Gasoline surge drives up costs of chemicals used in essential goods


A spike in gasoline prices has caused a shortage of chemicals that are also used to produce goods such as auto parts and pharmaceuticals, putting further pressure on the cost of manufacturing essential items.

Rising oil prices this year have already increased the costs of so-called petrochemical feedstocks, which are produced from a derivative of crude. But a strong appetite for chemicals among gasoline makers has intensified competition for these feedstocks.

Benzene, the derivatives of which are used to make rubber, nylon and pharmaceuticals, hit a record high of $1,900 a ton in Rotterdam last month, before falling back to $1,780 in early July, according to ICIS, a commodity data company. . Other chemicals such as toluene and xylene, which are used in plastic packaging and textiles, have also hit their highest levels since records began in the 1980s in recent weeks.

Petrol prices are near historic highs despite crude oil trading well below the record high it reached in 2008. For example, UK petrol and diesel prices have reached new highs with unleaded reaching 191.4p in June, above last year’s average of 133p, according to the RAC.

Brent crude prices fell from over $120 a barrel to $100 a barrel last month, a decline that oil prices are expected to follow with a lag, but the availability of refined products is expected to remain constrained.

Global supply has become extremely tight due to a shortage of refining capacity in the United States and Europe caused by shutdowns at the height of the pandemic and uncertainty over Russia’s ability to market its diesel and other products as a result of Western sanctions.

Despite the recent crash in crude prices, petrochemical analysts say sky-high gasoline prices have prompted refiners to use higher-value chemical feedstocks on an unprecedented scale to make gasoline. “It’s like using cream instead of milk to blend into your coffee,” said Zubair Adam of ICIS.

This added to upward pressure on petrochemical commodity prices which tend to follow oil price movements.

Passing on rising input costs poses a challenge for petrochemical producers such as divisions of Royal Dutch Shell and TotalEnergies, BASF and Covestro in Germany and Sabic in Saudi Arabia when demand for certain goods declines as consumer spending suffers inflation pressure.

Steve Jenkins, vice president of chemicals consulting at Wood Mackenzie, said refineries and petrochemical producers were prioritizing their fuel businesses over the production of chemical feedstocks. “A refiner is there to make fuel. What’s the difference between having no fuel on the forecourt and the price of a plastic bottle going up by a fraction? “, did he declare.

Adding to the challenge of higher raw material input costs is the extremely high price of natural gas in Europe, which has doubled in a month and is used to turn oil into chemicals in huge complexes.

Sriharsha Pappu, global head of chemicals at HSBC, said chemical producers, who use petrochemical feedstocks in their production processes, generally benefit from inflation, but suffer from rising costs and the recent decline in consumer confidence.

“The worst thing you can have is demand crashes and supply remains a problem, so you have margin squeeze,” he said.

Covestro said “we are of course experiencing higher volatility and macro price increases” for petroleum derivatives such as benzene, toluene and propylene, but added that “prices are currently below highs seen in spring”.

It added that it largely passes on price increases to customers when demand for its chemicals is high, but that it is difficult to assess how much the increased cost of finished products manufactured at the assistance from its supplies was attributable to its own price increases.

Pricing pressure is not felt universally for all chemicals. Mike Boswell, managing director of Plastribution, a UK retailer, acknowledged pressure on ‘aromatic’ chemicals but said there was a glut of propylene, a by-product of refining with many applications – a reversal sudden shortages during the pandemic when fuel demand plummeted.

“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 at a soft landing price-wise.”

Hakan Bulgurlu, managing director of Arçelik, a Turkish home appliance maker, shared his optimism that cost pressures are easing after an almost 25% increase in polymer prices year on year. another in the first half of 2022.

“Over the past six months, spikes in energy and oil prices have increased costs in the petrochemical industry. This has led to an increase in prices for polymers and derived products,” he said. “Under pressure from inflationary tides and recession forecasts, demand has recently tightened, bolstering expectations of a downward price trend in the months ahead.”

Tesco and Heinz recently settled a dispute over price hikes after the British supermarket temporarily withdrew its staples.

But Jenkins said more cracks will appear in supply chains due to cost pressures. He expects increased pressure from high petrochemical costs for fast fashion companies such as Zara owner Inditex, Uniqlo and H&M and consumer goods groups due to extremely thin supply base margins.

“There’s not enough fat in the system in terms of margin to absorb these cost pressures,” he said. “The fact that you have public feuds between brand owners shows that this pressure is real.”


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