Two industries hit by high oil and natural gas prices

A cross-section of Wall Street experts played down the recent surge in oil prices, saying it is unlikely to harm the global recovery. One indicator that supports this claim is the oil load, or the cost of oil as a proportion of gross domestic product. According to Morgan Stanley, the oil load – which is an indicator of the impact of oil on growth – is expected to reach 2.8% of global GDP in 2021, significantly lower than the long-term average of 3.2%, assuming an average oil price of $ 75 per barrel this year.

But by no means does that mean that no one will be penalized by the trajectory of oil prices.

Some sectors of the economy are feeling the effects of high oil and natural gas prices strongly, as companies are forced to delay major projects or even shut down altogether.

You can chalk the American fertilizer maker CF Industries Holdings Inc. to the latter category. According to the Wall Street Journal, CF Industries has been forced to close two factories in the UK due to soaring natural gas prices. CF Industries, which uses hydrogen and nitrogen to make fertilizers and other products, said it had halted operations at its UK manufacturing complexes at high natural gas prices with no schedule to resume production .

UK businesses are bearing the brunt of high energy costs, with electricity prices nearly seven times higher than at the same time last year. Meanwhile, the electricity markets in Germany, France and the Netherlands are also significantly higher ahead of higher demand expected in winter.

Natural gas prices hit their highest levels since 2014, overtaking oil and many other commodities. Natural gas futures traded up 1.9% to $ 5.37 per million British thermal units (BTU) on Friday, their highest settlement price since February 2014. natural gas rose 121% year-to-date, while the biggest nat. gas reference, the US Natural Gas ETF, LP (NYSEARCA: UNG) is up 101% over the period. The sticker shock is even greater in other key natural gas markets around the world, with the price of the European regional gas benchmark, the one-month TTF contract, closing at a record high of $ 24.2 by metric Wednesday, more than 5 times a year ago. levels.

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A recent Make UK survey found that around two-thirds of UK manufacturers say they feel the impact of energy prices, a Make UK survey, with energy-intensive manufacturing being the hardest hit.

Problem for petrochemicals

They are not alone.

After a brief recovery after seizing the unexpected opportunity presented by the Covid-19 pandemic (which has proven to be a double-edged sword) and a forgiving government that granted it an “open permit to pollute”, the wind seems to have turned against the petrochemical industry – again.

Not only have plastics manufacturers faced increasing competition as more refiners switch from gasoline and diesel to plastics, they are now seeing a sharp contraction in their profit margins thanks to rising costs of gasoline. Naphtha and LPG – the main raw materials of plastics.

Related: Energy Crisis In Europe Is Driving Up Natural Gas Prices Around The World

Petrochemicals – the building blocks of plastics – are processed from naphtha and LPG, or propane and butane. Companies whose production units are part of a larger refinery complex can exploit these locally produced raw materials as a by-product of petroleum distillation, but everyone must obtain raw materials from the market. free.

The result: Stand-alone factories without a fully integrated refining system and easy access to affordable raw materials increasingly face much higher production costs and may be forced to reduce cycles from for the third quarter of 2021.

To make the situation even more risky, Asia’s steam cracking capacity is expected to increase by around 20% in the current year, according to estimates by Armaan Ashraf, senior analyst at FGE.

Steam cracker plants convert naphtha and LPG into ethylene and propylene, the main building blocks of plastics. Meanwhile, a massive increase in natural gas prices along with a huge surge in petrochemical capacity in Asia, led by China, is not helping matters either.

The shale boom has led to a glut of cheap oil and natural gas, essential commodities used in the manufacture of plastics both as raw materials and as fuel. The fossil fuel industry has pivoted strongly to the petrochemical sector as the second cash cow even as the world grew weary of its role in environmental degradation and investors began to give it a boost. wide place.

Indeed, the plastics industry was on the verge of an epic explosion – until the coronavirus crisis and the collapse in oil prices that followed dealt it a potential fatal blow.

Last year, Time The magazine reported that South African integrated energy and chemicals giant Sasol Ltd has opened a new plastic plant in Louisiana, one of seven such projects underway, while Shell was building a massive, multi-billion dollar ethane cracker. plant in Pittsburgh with a production capacity of 1.8 million tonnes of plastic each year.

Hundreds of new plastic production plants and expansions were given the green light last year, according to the American Chemistry Council. Global plastic production is expected to increase by about a third over the next five years and triple over the next three decades.

But the energy and health crisis put an end to these optimistic plans and projections.

In July, Thai firm PTT Global Chemical announced it would indefinitely delay its plan to build a $ 10 billion ethane cracking plant in Ohio, citing uncertainty amid the health crisis, while Shell said in March that he was suspending his project in Pennsylvania.

Meanwhile, China’s plans to invest $ 84 billion in plastic and energy in West Virginia have yet to materialize three years after the pledge.

Kevin Swift, MD for Economics and Statistics at the American Chemistry Council, said Time that the price of oil and the economic crisis mean that spending is likely to be severely cut.

With Big Oil now shifting its focus from major investments to returning capital to shareholders in the form of dividends and share buybacks; the ESG boom and the continued backlash against plastics in general, don’t expect these dazzling petrochemical predictions to come to fruition anytime soon.

By Alex Kimani for Oil Octobers

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