The major issue with the higher natural gas prices in Europe (and rising prices globally) is the knock-on inflationary impact it will have on products that have natural gas as a feed, rather than those buying it as a fuel. The fuel buyers will take some of the hit, but will also try to pass on some of the hit, as it is generally a small part of overall product or service costs. The focus has been on ammonia/urea production because of the knock-on effect on food-grade CO2. But other products, such as methanol, would also be impacted, although there is not much methanol capacity in Europe. Higher LNG prices in Asia could encourage more coal-based methanol production, which is precisely what the increased use of LNG was supposed to prevent – replacing a high carbon footprint route with a much lower one. In our view, it is imperative that the attendees of COP26 recognize the need for (cleaner) natural gas and LNG, and enact policies to support it. This inflationary lesson is well-timed.
Separately, the relative stability in ethylene and propylene prices suggests that the effects of storms Ida and Nicholas are subsiding, and absent any further weather issues or other major unplanned outages, the next movement should be down for both products. We could see some support for ethylene if ExxonMobil/SABIC start-up derivative units ahead of the new ethylene plant, but the opposite argument also applies. See more in today's daily report.
Source: Bloomberg, C-MACC Analysis, September 2021