VINACHEM

There is no indication yet that the escalation in the Ukraine crisis has caused any disruption to Europe's petrochemical markets, but participants are paying close attention to the potential fallout.

The risks fall into three categories — exposure to Ukrainian production, exposure to Russian imports, and the potential for further increases in energy costs. On the flip side, there is caution that tensions could ease and, with that, some of the factors supporting energy and chemical prices.

Ukraine production

Ukraine has a limited petrochemical industry with just a single steam cracker operated by Karpetneftekhim in Kalush in the west of the country. It is a long way — around 1,000km — from the breakaway regions in eastern Ukraine that Russia now recognises as independent states, and so production there is under no immediate risk.

The cracker's nameplate capacities are 250,000 t/yr for ethylene and 125,000 t/yr for polymer-grade propylene. Ethylene is used locally in production of HDPE, LDPE and PVC. An associated unit produces around 200,000 t/yr of caustic soda and 180,000 t/yr chlorine.

Propylene is exported, mainly to Poland, with smaller amounts finding their way to Germany and Slovakia. Crude C4s are also offered occasionally to western Europe. PVC continues to be offered out of Ukraine.

The cracker was closed between 2012 and 2017 when it was controlled by Russian firm Lukoil because of disputes over pricing and reliance on raw materials from Russia. Since being sold to local entrepreneurs and restarted, the cracker has had access to wider sources of feedstock under a duty-free regime.

Russian exports

Russia exports a modest amount of chemicals. The initial US and European sanctions against Moscow are targeted at individuals and banks associated with the Russian government, so there are no immediate risks to existing trade flows. A broadening of sanctions could have an impact on chemical markets though, and European participants will be assessing their exposure to risks and options if that were to happen.

There have been indications that some buyers of Russian chemicals and downstream products, for example synthetic rubbers and potassium chloride, have brought forward some contractual purchases where possible as a precaution against tighter sanctions. And buyers are likely to be increasingly cautious about future purchases from Russia in cases where they have other options.

Russia's largest chemical export by volume is methanol — 1.4mn t was shipped to EU countries in 2021, with additional Russian volumes sent to the EU via Finland and the Baltic countries. Russian volumes make up an estimated 15pc of Europe's methanol demand and so there would be a big impact on the market if they needed to be replaced, although no disruption in deliveries is expected at the moment. Spot methanol prices are stable and discussions around monthly pricing indicate no significant change.

The synthetic rubber supply chain is another area that could be impacted. Russia exports large volumes of rubber across the globe to many of the major tyre manufacturers, mostly polybutadiene rubber and some styrene butadiene rubber. The country is also a major exporter of isoprene rubber. Some tyre producers have been building up stocks of synthetic rubber in anticipation of economic retaliation against Russia. At the same time, some European synthetic rubber producers may see sanctions on Russia as an opportunity to regain market share.

Olefins trade between Russia and Europe is limited. There is a modest amount of propylene shipped and railed from Russia into eastern Europe. Export statistics show 67,000t of propylene was exported to Europe from Russia in 2021, although the true figure is higher because not all propylene is captured in the statistics. For example, some is traded as LPG streams.

In the aromatics sector, there no issues at the moment. But there may be concerns if sanctions tighten, particularly in the orthoxylenes (OX) market. The European OX market is already tight because of reduced flows from India and the US. If future sanctions restrict movement of OX into Europe, some consumers could be caught short just as demand picks up in the summer. Western Europe imported 31,000t of OX from Russia in 2021. Any future restrictions on reformate trade could also support blending demand for aromatics. Argus estimates around 300,000t of reformate came to Europe from Russia last year.

Russia has increased export of polymers in the last few years after bringing on stream new capacity. Export of polypropylene to the EU reached 352,000 t/yr last year, up from just 51,000 t/yr in 2019, while HDPE exports rose to 146,000 t/yr from 18,000 t/yr over the same period. These volumes are still small in the context of Europe's overall polymer markets but they can influence spot market sentiment, particularly in Poland and Italy where the majority of product is moved to. There are no disruptions to Russian polymer exports so far.

Longer term, Russia has ambitions to further expand polymer production and exports, with the Baltic Chemical Complex situated on Europe's doorstep on the Baltic coast. The first stage of the complex, which will eventually have a capacity to produce around 3mn t/yr of polyethylene, could come on stream in 2024, according to the development company. There is no reason at the moment to suggest that the project could be directly affected by the deteriorating political situation, but European polymer producers may try warning potential buyers about the risk of increasing their reliance on Russia.

Energy costs

The risk of further inflation in energy costs is a concern right along the chemicals supply chain. The escalating tensions between Russia and the west over Ukraine has already contributed to crude prices reaching seven-year highs. Near and medium-term gas and electricity prices moved up on 22 February, but are below the highs of the fourth quarter of last year. Germany's decision to halt the certification process for the 55bn m³/yr Nord Stream 2 gas pipeline has not helped sentiment but does not fundamentally change the situation since there were no gas flows through the pipeline.

Any tightening of Russian energy supplies through existing routes could drive a further spike in oil and gas prices and, in a worst case scenario, a structural shortage. But a de-escalation could see energy costs pull back from current levels, and producers and buyers will be wary of building up inventories.  - argusmedia.com-