The Petrochemicals Shock That's Already Rippling Through Plastics

Hello, I'm Stephen Carroll. I'm in Brussels where many of Europe's biggest decisions get made. And I'm Caroline Hepgett in London with the hosts of the Bluebeg Daybreak Europe podcast. We're up early every week day, keeping an eye on what's happening across Europe and around the world. We do it early so the news is fresh, not recycled and so you know what actually matters as the day gets going. From Brussels, I'm following the politics, policy and the people shaping the European Union right now. And from London, I'm looking at what all that means for markets, money and the wider economy. We've got reporters across Europe and around the globe feeding in as stories break. So whether it's geopolitics, energy, tech or markets, you're hearing it while it happens. It's smart, calm and to the point. And it fits into your morning. You can find new episodes of the Bluebeg Daybreak Europe podcast by 7am in Dublin or 8am in Brussels, Berlin and Paris. On Apple, Spotify, YouTube or wherever you get your podcasts. Bloomberg audio studios. Podcasts, radio, news. Hello and welcome to another episode of the Adlots podcast. I'm Tracy Alloway. And I'm Joe, wasn't all Joe. I have a prop for today. Prop episode, a visual learning aid for a podcast. Okay. I'm going to hold this up. Yeah. What is this? Uh, it looks like a magenta marker magenta. Yeah. It's pink. It's hot pink. What's a magenta? It's like purplish pink. Really? Okay. Color is beside the point. It is indeed a highlighter. But more importantly, it is a result of a complex petrochemicals supply chain. You're right. This magenta is more purplish. I don't know why I always thought it's a little bit more pinkish, but yes, you're correct. You're correct. You're totally correct. I didn't intend your major takeaway from this conversation to be the different pink magenta. No, I feel a little stupid. Okay. But yes, you're right. And without advanced chemicals of all sorts and oil and all that, you would never have the plastic shell of the marker and maybe even some aspects of what gives it color when you draw on something. All right. So what is this plastic casing actually made of? This is a pop quiz. But I definitely have no idea. Okay. It starts from crude oil. Yeah. Okay. So crude oil distilled into. Keep going. Naptha. Naptha, right? Naptha. And then naptha is. This is a hint. Cracked into. Ethylene or propylene? Yeah. Okay. Yeah. I know. I know. Okay. And then it gets polymerized. Yeah. Of course. Into polyethylene. Right. And then it gets chopped up into tiny little plastic pellets, which are. I know you know this one. What are they called? The little plastic pellet. One of my favorite words. Go on. Nurtles. Nurtles. I remember all of this from that episode that we did. Nurtles. The building blocks of highlighters and lots of other plastic products would mean noodles. That's right. Okay. So the reason we bring this up is obviously. There's a situation in Iran. The Strait of Hormuz is still closed. And we're starting to see a lot of the disruptions in the oil market start to ripple out into other petrochemicals. Right. And someone asked this on a twin of the other day and they were like, "Joe, is the higher price of oil going to impact the price of plastics?" And I was like, "I would be very surprised if it didn't." I mean, I don't really know for sure. But it would be very weird. It would be hard for me to imagine a scenario in which the key input doesn't. The thing that I am very curious about, and you described this sort of sequential chain of industrial processes from the oil to the Nurtles. And of course, when we did the episode, one of the things that we've talked about is that there is a gap between the price of some of these end products and the implied price of crude oil. So crude oil, I don't know exactly where it is. Right now at this moment, they were recording it, but it's shot up. But these end products have shot up even more, and our guest, Worry Johnson, had a really good explanation, which is that the refineries do not want to shut down. And so they're rationing. They're slowing their input. They're input because it is very costly to shut down and ever restart should they ever run out, which is a prospect given that we're seeing a volumetric decline in the amount of oil available in the world. What I'm curious about, which I don't know the answer, is whether this applies to all of the different processing steps along the way, which is, is there the sort of even greater price impact because the entities that do all these sequential industrial processes are slowing down because the shutdown and restart process is costly for them as well. Well, I would say the added complication with a lot of petrochemicals is we are, in fact, seeing some closures already. So in Asia, we've had a few crackers, as they're called, Asian crackers, start to shut down their production and basically declare force measure. And so we are seeing your petrochemicals get made in places like Japan and South Korea. I think the question we're kind of inching towards is whether or not this is just going to be a question of price, you know, prices for plastics go up or an actual supply shortage in the sense that maybe you just can't get certain types of plastics or packaging. And one other thing I would just add, I think in the post-COVID environment, and under appreciated driver of inflation at that time was the cost of packaging. That's right. Because we did see the cost of plastics go up. And if you think about what you're buying at a grocery store, like, okay, it's a bunch of carrots, but it's also a bunch of carrots in a plastic bag. In a plastic bag completely or jar or whatever. And I would say in a lot of the cases of food stuffs in particular, you're mostly paying for the entire supply chain and the packaging of it. The actual food value is almost dirt cheap if nothing. And so yeah, and are we just going to get outright shortages? What are the ripple effects? I don't think we have any idea. Probably one of these things that compounds the longer this war enclosure goes on. Many questions that we have. All right. Well, I am happy to say we do, in fact, have the perfect guest to talk all things petrochemicals. We're going to be speaking with Philip Guerts. He is the chemicals and oil analyst over at B-Neph and a guy who lives and breathes polymers, hopefully not literally. Not breathes. Hopefully not breathes polymers. All right, Philip. Thank you so much for coming on all thoughts. Thank you very much, Tracy and Jill. And Sounds are reset to introduce me with living and breathing polymers, but I'll take it. I'll take it for sure. Well, we're all filled with microplastics now, right? So you're not the only one. Exactly, right? So I'm tempted to begin just by asking you to kind of list all the