A rise in gasoline prices has led to a shortage of chemicals that are also used in the production of goods such as auto parts and pharmaceuticals, putting further pressure on the costs of manufacturing essential items.
The rise in oil prices this year has already increased the cost of so-called petrochemical feedstocks, which are produced from a crude oil derivative. But a strong appetite for the chemicals among gasoline makers has intensified competition for these important building block materials.
Benzene, derivatives of which are used to make rubber, nylon and pharmaceuticals, soared to a record high of $1,900 per tonne in Rotterdam last month, before declining to $1,780 in early July, according to ICIS, a raw materials data company. † Other chemicals such as toluene and xylene, which are used in plastic packaging and textiles, have also reached their all-time highs since record highs began in recent weeks in the 1980s.
Gasoline prices are near historic peaks, despite crude oil trading being well below the all-time high it reached in 2008. For example, petrol and diesel prices in the UK have soared to new heights, with unleaded reaching 191.4 pence in June, above last year’s average of 133p, according to the RAC.
The price of Brent oil has fallen from more than $120 a barrel to $100 a barrel in the past month, a decline expected to follow with some delay, but availability of refined products is likely to remain limited.
Global supplies became extremely tight due to shortages of refinery capacity in the US and Europe caused by shutdowns during the height of the pandemic and uncertainty over Russia’s ability to get its diesel and other products to market following Western sanctions.
Despite the recent drop in crude oil prices, petrochemical analysts say skyrocketing gasoline prices have encouraged refineries to use higher-value chemical feedstocks to make gasoline on an unprecedented scale. “It’s like using cream instead of milk to mix in your coffee,” says ICIS’s Zubair Adam.
That has added upward pressure on the prices of petrochemical commodities, which tend to follow oil price movements.
Passing on increased input costs poses a challenge to petrochemical producers such as divisions of Royal Dutch Shell and TotalEnergies, Germany’s BASF and Saudi Arabia’s Covestro and Sabic, as demand for some goods falls as consumer spending comes under pressure by inflation.
Steve Jenkins, vice president of Chemicals Consulting at Wood Mackenzie, said refineries and petrochemical producers are prioritizing their fuel operations over the production of chemical feedstocks. “A refinery is there to make fuel. What’s the difference between not getting fuel in the forecourt and the price of a plastic bottle going up a fraction?” he said.
The challenge of having higher input costs for raw materials comes on top of the extremely high price of natural gas in Europe, which has doubled in a month and is relied upon to process oil into chemicals in huge complexes.
Sriharsha Pappu, Global Head of Chemicals at HSBC, said chemical producers, who use petrochemical feedstocks in their manufacturing processes, mostly benefit from inflation, but have suffered from rising costs and the recent decline in consumer confidence.
“The worst you can have is demand is falling and supply is still an issue, so you’re on a tight margin,” he said.
Covestro said that “of course we are experiencing higher volatility and macroeconomic price increases” for oil derivatives such as benzene, toluene and propylene, but added that “prices are currently below their spring peaks”.
It added that it largely passes on price increases to customers when demand for its chemicals is high, but it has been difficult to estimate how much the increase in the cost of finished products made using its inventories is due to its own price increases.
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The price pressure is not universally felt for all chemicals. Mike Boswell, chief executive of Plastribution, a UK distributor, acknowledged the pressure on “aromatic” chemicals but said there was an abundance of propylene, a by-product of refining with many uses – a stark reversal of shortages during the pandemic when the demand for fuel fell.
“It’s a story of two halves,” he said. He predicted that petrochemical producers would cut production to meet demand, adding that “we have peaked and are looking for a soft landing in terms of pricing”.
Hakan Bulgurlu, chief executive of Arçelik, a Turkish device manufacturer, shared optimism about cost pressures easing after polymer prices saw an annual increase of nearly 25 percent in the first half of 2022.
“Over the past six months, increases in energy and oil prices have pushed up costs in the petrochemical industry. This caused price increases in polymers and derivatives,” he said. “Pressed by inflationary tides and recession forecasts, demand has tightened recently, bolstering expectations of a downward trend in prices in the coming months.”
Tesco and Heinz recently settled a dispute over price increases after the UK supermarket temporarily halted its staples.
But Jenkins said there will be more cracks in supply chains than cost pressures. He expects more pressure from high petrochemical costs for fast fashion companies like Zara owner Inditex, Uniqlo and H&M and consumer goods groups due to the wafer-thin margins of the supply.
“There’s not enough fat in the system margin-wise to absorb this cost pressure,” he said. “The fact that you have public squabbles between brand owners shows that this pressure is real.”