcements on projects that we're in the
Speaker 4: pipeline from China and technically the Middle East, but the
Speaker 4: Middle East I have already kind of provisionally done away
Speaker 4: with with well, that's probably not going to work out
Speaker 4: in twenty twenty six, twenty twenty seven, any projects for
Speaker 4: planned for twenty twenty six. What happens there? Point number three,
Speaker 4: what is China's strategy here at large going forward? Because
Speaker 4: China has in a very interesting position. It's not as
Speaker 4: badly affected as Self Creer or Japan, but it still
Speaker 4: changes a lot of things because well for a lot
Speaker 4: of new facilities. For example, so China had about twenty
Speaker 4: million tons of new athlete capacity in a pipeline, almost
Speaker 4: all of which coming from cranking, almost all of which
Speaker 4: coming from after a lot of which hinging on crude
Speaker 4: oil coming from the Middle East. What happens to that?
Speaker 4: That's a big question mark to me, and I'm curious
Speaker 4: to see indeed, whether we're going to see a shift
Speaker 4: more toward new call based facilities. I think that would
Speaker 4: take a couple of months rather than weeks, but that's
Speaker 4: something I'm looking out for. And in the same vein
Speaker 4: two more points, one being Western Hemisphere US where we
Speaker 4: see a research interest in investments, and Western Hemisphere Latin
Speaker 4: America and Bolivia, Peru, Venezuela, which had a lot of
Speaker 4: interest in the chemical industries in the past, but it
Speaker 4: was dropped again. Well, we see a renewed interest there
Speaker 4: and potentially in Argentina with a lot of shell guess.
Speaker 4: And then lastly Europe. Europe is very interesting because up
Speaker 4: until recently I've been going on and on about how
Speaker 4: your chemical industry is in decline and it was now ironically,
Speaker 4: and this is a big topic of debate, but I
Speaker 4: take the stance that all of this is happening very
Speaker 4: much more likely than not is a net benefit for
Speaker 4: a lot of chemical producing Europe. And this is a
Speaker 4: big topic to unpack, maybe for another time, but I
Speaker 4: would definitely be watching indeed whether this turns out this
Speaker 4: way for European producer.
Speaker 2: Philip Gratz, thank you so much for coming on all thoughts.
Speaker 2: Really enjoyed the conversation. That was a lot of fun than.
Speaker 4: Two guys, Joe.
Speaker 2: That was a lot of fun. I always appreciate analysts
Speaker 2: who come with the numbers just memorized right, and just
Speaker 2: rattle off like, well there's a difference between production versus capacity, all.
Speaker 3: Of that, right, Or there's like okay, South Korea, Malaysia, Japan, Indonesia,
Speaker 3: all right, Singapore, That gets you to forty four million. That. Yeah, Now,
Speaker 3: people who can do that, those are the people that
Speaker 3: always know their stuff and details matter.
Speaker 2: But the last question you asked about, you know what
Speaker 2: Philip is looking out for and his answer. I wrote
Speaker 2: about this in the Authoughts News yater yesterday, which is
Speaker 2: why it's on my mind. But like when we're talking
Speaker 2: about the closure of the straight of war moves, we're
Speaker 2: basically talking about like the choke point of all choke
Speaker 2: points in the global economy, right, And obviously oil is
Speaker 2: a big part of that, but as we just learned
Speaker 2: in this episode, so is petrochemicals, so as fertilizer. We've
Speaker 2: done previous episodes on that, and so it strikes me
Speaker 2: as almost inevitable that people are going to come away
Speaker 2: from this experience, no matter how long it goes on
Speaker 2: for with the intention to build out their own capacity
Speaker 2: or secure their own supply. And it was interesting even
Speaker 2: in a place like Europe, which we tend to think
Speaker 2: of sometimes as in structural decline, certainly in terms of
Speaker 2: its chemicals industry, even there, like you could see a
Speaker 2: revival as a result of this, even you know, three
Speaker 2: weeks worth of disruption.
Speaker 3: Yeah, I really think this is the main story. It
Speaker 3: was the main story before the start of the Iran War,
Speaker 3: and now clearly an accelerant to this story, which is
Speaker 3: just every country wanting to have greater capacity domestically and
Speaker 3: to be less reliant on choke point. Look, if we
Speaker 3: knew for a fact that the straight ofform moves was
Speaker 3: a going to reopen just as it was a month
Speaker 3: ago in b never close again, how would you possibly
Speaker 3: know that? He's like, oh, we don't need to do anything,
Speaker 3: but like, we're in a state we know now that
Speaker 3: like it is closable, we know it's closed. Not only
Speaker 3: do we know that it's closable, we know that it's
Speaker 3: closable without a particularly large military effort. That you fire
Speaker 3: a few drones or missiles a day, not even in
Speaker 3: a particularly costly effort, and you can bring so many
Speaker 3: industries and so many countries and so much activity basically
Speaker 3: to a halt, that fact can never be unknown again. Basically,
Speaker 3: that's sort of what Teleb talks about when he that
Speaker 3: is sort of the significant of a black swan. That
Speaker 3: word gets abused a lot because every time an event
Speaker 3: has a black swan. But the key insight where I
Speaker 3: find it actually to be a useful phrase is if
Speaker 3: you think all swans are white, and you see a
Speaker 3: black swan, then you know for the rest of your
Speaker 3: life exists. Then you know that they exist. And so
Speaker 3: it is a black swan in the sense that if
Speaker 3: the straight of horror moves can be closed, which is
Speaker 3: something that people have contemplated before with relatively little effort,
Speaker 3: you're going to know that the rest of your life.
Speaker 3: And that's going to change planning for the rest of
Speaker 3: your life, and it'll be really interesting to see. It's
Speaker 3: also just interesting, I think his point about how because
Speaker 3: of Chinese supply, so many of these Korean, Japanese, et cetera.
Speaker 3: Crackers were already in trouble. Yeah, and now what's going
Speaker 3: to happen there? I mean that is also a really
Speaker 3: big structural shortage, this sort of the milkshake of economic
Speaker 3: activity pouring into China relative to everywhere else, So lots
Speaker 3: of things going on at once. Well.
Speaker 2: Also the non substitutability of polyethylene, especially package like the
Speaker 2: idea that we're not all suddenly going to switch to
Speaker 2: burlap bags and bring our own like wooden crates to
Speaker 2: pick up like beams from the Yeah, I could see
Speaker 2: that being an esthetic choice, but that's not to keep
Speaker 2: so not scalable. All right, shall we leave it there?
Speaker 3: Let's leave it there.
Speaker 2: This has been another episode of the Odd Lots podcast.
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 3: And I'm joll Wisenthal. You can follow me at the Stalwart.
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