petrochemicals affected by the straight of hormones, sort of like forced gump style, ethylene, propylene, polyethylene. Go on and on and on. But just broadly, why don't you tell us about the Gulf region and its role in the petrochemicals supply chain? Who? Right. Yeah. Lots to unpack here. So when it comes to chemicals at large, let's maybe establish three different categories. We have the feedstock, like you already pointed out, Tracy. Basically, you almost don't need me here. But you have the crude oil that's turned into Nuffda and liquefied petroleum gas, which are butane and propane principally ethane. Those are all the feedstocks that go into the so-called crackers and the crackers turn them in what we call base chemicals. They're technically six major base chemicals that come out of this. But for the sake of today's discussion, the major focus will probably be really around ethylene propylene. If we want to get re-defense, we can talk about xylenes, parasolene or butadiene. But a lot of the, really, the majority of the bulk plastics that we talk about really come from ethylene and propylene and some from parasolene in terms of polyethylene, terraftolate or also more commonly known as polyester. So ethylene, propylene, xylene are turned into polyethylene, polypropylene and into polyethylene terraftolate or polyester. Now you have a wide range of really different derivative chains. Even within polyethylene, you have a lot of subcategories and within those subcategories. You have other subcategories. Very simple terms. You have a three-way division into high density polyethylene, low density polyethylene and linear low density polyethylene. It doesn't matter too much, but it's good to be aware of that when we talk about, while in analyst terms about where the market is moving, we typically look at high density polyethylene, what's the supply demand there? Same goes for low density. Obviously, they have different applications and also within those larger buckets, there are a lot of subcategories. Now to circle back to the major theme here of what's the position of the Middle East Gulf. So within those three categories, firstly, the Middle East itself is a major exporter of polyethylene, polypropylene, etc., etc., especially of polyethylene. And when I say major, let's be specific and eat polyethylene, polyethylene varieties, that's about 12% of global capacity. Production would be slightly higher, 13%, 14%, quite a significant chunk to make that even more explicit. If you take those volumes, we're talking about 18 million tons, 1/8 of production capacity, and Middle Eastern crack or Middle Eastern facilities typically run at very high rates 90-100%, so roughly an equivalent amount of production. If you take all of that, that's basically as much as Europe/slightly more consumes. So it's a lot, right? You have those volumes firstly being taken off the market directly, although couple of here because technically polymers are not. exported differently than fuel. They're exported to the solid state, which means theoretically, there should be the possibility of diversion that's slightly easier than for oil, NAFTA, or oil products in general. It's a big asterisk there, but if you take all of that off the market, you basically have the entirety of what Europe consumes all of the sudden disappearing. So that's step number one. Emphasis here on this goes especially again for polyethylene varieties. Polypropylene is slightly lower. We're talking about seven-ish percent of global production. PVC, poll-evenal chloride, which is used heavily in infrastructure, even lower. It's three to four percent. Styrene, which is another major value chain we're talking about against six to seven percent. So, the Middle East in terms of polymers, that's really, really a polyethylene story, but not exclusively. The direct polymer export. Step number two is, and that I would argue is really where you see the biggest impact is on the feedstock side. This is something you can subdivide into three categories. You have direct NAFTA exports. You have crude oil exports that are then turned into NAFTA amongst others. So the refineries run on it. And obviously, if you have to cut refinery rates, you're also going to lose NAFTA output. And you have what's again called LPG liquefied petroleum gas, which I'll just follow too. Well, as LPG from now on, but that means propane butane. So we have those three. They almost exclusively go to Asia. And when I say Asia, we can go into the nitty gritty details of how dependent each individual producer is exactly in those feedstock streams, because they are quite huge differences there. But in very broad terms, polymer exports, that's 12 percent. If we take the NAFTA exports and the crude oil exports, and we translate that into how much does ethylene and consequently polyethylene production would have to be cut in Asia, that's probably around 15 to 17 percent of global production. So that's really where predominant hit comes from. That was fantastic. First of all, quick question. So on NAFTA, is that typically produced where the oil comes from? How tight is that? If it's derived from crude oil, is it typically right there or they're parts of the value chain where the oil gets shipped a long way and then the NAFTA is produced somewhere else? That's basically the latter or rather, it just depends. The same as for refinery that large, it just depends on where your refineries are located. So if you look at the Middle East, for example, or let's take Saudi, Saudi produces around 10 to 11 million barrels of crude oil per day. But if I'm not mistaken, that's refining capacity is around anywhere between three and four million barrels per day. So in that case, it refines a relatively small amount of its total production capacity. So to Joe's point, why do places like Japan and South Korea, why do they have crackers who are refining NAFTA into other polymers at all? Why does that make sense for them? Or is strategically important? Well, history plays a huge role. Japan next to Europe and the US was really one of the front runners of the Petrochemical industry. And that's also why at the same time, even before all of this happened, Japan was also on the front line of losing its chemical industry. That's another topic we can get into later. But basically, your question would also be then why aren't those products exclusively produced in the Middle East and then shipped? Why not just import them? Why even bother refining them domestically? Well, I mean, it's not only a question of NAFTA press A, right? But Japan also needs jet fuel diesel gasoline, etc. So all of those come into one supply chain. And another asterisk here is the Middle East. Again, the Middle East is also a major producer of chemicals. If you look at ethylene, for example, the largest by far, surprisingly, I don't need to turn