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FRANCIS FUKAYAMA famously wrote about the “end of history” after the Berlin Wall came down. At that time, it really did feel like that for those of us who had grown up during the constant terror of the Cold War.

But with the benefit of hindsight, the history of major geopolitical divisions hadn’t come to an end, it had merely paused. Evidence of this is Mike Pence’s 2018 speech on China and the cross-party US pivot towards trying to contain the rise of China.

Further evidence that history only paused in 1989 are the Ukraine-Russia tensions. Europe seems to have edged closer to its biggest conflict since 1945 following the Russian decision to move troops into the separatist Ukraine regions of the self-declared Donetsk and Luhansk People’s Republics.

Vladimir Putin has also endorsed the claims of Russian-backed separatists to the entire Donbas region of eastern Ukraine as new sanctions by the West against Russia are introduced, The endorsement of the claims is seen as moving the crisis closer to a full-blown war between Ukraine and Russia.

Today’s polyethylene pricing, margins and the four megatrends

Geopolitics is just one of the four megatrends that I see shaping global petrochemical markets in the short and long term, the other three being Demographics, Sustainability and the Pandemic – or perhaps Pandemics. A Duke University study in 2021 estimated that the probability of novel disease outbreaks – which could lead to further pandemics – would likely grow three-fold over the next few decades.

“What on earth has this got to do with the price today and next week of polyethylene (PE)?” I can hear sales and purchasing managers asking.

Absolutely everything as the first chart below shows, which details the history of northwest Europe high-density polyethylene (HDPE) injection grade prices premiums over northeast Asia (in effect, China). It is the same pattern in the other grades of PE and polypropylene (PP).

China has never been as cheap versus Europe in the history of ICIS price assessments. Or to put it another way, Europe has never been as expensive compared with China.

In this first chart I cover just some of the many aspects of and interconnections between two of the megatrends that are shaping global PE markets.

This second chart examines the other two megatrends and shows how European and US HDPE margins have never been so far apart. Our margin assessments of course factor in the big gap in pricing, co-product credits from selling aromatics and C4 olefins etc. and costs of production.

Back to Ukraine-Russia and its immediate implications for PE.  The chart below – from this excellent ICIS Insight article by my colleague, Will Beacham –- shows European refineries that rely on Russian crude via the Druzhba pipeline.

In the event of an invasion of Ukraine, sanctions against Russia could cut supplies of crude oil through the pipeline, threatening oil refinery operations and petrochemicals production in Hungary, Slovakia, Czech Republic, Poland and the former East Germany.

The ICIS data forecast that for 2022, 2.79m tonnes of ethylene (11% of total European capacity) and 2.34m tonnes of propylene (12% of total European capacity) are reliant on refineries located along the Druzhba pipeline. While some alternative sources of crude oil could be sourced, it is unlikely normal levels of operations could be maintained.

“Although many refineries have built alternate sources, keeping full operating rates would be difficult for them as they rely on a consistent and reliable source of crude,” said Michael Connolly, ICIS Principal Analyst Refining, in the same article.

“Most refiners in Europe are aware of the risk of Russian crude and over the past five to 5-10 years have tried to reduce their dependence, or at least to build some capability to have an alternate supply. It doesn’t mean they would be unaffected, but there should be a little bit of resilience, depending on the site,” he added.

Europe depends on Russia for 40% of this its natural gas imports. But record shipments of liquefied natural gas to Europe in 2022 are helping ease the pressure.

Nevertheless, Clemens Fuest, president of German economics institute ifo told ICIS that in the event of a Russian invasion: “Even if the supply of gas isn’t restricted, there would still be a price shock, at least temporarily. This would affect private households and industry in Germany in equal measure.”

A recession wouldn’t necessarily mean weaker PE demand

The above comment points towards the risk that inflation could tip Europe, and possibly the rest of the world, into recession. But this would not necessarily mean weaker overall demand for PE as it is so, so much more complicated than this.

For your reference again, see below 10 drivers of global PE demand in 2022. I advise cutting this list out and pinning it your boardroom wall in order to stimulate constant discussion:

If you study these trends closely, you will see they are all driven by the four megatrends I highlighted at the beginning of this post. As a reminder they are Geopolitics, Demographics, Sustainability and the Pandemic/Pandemics.

Clearly, therefore, we need new models to understand demand. These models will involve far more complexity than assuming PE demand –- or demand for any petrochemical –- moves in line with GDP.

ICIS is working on these models. Meanwhile, amidst all this chaos, here is one piece of useful short-term advice: Stay in touch with our editors and analysts who track every micro-movement in petrochemicals markets. The micro-movements might not reveal any clear patterns, but they will at least help you make tactical and immediate selling and buying decisions. 

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