Ukraine-Russia: Global Chemicals Market Trade Impact Analysis

As more and more companies cease operations in Russia, harsh sanctions continue to weaken trade between Russia and the Western world.

But Russia's invasion of Ukraine has also affected all commodity markets, although each market varies depending on existing trade and other factors. The rise in crude oil and major feedstocks has added cost pressure to all petrochemicals and chemicals worldwide.

Europe has been particularly affected by rising prices of natural gas, a major energy source in the sector, compared to the cheaper energy value in North America and the more diversified and cheaper energy sources (coal and fuel oil) in Asia.

Dutch TTF natural gas futures can be used as a representative reference for energy prices in the European petrochemical industry. The chart above shows how MWh prices have evolved in recent years. The upward trend in TTF values in the fourth quarter of 2021 has accelerated since mid-February, adding higher costs and significant uncertainty to the cost structure of all companies.

High energy values are affecting petrochemical companies in many different ways. Energy-intensive chemical companies must maintain or increase previous supply disruptions through costs and/or adjustments to operating rates.

Abnormal fluctuations have led to the need to review mechanisms for the settlement of contracts for major feedstocks, chemicals and polymers in Europe. Negotiations that do not include energy terms for 2022 are forced to implement energy surcharges or price increases in response to high costs.

At the same time, high energy prices threaten the already weak growth of the European economy, hindering or questioning future demand for products in different chains. Products in the nylon 6 chain can be used as an example. Producers of caprolactam and polymers who have announced April deliveries have seen prices increase by 1,000-1,300 euros/tonne, more than 35% higher than the current price. As a result, the pressure shifts to the downstream industry, making it more difficult to pass on higher costs.

The maleic acid industry remains vigilant

Kaiyin Hu, consultant on maleic anhydride, oleochemicals, biomaterials and intermediates, said rising crude oil and natural gas prices have affected the maleic anhydride market.

In the United States, rising n-butane prices have put maleic acid prices under upward pressure. However, market participants are not worried about the supply of n-butane, as there is a large supply in the United States.

Europe is highly dependent on Russian oil and gas, a growing threat to European gas and oil supplies, and fluctuating raw material prices have become a top concern for European maleic acid producers and buyers.

Stakeholders are closely monitoring the possibility of n-butane shortages in the European market. Depending on the raw material sourcing strategy, some maleic acid producers may be more susceptible than others. As of March 11, it had not been confirmed that the supply of n-butane to major European players in the maleic acid industry was directly affected by the war.

Maleic acid producers that are highly dependent on Russian n-butane are expected to be affected first. Trying to reduce dependence on Russia and switch to another contract supplier may not be simple, Nonsense said. One contact noted that sourcing n-butane from a European contract supplier usually requires a long-term partnership.

Buyers may have to turn to the spot market to meet the quantities they need, but those prices may be much higher. In the short term, if the situation does not improve, there may be some production cuts or even force majeure in the market," Hu added.

In Asia, Hu's analysis suggests that uncertainty and fluctuations in raw material prices have left market participants "nervous." "Buyers hesitate when making decisions," Hu concluded.

methanol

Since Russia has been a major supplier of imported methanol for many years, market participants in Western Europe have been following developments in Ukraine for weeks.

In 2021, the European Union (EU 27) imported about 1.33 million tons of methanol from Russia, down from 1.49 million tons in 2020 and 1.64 million tons in 2019. However, the 2021 total was higher than the 2018 total (1.29 million tonnes) tonnes) and 2017 (1.21 million tonnes). Russia accounts for about 20% of the total EU methanol imports each year. Since methanol is a highly contracted market globally, it is difficult to replace this amount.

There are currently several methanol plants around the world that are idle, and if restarted, some pressure can be relieved in the medium term, but how quickly operators can get these plants to restart and operate at a steady rate also depends on the availability of natural gas feedstock supplies and the high cost of that gas in the current environment. Methanol buyers in Europe will also find themselves competing with consumers in other regions for any additional production.

Butyl acrylate spot market is tightening

Rachel Uctas, senior advisor on acrylic and acrylates, expects contract prices to rise in the second quarter as natural gas prices soar and the war exacerbates the bullish crude oil market. As early as October, Arkema had imposed natural gas-related surcharges on all butyl acrylate (BA) and 2-EHA contracts, but so far no other producer has followed suit. This is likely to change in the second quarter.

Russia's two producers of glacial acrylic acid (GAA) and BA — Gazprom and Sibur — have a total capacity of about 105 ktpa acrylic and 120 ktpa butyl acrylate, she said. The two producers have been actively selling butyl acrylate in several regions, including Europe, Turkey, the Middle East and South America. In fact, Uctas says they formed a joint venture in 2019 to increase their presence in export markets.

Traders and distributors are increasingly discussing reducing exposure to Products of Russian origin, and they are reportedly looking for alternative sources of BA due to ethical concerns. Since the invasion, the flow of material between Russia and Europe has deteriorated. Sources said that the supply of spot BA in Russia is drying up, for example, the supply situation in Turkey is tightening, and spot prices are expected to rise. The European BA spot market also strengthened in March.

PET and PTA markets

The PTA and PET markets already have good demand, limited imports and a high dependence on European sources, which increases the profitability of the industry in 2022. Trade flows between Russia and Europe are not large, so the current situation does not trigger a major change in the dynamics of supply and demand in Europe. However, in the face of increasing uncertainty and logistical constraints, especially in Eastern European countries, it was concerned with the need to ensure the supply of products.