this into a pop quiz. That's China. That's 61 million tons of ethylene, 25% of global capacity. Then comes the US 44 million tons, a data, by the way, as of January 2026, provisionally. Then you have Saudi Arabia, 17 million tons. Right? So you already have a huge step down here. But Saudi Arabia is the third largest producer in terms of chemical ethylene capacity, at least. Then you have South Korea of 13 million tons. So what I'm getting at here is, the Middle East already, Saudi as an example, produces a lot, has a lot of capacity. But because there is such extraordinary oil producers, next to chemical producers, and to chemicals, they produce locally, by the way, are largely gas-derived. We can get also get into that later. But they do both, right, to export a lot of polymers, a lot of chemicals, but they also export a lot of products. Probably a bigger question in terms of the overall oil supply chain. Why companies have chosen to also build out the refined reason Japan, South Korea, Watt and in all in the Middle East itself. The Bloomberg This Weekend Podcast News Analysis and the lighter side of Bloomberg, including our weekly news quiz. Mattel reported higher than expected first quarter revenue thanks to the demand for which toy car brand. I will. I will. Yes. I've stepped on many of those with my terms. With those. Very much. Very fair feet. The Bloomberg This Weekend Podcast, subscribe today on Apple Spotify or wherever you listen. What end uses would you be most worried about now? Because the volume or the capacity numbers that you mentioned are pretty substantial. So again, I'm not too worried if we go for a few months without making highlighters. What are the end use cases that you're watching right now? They're like, oh, this could be a real problem. You guys had podcasts on fertilizers on this. Yeah, that's right. It was the very similar story. My manager sir and without it, I would be food packaging. Okay. I am not aware of any fungible products for polyethylene to be used at the same skill for food packaging as well polyethylene. So I do not know where it is a viable alternative. Maybe there is and I'm just ignorant about it. But to me, without a doubt, food packaging and packaging at large, it's very cliche to take your own topic and talk about how incredibly important it is to modern day society. But I mean, this is the complexity of modern day society. And this is actually a very important point. And just like everyone jokes is like, oh, what I do is the chase is the key thing holding modern day society together. Okay, podcast and maybe not, but like you're not wrong. Like any one of the easiest things go and the whole thing goes. That was the less of the COVID. So you're not absolutely. So take the take the credit you're at the center of the world right now. So yeah, all right, talk about food packaging and what you're worried about. Yeah, food packaging packaging at large. I'm less worried about let's say infrastructure projects, right? Because if you take let's say high density polyethylene and polyvinyl chloride, a lot of them go into infrastructure projects. Hence why you could see in India, for example, since 2018, 2019, huge search in those chemicals demand, especially high density polyethylene, because there were incredibly large infrastructure projects, especially on water pipelines, if I'm not mistaken. So a lot goes into that still incredibly important. But if we talk about meeting really the urgent tasks of the day, which is making sure that everybody has access to their basic needs, I find it very hard to see how value chains can be constructed or how a shortage of polyethylene or other plastics can be circumvented, especially polyethylene here. I'm concerned about because of the disproportionate impact. And we briefly touched upon, hey, if 12% of polymers are cutoff, polymer exports from the Middle East and if feedstocks are cut off, but that's only a part of the story there are many angles here to take overall impact, obviously without a doubt will be sizeable, how sizeable time will tell. But I cannot think of alternatives to the problem we would be facing, which is packaging, getting stuff from A to B, making sure that stuff is conserved. So if anybody knows in the audience, please let us know in the comments or yeah, to learn. So okay, on that note, what are we seeing now in terms of polyethylene availability? So I mentioned that we have seen some crackers in Asia who have had to reduce their refining output. Are we seeing prices start to rise? Are we seeing outright shortages? What are you observing in the market so far? So I would kick this off by saying that everything happens with a significant delay. And especially now, voyages from the Middle East gulf to South Korea Japan take about 18 to 25 days and all were kind of now entering that period. So if you look at crude oil imports that went to South Korea, for example, you could see them still spiking in the second week of March, just because a lot of ships departed in late February, a wet or not in anticipation of this happening, but there is a spike in the second week of March. So on a physical site, to me, it seems we have seen comparatively little impact yet. I think most of this where we materialize around early April and from Darron it gets worse pretty quickly. Also one important site note here, and people can again pitch in in the comments, but polyethylene markets are relatively opaque when it comes to the exact availability. So we talk a lot about run rates, even demand, right? One very cliche topic that's regurgitated a lot is demand in Europe is look warm. But if you look at apparent demand, which is trade plus some production run rate assumptions that are reasonable and based on company statements, you see that demand is pretty stable. So my point here is that demand how much is consumed in in the first place as a relatively obscure topic in the world of polyethylene and plastics, because if you look at what polyethylene consumption means, you have a lot hundreds, thousands per market of small plastic converters, they take those pellets and they turn them into usable plastics. And to me, it seems that data collection there may not be as well developed as for, let's say, oil refineries, or maybe I'm just ignorant about it, but that's been my observation so far in the industry that demand numbers are hard to get by. So circling this back to where we're at right now, three, four weeks into the scenario. I'd be careful with any concrete data points you're seeing or any general statements about demand being down, about supply being cut. Force measures, for sure, we've seen an incredible high amount of statements of production being cut. We can also get into the details of which markets, how much. But if you look at across Asia, you've had about 30 to 40 crackers, probably that have