As the international oil price hit a 14 year high at the beginning of this week, the impact of the soaring price of the world's "king of commodities" began to spread to the downstream of the petrochemical industry chain, and the plastic industry was the first to bear the brunt.
Industry insiders said that as profit margins were squeezed by soaring costs, many plastic manufacturers had reduced production activities, the first sign that the demand damage caused by soaring oil prices could spread to other industries.
According to a number of traders in the industry, the operators of some factories manufacturing petrochemical products in Asia have reduced the processing rate to 80%. These plastic products will be used as key materials for the production of many products such as children's toys and car interiors. In the past, these facilities, known as petrochemical cracking plants, usually operated at or near full capacity.
These traders pointed out that the surge in crude oil prices and the prospect of the supply of petroleum derived naphtha from Russia are doubtful, and are challenging the economics of the production of plastics in the cracking plants of Korea, Taiwan, China and Malaysia. This is also an early sign that the conflict between Russia and Ukraine may lead to operational difficulties for industries that rely on upstream raw materials.
According to FGE, an industry consultancy, up to 15% of Asia's naphtha imports come from Russia, the Black Sea and the Baltic Sea.
Naphtha is a light oil for chemical raw materials processed from crude oil or other raw materials. It is mainly used as raw materials for chemical processes such as catalytic reforming and cracking. Its downstream products include a series of chemicals such as ethylene, propylene and butadiene.
At present, many petrochemical plants have suspended procurement from Russia and are hesitant to buy oil elsewhere in the context of such high oil prices. The finished products of these petrochemical plants will take about six weeks to complete production.
High freight rates have also exacerbated cost challenges and led companies to cut production activities now rather than risk huge losses.
The profit margin of commodities such as ethylene and propylene used to produce plastics is already very low, while the profit margin of relevant industries has further shrunk since the outbreak of the conflict between Russia and Ukraine.
"The situation is very uncertain for cracking plants in Asia," said Armaan Ashraf, senior analyst at FGE He said buying naphtha at a price of $130 a barrel was "very risky". He added that production margins would remain low for at least a month.
According to relevant traders, China Taiwan's Formosa Plastics Petrochemical Industries Co is reducing its operating rate of the maoliao plant cracking plant to 80% to 85%. Lotte chemical Titan, a subsidiary of Lotte Group in South Korea, has also reduced the operation rate of its Malaysian plant to less than 90% and plans to reduce it further when market conditions deteriorate.
Compared with the spot premium of less than $10 at the beginning of January, the spot price of naphtha for Asian delivery and the premium of the contract one month later have exceeded $30 / barrel. The extent of the spot premium reflects the anxiety of the market about the extremely tight supply situation.
