The BASF commentary about the impact of gas cuts in Europe should not be read as specific to BASF, but as we move out of the winter in Europe it is less likely that countries will directly restrict industry in favor of retail customers should gas supplies become limited. While many European countries will try to protect retail customers from hyperinflation in energy costs, their ability to do that for the industry might be more limited as they cannot find the additional gas, and subsidizing everything would be fiscally irresponsible. We expect to see more basic chemicals and derivatives moving from the US and the Middle East to Europe to displace uneconomic local production, but we understand that all shipping capacity is now constrained – liquids, gases, and containers – limiting the volumes that can move. The high end of the cost curve that Europe has occupied for decades in chemicals means that exports from Europe have been very limited and reducing exports is not a balancing act tool that Europe has to play with. We continue to see significant upward pressure on prices in Europe and the jump in inflation in the region, reported today, was dramatic but could accelerate as there are very few corrective levers that Europe can pull right now.
Source: Bloomberg, C-MACC Analysis, April 2022
The declining US ethylene price, shown above is an indication that the logistics system is strained as US ethylene could move in large volumes to both Asia and Europe at current economics, but there is not the export capacity to make it happen. With Europe and Asia facing higher operating costs and with limited ability to move materials around the world to exploit relative costs, the upward pressure on prices in Europe and Asia will remain and this will create an even larger margin umbrella for those US producers that are exporting polymers, especially if ethane prices do not follow US natural gas prices high, as has been the case this week.