made statements in one way, shape or form quite often, though that just pertains to production curtailments, not per se a full shutdown. Or force measures, meaning that they cannot guarantee that they can supply their contractors with whatever the contract stipulates. Very long story, slightly less long. So far, my take is the impact has been relatively limited on the material front. We have seen price increases, by the way, especially on the NAFTA front in Asia. But I would be very surprised if this does not deteriorate very significantly over the next two to three weeks. By the way, I genuinely wasn't sure about this. There is polyethylene futures that trade on the Dallion commodity exchange. We have quotes on this. You can see they're traded in lots of five metric tons. So in USD, in the beginning of the year, it looks like they were trading at around $925 for five metric tons of polyethylene. Now around $1,300. So the price is already surged massively. I'm curious though, like when we think about the market for some of these chemicals that you track, how much is it sort of open liquid markets versus long term contracts, etc. That, you know, sort of dark prices that the public would never see because it's an arrangement between a producer and a specific buyer, etc. Versus more clearing, how it's modeled. Talk to us about pricing transparency that we have in this market. Ooh. Yeah, love it. Just quick disclaimer here. There are some topics that I know more of and are some topics that I know less about. This falls into the category of the latter. But to my understanding, when it comes to prices and contracts in the polymer markets, the vast majority is stipulated via contracts, although they're typically relatively short lived on a monthly quarterly basis. That's my observation. I may be wrong. And in terms of the spot market, they're relatively small, but the spot market is really short. I figured with the spot market is usually where you see those price distortions firstly showing up, right? And when it comes to the first three to four weeks, especially this week has been relatively this week actually had quite a phenomenon because I just checked the prices an hour ago. And I was surprised by polyethylene in East Asia apparently stagnating over the past week, which to me, either something is wrong with the prices that I was looking at or some of my theoretical underpinnings are slightly off. So I'm curious about that for the next couple of days, like weeks. Didn't that happen during COVID as well? Wasn't there a big arbitrage between like polyethylene prices in Europe and the US versus Asia? There seemed to be these regional differences. 100%. It depends on which part of the value chain you look at and whether you're looking at margins, which is what most companies are really curious about right now, which profit can actually make out of this versus prices. So if you talk about polyethylene prices, for example, they're comparatively low in Asia compared to Europe. The US is also low, but the US also only pays a fraction of the production cost because US is ethane or gas-based. Asia and Europe are largely enough to base. And the reason, by the way, it is an important nest trick. It's almost going into a side-tensioned year, but it's very common within our industry to talk about how ethane gas-based production is more competitive is cheaper. But one of the principal reasons why this is the case is because you only need 1.2 tons of ethane to produce one ton of ethylene, whereas if you produce ethylene via anaphtha, you need about 3.2 tons of enough to, so you just need a lot more feedstock. And obviously you get a lot of byproducts. But then for enough to cranking in Europe and Asia, their competitiveness also hinges a lot on what the price movements are of those byproducts just as a side-net. By the way, I'm looking at the European naphtha swap of this trades in the NIMEX. That is at $842 per metric ton right now. But that was around $496 at the beginning of the year. So all of these different chemicals and polymers that you're talking about massive spikes, obviously, and the big spike, obviously, since the start of the war. What does it mean when force measure is declared? What is that actually in tail? You tell me. No. It depends a lot. Usually again, we like to talk a lot in certain terms. I think a force measure colloquially is implied to mean, oh, production is fully cut. It kind of depends. Yeah. So to give you one concrete example, one-wha chemicals in China has amongst other is two very large crackers, 2.2 million tons in total in Yantai, Shandong region, hopefully not butchering the pronunciation too much. They declared force measure for their supplies to the Middle East. So I looked at this. What does this mean? So you dig further to try to find something specific. The only thing I could find publicly announced is they're declaring force measure under supplies to the Middle East, which to me was very interesting because in the first place, very few Chinese producers are suppliers to the Middle East of certain chemicals in the first place. So the bottom line here being that when you read force measure, at least that's what I'm doing. If I don't find anything specific, it's a big question mark and I usually assume it means reduced run rates. Question is then also by how much? Kind of a floor for a lot of crackers is 50 to 60% of their total capacity below that it quite often is set. It gets un-economical, but it is a big question mark to me at least. So this came up in the context of jet fuel, but the sort of the implied barrel price of jet fuel is higher than what a barrel of oil is trading for right now because of this dynamic where the refiners are running slow because it's costly to actually have to straight up shut down. Can you talk about that in the context of some of these chemicals? Does the same phenomenon apply that it is a very costly business choice to actually shut down the refinery? And do we see a widening spread between where the price of oil is right now and the implied price of oil by the end product price? Yeah. That's a great question. If I'm not mistaken, the spread has increased a lot over the past three weeks, both in Europe and in Asia, but especially enough that price in Asia have searched. So here the following hypothesis. To me, it seems based on what we talked about earlier, how chemicals are used with a lot of it going into packaging and let's define actually how much. So polyethylene consumes about 60 to 70% of ethylene, which again is the main product that we're getting from after cracking. So let's just say close to more than half of Nafta in one way shape performance used for polyethylene and those type of chemicals that are used for packaging. So half of it is pretty much dictated ish by the packaging sector. And our reality is more complicated