Record-high chemical prices could fuel downstream inflation

Rising global chemical prices could trigger inflation in downstream industrial production and consumer goods
.

Since the onset of the COVID-19 pandemic in early 2020, a series of events have disrupted the supply of chemicals in the global market, with prices for some value chain products hitting new highs amid strong demand
.

Refinery closed or reduced run rates due to lower demand for transportation fuels in the first half of 2020
.
This reduces the supply of feedstocks such as naphtha and propylene for chemical production
.

The 2020 hurricane season in the U.
S.
and the extreme cold in February 2021 caused disruptions to most chemical production in the
U.
S.

After the extreme cold weather, the production capacity of some important products in the United States, such as BD and PC, was almost completely offline
.
After months of repairs and reboots, it still hasn't fully recovered
.

The global container crisis has also disrupted chemical supplies
.
Market participants say the normal flow of products has been delayed or cancelled due to a lack of supply, and prices have soared to unsustainable levels
.

China-Europe routes have been hit particularly hard
.

Some European chemical markets are already struggling with current supply chain disruptions, made worse by a "big traffic jam" in the Suez Canal at the end of March
.

The container supply chain crisis is expected to last until at least the third quarter of 2021
.

In addition, Europe has also been affected by a series of unplanned production interruptions, and a large number of force majeure events have emerged
.

Currently, a total of 27 locations are affected by force majeure, up from 14 in the same period last year and seven in 2019
.

At the same time, a large number of planned maintenance work in Europe has led to more production capacity offline
.
Some of them were postponed from 2020 due to the impact of the epidemic
.

Against this backdrop, prices in parts of the European value chain have reached the highest levels of the century
.

strong demand

Initially, demand rose unexpectedly, driven by pandemic-related products and plastics used in packaging
.

Since the second half of 2020, there has also been a strong rebound in demand from large end-use industries such as automotive and construction, which were hit hard in the early months of the pandemic
.

China leads the economic recovery, followed by the US and Europe
.

"Global demand for chemicals is booming, led by a recovery in industrial production," said Rhian O'Connor, chief demand analyst at ICIS
.

“According to Oxford Economics, global industrial production in the second quarter of 2021 was an incredible 15% year-on-year and 4% higher than in 2019.

This basically means that not only has chemical demand recovered, but In fact, compared to before the epidemic, it has increased
.
"

In a material-starved market, panic buying emerged as downstream industries rushed to maintain supply security
.

Supply became more important than price, and as a result, prices for many products hit new highs
.

European supply chaos

European chemical distributors consulted by ICIS confirmed that supply chains are stretched and downstream customers are still in panic buying mode
.

Frank Schneider, an executive at Netherlands-based chemicals distributor IMCD, said desperation over product availability has driven over-ordering, which has left the market potentially a third larger than it actually is
.

"I do think that the current supply chain is a little bit inflated, bigger than normal market demand
.
I don't believe the market has grown 20-30% this quarter
," he added
.

There is currently an extreme shortage of key raw materials and production across the value chain is constrained, sending prices soaring
.

Force majeure in Europe has further heightened tensions, with supply chain disruptions expected to continue until the end of the year
.

Raw material prices are also expected to remain high, but higher oil prices and demand are likely to lead to a sharp rise in refinery output in the coming months as vaccination programmes roll out, the IEA said
.

Although the euro zone fell into recession again in the first quarter of this year, demand has largely been rebounding since the end of Europe's first lockdown in mid-2020
.

Eurozone manufacturing has been driving overall private sector growth since the third quarter of 2020, with chemical production significantly outpacing general industrial growth in March, up 1.
1% month-on-month, while manufacturing as a whole grew, according to Eurostat.
0.
1%
.

Demand is likely to remain strong as economies in the developed world continue to recover, as economies move toward a point that may resemble normalcy
.

Supply and demand balance

Once the current supply disruption draws to a close, real underlying supply and demand may become more balanced, reducing price inflation pressures
.

Driven by Northeast Asia, ethylene capacity is expected to hit record highs in 2021 and 2022
.

"China's ethylene capacity is expected to more than double between 2019 and 2025, which will outpace demand growth and lead to lower operating rates,
" concluded ICIS analyst James Wilson
.