While the short to medium term looks positive, the main concern in Europe in the medium to long term remains the consensus on stable or weak end demand for raw PET, and logistics constraints as the main reason for the good performance. Companies in the polyester chain work with downstream users, new technology suppliers and more to focus on how to respond to unstoppable trends in response to new environmental, social and governance standards. The use of PET will continue to grow, but a reduction in fossil feedstocks seems feasible. This change will change the cost structure, changing existing supply chains, operations and other factors.

epoxy resin

In early March, the European epoxy market was in turmoil as Russia's conflict with Ukraine left participants uncertain how to respond to spikes in natural gas and crude oil prices. Manufacturers say they need to pass on the spike in production costs, but by March 15, they are still assessing what increases the market will accept.

Phenol/acetone producers have approached customers to recommend adding at least 40% to the Q2 additive. Suppliers acknowledge, however, that if they work too hard, they may hinder demand that should have been a seasonal boom.

On March 14, epoxy producer Olin announced that it would temporarily cut production at its Stade plant in Germany. In the first quarter of 2022, the company said, "demand for epoxy resins in Europe was lower than expected, exacerbated by uncertainty following Russia's invasion of Ukraine." Olin went on to say that it was "unwilling to sell incremental products to poor-quality markets, and it would be impractical to operate epoxy facilities at less than 50 percent operating rate." ”

"Because of these factors, record natural gas and electricity costs in Europe, and facility maintenance, Olin decided to suspend stade epoxy production," its press release said.

According to market sources, epoxy resin producer Huntsman has imposed an energy surcharge of 300 euros/ton on all accounts. Westlake Epoxy (formerly Hexion) has yet to be officially announced, but buyers are gearing up for a sharp rally in April. Market sources said that due to the increase in inquiries after Olin's announcement, European suppliers had to introduce sales distribution.

polyamide

The European polyamide market came under pressure again in the first half of March due to upgrading gas and electricity costs since Russia's invasion of Ukraine. Ammonia is a key precursor to THE PA6 and PA 66 intermediates due to rising natural gas prices, which rose from about $200 per tonne in March 2021 to nearly $1,500/tonne in early March 2022.

Ukraine, a major producer of ammonia, has closed its factories. Other ammonia production facilities in Europe are grappling with high raw material prices, and polyamide market players are concerned that other facilities may also be closed due to increased production costs. According to one European market participant, "polyamide 66 cannot be produced without ammonia".

Polyamide producers cope with higher production costs through a series of sharp price increases, some of which cost up to 1,000 euros per tonne, depending on the material and time. Several major automakers in Western and Central Europe announced temporary closures due to supply disruptions from Ukrainian component manufacturers, and downstream consumption of polyamide products slowed in early March. Market participants are concerned that polymer producers and synthesizers could reduce operating rates or even shut down production lines, depending on the duration of the war in Ukraine.

Chlor-alkali industry impact

As far as caustic soda is concerned, many industries will be affected. The Kalush plant in Karpatnaftochim, Ukraine, has a capacity of 199 ktpa caustic soda, 181 ktpa chlorine and 300 ktpa PVC – which was discontinued on 24 March due to martial law in Ukraine.

"The entire equipment and communications of the process department are extracted from the product, filled with an inert gas (nitrogen) and put into protective mode," the company wrote. The device is in an appropriate technical state. Fire protection systems, emergency protection, early detection and early warning systems, and energy supply systems work well.

Ukraine's exports of PVC to Europe increased in January and early February. Since production is completely shut down, this will not happen in March or for the foreseeable future. Karpatnaftochim is the only PVC producer in Ukraine.

There will also be an impact on caustic soda due to the reduction in caustic soda production in Ukraine, but this is unlikely to attract attention, as Rustal has stopped production at its Ukrainian alumina refinery, which will partially offset the reduction.

Due to planned and unplanned production cuts, chlor-alkali production in Europe is currently decreasing. High energy costs put a lot of pressure on European producers, and spot products are now almost non-existent.

Supply is unlikely to improve in the short term, while the demand situation could be negatively impacted, particularly in the pulp and paper industry, where many major European companies have announced they will stop producing in Russian factories or stop trading with Russia.

alumina

Another major industry that has been directly affected by the conflict is the alumina industry. Rio Tinto announced it would cut ties with Russian companies. Reuters reported on March 10 that Rio Tinto was terminating all commercial relations with any Russian company.

The move has created uncertainty about the future of Rio Tinto's joint venture with RUSAL. Rio Tinto owns an 80% stake in Queensland Alumina Limited in Gladstone, Australia, which is believed to have an alumina capacity of 3954 ktpa. Rio Tinto also reportedly plans to halt the supply of bauxite and purchase alumina from Ireland's Aughinish Alumina, which is wholly owned by Rusal Syndication.

In addition, on March 10, the United Kingdom imposed sanctions on Oleg Deripaska, the founder of Rusal and the majority shareholder of the aluminium company EN+. It's unclear what impact the sanctions will have on the alumina industry or Rusal's business, but it doesn't think it will affect Aughinish Alumina.

In 2018, Oleg Deripaska was sanctioned by the U.S. government, leading to an increase in alumina prices and shortages. Finally, in early 2019, after Oleg Deripaska reduced his stake in these companies, the U.S. Treasury Department lifted sanctions against RUSAL and its parent company En+.