than maybe we can cut it to one third or so. It's a huge chunk out of way. And to me, again, that sector seems pretty non-fungible. It's very hard to really destroy a lot of demand within an industry. If we talk about jet fuel diesel and gasoline on the other hand, we can introduce carless Sundays. We can introduce, or people will at the end of the day, if fly tickets just become too expensive to see it, not our carousel flight. Or cancel flight, just period. Exactly. Yeah, yeah. So to me, it seems that diesel, gasoline and jet fuel have more wiggle room for demand destruction than Nafta. That's my current hypothesis. And again, maybe I may be proven wrong on that because it's also the first time for me being in such a scenario, I mean for all of us in a way. But so when it comes to the spread between crude oil and Nafta for both Asia and Europe, my expectation is that, well, the argument seems to be very strong that that will increase over the next weeks, potentially months. For Nafta, a big question also that I'm just throwing into the room is how viable is it for refiners to actually shift more toward Nafta production, both from an economical and just engineering perspective, right? Because within the industry, we often talk about those things as a given. But our production is kind of fixed, which to an extent is true, but also not true. At a certain point, and maybe there are some chemical engineers here that know it is better than I do, but at a certain point, it may even become feasible to switch some road fuel production toward Nafta production if indeed demand destruction on gasoline becomes stronger than Nafta. Hmm. I want to go back to, you mentioned China for a second. And I remember seeing headlines about China's petrochemical boom and worries about a glut in the market. I think some of those headlines were like two months ago. Yeah. Can China pick up some of this production? I assume it's getting some naphtha from, I would gas, Russia, or Iran at this point. Like what's going on there? Yeah, big question. Short term, no. Short term, minus if you would have a lot of production within refined, we shifting away from gasoline to Nafta. Minus that scenario, and again, I don't know how technically feasible that is, or economically, a lot of refiners, but other than that, I don't see any possible way where you could compensate for that right? Because let's be specific. So we're talking about, again, assuming a full disruption here, we talk about roughly 17, 18 million tons disappearing from the Middle East. We talk about South Korea. Japan. So major Asian players need to be specific. We have South Korea first, Japan, Taiwan, Singapore, India, Thailand, and Malaysia and Indonesia. Those I think should be eight. Now if you take them together, they probably have an athlete and production capacity of around 45 million tons ish. So China and them together is about 100 million tons, China 60 million, those are days about 40 million together. Out of just 40 million depending on again what happens, but probably it won't 30 million. You could potentially discard. It's, don't quote me on that exact number, but just to give a ballpark, right? I don't see any possible way how you could compensate for that. You have some wiggle room because some crack and facilities were operating at lower rates. You can compensate there in the US especially. But if you assume, for example, that US was running at about 85% before and they would go all the way up to 95% now. So 10 to 15% difference. That's about 4 to 6 million tons at it. So that's basically one tenth of what more one eighth of what would be lost in the most extreme scenario. And when it comes to China, the thing is that those crackers are large projects. They take time. And the world at large had an incredibly large pipeline for 2026, which is ironic, and which is why I emphasize polyethylene so much because the amount of projects, like world-skilled projects that are very well covered, and no uncertainty about whether they would come online or not until now, they were set to come. And now they seem largely either off the table or big question mark. So I don't see any way in the short term to compensate for such an extreme shortfall if that we're really to manifest. To the utmost extent. That's a really good example of how the short term disruptions can linger for years and years and years. Okay, one other question on trying to fill the gap and supply. What about recycling existing plastics? I mean, we've been told for years and years and years the world is awash in plastics like, okay, let's do something with that. Yeah, that's an excellent question. I don't see why recycling should not get a major boost from this if this persists. To me, that seems like a very reasonable solution. There are obviously a lot of asterisk where recycling has its own fair share of complications in terms of having to firstly distill the different types of streams. You also need production facilities for this, which also again needs time to be built. I'm utterly unaware of the existing utilization rate or of the utilization rates of existing recycling facilities, but- Which probably tells you something about the importance of recycling in a hydrochemical analyst career, but yeah. Exactly, right? It's very much under fringes. I'm very peripherally aware of it, but when I think about recycling facilities that are read on more anecdotally, they're usually in the range of a couple of tens of thousands to maybe a hundred thousand tons per year of production capacity, which compares to a world-scale crack, right? It's usually one to two million tons, right? So that's a north of magnitude lower. That said, if you look at the total share of global polymers that are in circulation that come from recycling, I find it hard to give an exact number, but maybe one-tenth or so because it depends on the substream and again, it's not my four tape per se. It's a reasonable amount and I could definitely see especially within the time frame of a couple of months that this would gather a lot of speed or it would become priority to fill some gaps somewhere, but again, it probably falls short very significantly from really fixing the problem. When we did a recent episode about natural gas, one of the winners at least in the short term was coal and that country is that can't get natural gas, they're going to turn to coal for energy and you see coal prices creeping up. What about coal liquefaction in the short or medium term? I mean, you could turn coal into oil, the Germans did that during World War II and I still have a thing. Can that in the medium term be just derive our plastics from coal? Medium term sure, but I don't think medium term is the problem here. Yeah, if we define medium term, that's not going to help us in the right. But if we see this is going to reshape, the longer