It is likely a difficult day for the European chemical industry as all of the fuel prices that they depend on are rising quickly, which will force many difficult decisions over the coming days. There are a couple of factors to consider – what happens to costs and margins if energy prices remain inflated, and what happens if energy availability becomes an issue and plant closures are necessary. In a world that is already reeling from inflationary pressure that we have not seen in four decades, there is at least an acceptance that prices can move higher, but the energy-dependent European industrial and materials companies will need to move prices quickly and meaningfully to absorb their higher costs. If natural gas supplies from Russia are halted, Europe is likely going to need to allocate supplies, as there is no easy fix given an LNG system that is already at capacity. Industry will likely take the hit to ensure power for heating and cooling. This will drive product shortages in Europe, especially for chemicals, which will likely make it easier to get the pricing necessary to cover costs.
Source: Bloomberg, C-MACC Analysis, February 2022
There is an opportunity for the US to fill the gaps here – less so on LNG because terminals are already working at capacity – but possibly significantly for chemicals. As we noted in today's daily report, US natural gas prices have only moved up a fraction of what we have seen in Europe today and this is because the market is not that liquid as there is finite US export capacity. In the chart above, Asia costs are a reasonable proxy for Europe. Consequently, the US has much lower costs for many materials and plenty of margin over costs to move products to Europe, more so if European prices rise. The issue may be shipping capacity as we are still very constrained on container availability and container ship availability. Ironically, the world has overbuilt LNG shipping capacity relative to terminal capacity and empty LNG ships are looking for cargoes today. The rail data shows more US chemical activity and any need to move more material to Europe would put further strain on the rail and on-road transportation to get products to ports.
Source: Orbia 4Q21 earnings release, February 2022
Chemical stock prices are falling in Europe, but not to the degree that is possible if Europe becomes feedstock and energy-constrained. We would expect any curtailment of gas supplies from Russia to have a direct impact on chemical company earnings and share prices. The major US chemical companies are also losing ground today, and while they might be beneficiaries of shortages in Europe from their US bases, Dow, LyondellBasell, Westlake, ExxonMobil Chemicals, and others all have significant European production capacity. We note the strong Orbia results below - Orbia and Westlake have significant PVC businesses in Europe – Shin-Etsu and Formosa do not.