that this goes on and we don't know how long this is going to go on, could coal at some point in the short term be part of the solution for the origin of our plastics. Beautiful question. I think the bigger question here is, well, twofold. Firstly, if this continues, will it reshape how the global chemical industry works? Yeah. And the second part is maybe have we already reached that point, because I think even if things were to quote and quote normalize whatever that may mean right now, I think one major problem that we face is that the perceived risk of passing through the straight of Hormuz has changed. Yeah. And a lot of Asian producers were already under cusp of closing their business. And by a lot, I mean South Korea, Japan, Taiwan, Singapore, especially. If you take them together, we talk about South Korea's 13 million tons, Japan's six million tons, Singapore and Taiwan, both three to four million tons, so collectively close to 30 million tons. It's a lot. Not all of it was said to be closed, but to me, if I looked at the fundamentals, it seemed reasonable to assume that by 2030, about 30 to 50 percent of this could disappear. Wait, wait, sorry. Why? Very long story short, because the overcapacity that was in the pipeline, especially for polyethylene was so severe that the case was very hard to make for some units to stay in business. My hypothesis here is that what's happening currently, there increased perception of risk through the straight of Hormuz for an industry in a market that was already perceived to be, well, really going downhill. Pretty much could really lead a lot of facilities to just close down over the next couple of months. I would be very surprised if that does not happen. Then the question becomes what, well, two questions here. Firstly, what happens afterward if things indeed normalize? And then secondly, for the entire pipeline that exists for the next four to five years, a lot of it was also in Asia or the Middle East and hinged on feedstocks coming from the Middle East. What happens to that? And to go full circle here and to your coal question, that's something I looked into and that I wondered. So to put it into perspective, China right now has 60 million tons, of ethylene capacity. Roughly 50 million tons of this is foil or gas-based. So it comes from cracking. 10 million tons comes from coal. Slash methanol. So I'd note here also that because how it works is that coal is converted to methanol, which is then converted to ethylene, a propylene methanol is also imported from the Middle East. So that could also cut into that production there. But when it comes to coal, it would need a really huge push. So now we have 10 million tons of ethylene. We have another roughly three to four million tons in the pipeline because China has been revitalizing that already before the war. But the push again would be extremely significant. You would be talking about basically three to four full quadrupling the sector over the next couple of years, right? Which in theory could happen, especially for a country such as China, which has proven in the past time and time again that it's very much capable of completely revamping industries. But it would be a big push. I think what's more likely to happen is three things. So firstly, renewed, again, also depends obviously on how long the supply disruption is, but I think we're well on our way. I think one renewed interest in the Western hemisphere. Using Western hemisphere here more broadly because I would say for the US there are also a couple of asterix in terms of the political environment. Sure. Where that is not considered to be too volatile. That out of the way though, if you talk about chemicals and the potential there, there was a significant slowdown because of this over capacity. But US producers right now are having a heyday. And even if this does not continue for a long time, I think again that this heightened risk or this heightened perception of risk at Hormuz really shifts a lot of production potentially to the US. So I'd be surprised if you would not see a lot of renewed interest in US ethane and US chemicals. Yeah. This was going to be my next question actually. So I'm looking at a chart right. This is going back to the beginning of our conversation. So this is a chart of sensitivity of different oil or fuel products to demand destruction. I'm cheating. You're like on an exam. I'm like, you can't see it. I'm in the studio. I'm leaning over and looking at traces. A lot of times I couldn't get a look at. So it actually it has now JP Morgan chart. JP Morgan. Yeah. So it has, you know, jet fuel is pretty sensitive because as we were talking about earlier, if the price of jet fuel goes up flights tend to get curtailed. It also says that naphtha is pretty sensitive. And one of the reasons naphtha apparently is sensitive is because if prices for napthha go up, then petrochemical plants can substitute E-thing, which it seems we're starting to see. I'm also reading a Bloomberg's. I'm doing my research for this episode. Wow. We're in the middle of the episode, but regardless of that, there's a Bloomberg story that saying that US producers of polyethylene are buying more ethylene to make plastics. What's the substitutability of E-thing versus napthha? Because you touched on this earlier, but I really want to drill down on this point. Not very high. Okay. So two things here. I realize I like to make a lot of lists without completing them, but maybe you can get full circle on the other topics later. But on this two things, so first is just technical substitution. So the furnaces that are used for E-thing and NAFTA, they're pretty different. in a lot of ways that they're configured. So switching between those two is pretty difficult. Very specifically, one major problem is the type of products that you get from both. So if you crack ethane, you principally only get ethylene in notable amounts. Whereas if you crack enough that you get ethylene, you get propylene, you get butadiene, you get benzene, - The bi-products you mentioned earlier. - Exactly. And they need to be separated and there is a whole post-discracking section for that that just vastly differs for enough to crack versus ethane. I think one common point of confusion is, so you have three major oil or gas feedstock streams, you have enoughta, you have LPG and ethane. And I would group LPG and enoughta as being more together than LPG and ethane, despite the fact that LPG and ethane are colloquially kind of referred to as being gas-based. But LPG also gives a lot of bi-products. So the substitution possibility there is higher than for ethane. And also if you just look at the practicality of it, they're comparatively outside of the US and to Middle East. They're not that many crackers that use ethane. And if they use ethane, they typically fully use ethane, not exclusively there are some exceptions, such as I think the one who had chemical yarn tie cracker that I mentioned earlier, one of those actually runs partially on ethane, partially on enoughta. But typically if a cracker fully runs on ethane, it fully runs on ethane. Whereas for a lot of enoughta crackers, they play around with the LPG share depending on the price movements. I've learned a lot from this conversation. I would be lying if I didn't say that, you know, I'm going to have to go back and look at what some of these things are. Whatever. But just to help me conceptualize what some of these things are, I remember from a liberation day, the trade fights in 2025, one of the few things that the US exports to China in mass other than soybeans is ethane. I don't know. What is it? Can you just explain that? Why do we have a lot of extra ethane? Why does China need to get it from a lot of us? And what does it go into? It all depends on what we mean by a lot. That's a very relative term. I wouldn't know that we about half of all US exports of ethane, which is extracted from US shale gas, which probably explains why we have a lot head to China. So what do they, what's the deal with that? Yeah. So firstly that mainly comes because the US is a very large producer of shale gas, which yields a lot of ethane LPG. And because the US has well basically exceeded it in its LPG ethane production, what it domestically needs, it has started to export a lot. And that's still ongoing. We still have some new terminals coming up in 2026 and beyond. It will increase the capacity for LPG and ethane to be exported. But the reason why I answered this question skeptically initially is because if you look at it, total volumes, you talk about China, if I'm not mistaken, in 2025 imported around five or six million tons of ethane. And you can make one around five to six million tons of ethane from it, which is about 10% of China's production capacity. Right. So is that a lot kind of issue? I'm really saying. So that's kind of a lot relative to US industry. But it's not really a lot of the grand scheme of how much China is using and producing. And even for the US, this is probably if we convert this into mail into barrels per day, it's probably around 200 to 300 thousand barrels per day, which even this article I'm saying says about half of all US exports of ethane go to China, which means this is just a fraction of total ethane production in the US. Exactly. Okay. So that's, I think the entire ethane story is relatively if I can use the word overhyped because I think if you just read the articles, yeah, it seems like there's a huge wave of new ethane crackers in Europe and the Asia, etc. But if you really double down on which facilities they are in Europe, it's one. It's project-busting the ethane hype. On all sides. There's like a hell of these people going around thinking, yeah, the ethane hype end is now, I think. Yeah. By the way, by the way, guys, to actually finish one of my list because those mentioned, you know, there are two two points on US and ethane and how much flexibility there is there. I think another thing is just production volumes. Dead goes up, but it goes up steadily. Yeah. To me, it seems very unlikely that production could surge by that much that you could really substitute for any notable amounts. That's the second point on ethane substituting for Nafta. There's just their limited supply as for now that can go up, but also that takes time. I have an informal gauge of how bad things are and it's the sort of cocktail party question type thing. But you know, when you're going out and speaking to people now as a petrochemicals analyst, how many people are starting to actually get very interested in the future of plastics and maybe get very worried when they talk to you. Bulltus, you might go out and speak to people. I'll stop there. No. Poo. I think the conversations have changed. I mean, more on an informal note here, right? Because I've been in the industry for four years. Like I mentioned, oil more broadly, two years and petrochemicals, two years. During the first two years, and maybe that was also more that side guys back then, 2022, 2023. A lot of the conversations were about morality over working as an oil analyst. Now a lot of that has dissipated or maybe I just don't talk to those people. I'm not sure. But I think nowadays people to my observation approach those questions a lot more practically. And a lot of people are well about petrochemicals. I think a lot of people are more curious about the baseline understanding of how the industry works if they're curious at all, right? Because I mean, quite frankly, for a lot of that, I talk to people from time to time, but very rarely actually about petrochemicals also because it takes kind of a baseline denominator to get into it. And I feel that you need to bombard counterparty with a lot of baseline information to kind of get to an interesting point to which I'm like, they're probably also not that interested in that. Well, I have one last question, which is just tell us about the next several weeks. And what are you looking out for? And how bad could it get? And what is the timeframe for that? Give us your sort of outlook at telling clients they ask, how bad is it? What's going on? And let's suppose we none of us know when the war is going to end. It could we're recording this March 24 9 53 AM. It could end by the time this episode comes out. But let's just say we don't know the war is going on in a month, suppose. What how what are we looking at? Still one trick there. Whether the war continues or not, which we talk about in binary terms, it does not mean that this trade of firmness will become accessible again. Right. Just important. So that's when I look over the next weeks or months. Again, I usually abstain from giving any political commentary. But to me as an analyst, just looking at baseline assumptions over next weeks or months, the assumption that a straight of her moves will become passable again to me is very hard to make. So that's my first really major takeaway. At least when I look at my own forecast outlooks, which partially have become completely obsolete. We need I need to overall. But I'm very inclined to make that assumption still waiting for a couple of days, weeks to see how things develop. But that's my first really major thing that I just find the argument that the straight of her moves that things return to normal in terms of shipping incredibly hard to make. So point number one. Now when it comes to chemicals, firstly spread between Nafta and Kudoyl, especially in Asia. I expect to search, especially to search in early April. The reason being because Asia still has to tap into its inventories, Nafta inventories, they're not a lot, but they can cover a little bit of ground. We again still have to see the impact of the voyages. I think we've just bought that time. We're now entering the phase where you really see more material shortages. I think all of that will peak in early April. And then again, technically depends on what happens next. That's point number one point number two. What I'm really looking out for is any announcements on projects that weren't a pipeline from China. And technically the Middle East, but the Middle East, I've already kind of provisionally done away with with. Well, that's probably not going to work out in 2026, 2027. Any projects for planned for 2026, what happens there? Point number three. What is China's strategy here at large going forward? Because China is in a very interesting position. It's not as badly affected as South Korea, Japan. But it still changes a lot of things. Because well, for a lot of new facilities, for example, so China had about 20 million tons of new ethylene capacity in a pipeline, almost all of which coming from cracking, almost all of which coming from NAFTA, a lot of which hinging on crude oil coming from the Middle East. That's a big question mark to me. And I'm curious to see indeed whether we're going to see a shift more toward new coal based facilities. I think that would take a couple of months, rather than weeks, but that's something I'm looking out for. And in the same vein, two more points. One being Western Hemisphere, US. Well, we see a research interest in investments. And Western Hemisphere, Latin America, Bolivia, Peru, Venezuela, which had a lot of interest in the chemical industries in the past. But it was dropped again. Well, we see a renewed interest there, and potentially in Argentina with a lot of shellguests. And then lastly, Europe. Europe is very interesting because up until recently, I've been going on and on about how Europe's chemical industry is in decline. And it was. Now, ironically, and this is a big topic of debate, but I take the stance that all of this happening. Very much more likely than not is a net benefit for a lot of chemical producing Europe. And this is a big topic to unpack, maybe for another time. But I would definitely be watching, indeed, where it just turns out this way for European producers. Philip Guards, thank you so much for coming on all thoughts really enjoyed the conversation. That was a lot of fun. Thank you, two guys. Joe, that was a lot of fun. I always appreciate analysts who come with the numbers, just memorize, and just rattle off like, well, there's difference between production versus capacity, all of that. Right. Or there's like, okay, South Korea, Malaysia, Japan, Indonesia, all right, Singapore that gets you to 44 million that, yeah, now people who can do that, those are the people that always know their stuff and it's details matter. But the last question you asked about, you know, what Philip is looking out for and his answer. I wrote about this in the All Thoughts Newsletter yesterday, which is why it's on my mind. But like, when we're talking about the closure of the straight-of-our-mouse, we're basically talking about like the choke point of all choke points in the global economy. Yeah. And obviously oil is a big part of that, but as we just learned in this episode, so as petrochemicals, so as fertilizer, we've done previous episodes on that. And so it strikes me as almost inevitable that people are going to come away from this experience, no matter how long it goes on for, with the intention to build out their own capacity or secure their own supply. And it was interesting, even in a place like Europe, which we tend to think of sometimes as in structural decline, certainly in terms of its chemicals industry. Yeah. Even there, like you could see a revival as a result of this, even, you know, three weeks worth of disruption. Yeah, I really think this is the main story with the main story before the start of the run war and now clearly an accelerant to this story, which is just every country wanting to have greater capacity domestically and to be less reliant on choke points. And look, if we knew for a fact that the straight-of-our-mouse was A going to reopen just as it was a month ago and B never closed again, how would you possibly know that? And he's like, oh, we don't need to do anything. But like we're in a state we know now that like it is closable. We know it's close, not only do we know that it's closeable, we know that it's closeable without a particularly large military effort that you fire a few drones or missiles a day, not even a particularly costly effort. And you can bring so many industries and so many countries and so much activity, basically to a halt. That fact can never be unknown again, specifically. That's sort of what Tolembe talks about when he that is sort of the significant of a black swan that word gets abused a lot because every time an event happens, the black swan, but the key insight where I find it actually to be a useful phrase is if you think all swans are white and you see a black swan, then you know for the rest of your life, then you know that they exist. And so it is a black swan in the sense that if the straight-of-hormouse can be closed, which is something that people have contemplated before with relatively little effort, you're going to know that the rest of your life and that's going to change planning for the rest of your life. And it'll be really interesting to see. It's also just interesting, I think, his point about how because of Chinese supply, so many of these Korean, Japanese, etc. Crackers were already in trouble. Yeah. And now what's going to happen there, I mean, that is also a really big structural shortage, the sort of the milkshake of economic activity, pouring into China relative to everywhere else. So lots of things going on at once. Well, also the non-substitutability of polyethylene, especially packaged. Yeah. Like the idea that we're not all suddenly going to switch to burlap bags and bring our own, like wooden crates to pick up like beamers from the grid. Yeah, I could see that being an aesthetic choice, but that's not a scalable solution. Not scalable. All right. Shall we leave it there? Let's leave it there. This has been another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway. And I'm Joe Wyzenthal. You can follow me at the stalwart. Follow our producers, Carmen Rodriguez at Carmen Arment. Dash, she'll be in it at Dashbot and kill Brooks and kill Brooks. And for more Odd Lots content, go to bloomberg.com/odlots for the daily newsletter and all of our episodes. And you can chat about all of these topics 24/7 in our discord discord.gj/odlots. And if you enjoy Odd Lots, if you like it, when we talk about nerdals and other followers, then please leave us a positive review on your favorite podcast platform. And remember, if you are a bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening. [Music]