The fragile two-week ceasefire between the US and Iran is a welcome break from mounting hostilities, even though tension between Israel and Lebanon threatens to derail negotiations. However, the conflict’s impact on global energy and chemicals supply chains will take significantly longer to resolve.
While a few more ships are now beginning to cross the Strait of Hormuz, Iran’s military maintains strict control of the waterway, as shipping companies seek to clarify the terms under which they might be allowed passage. There are reports that Iran will only allow a handful of ships to cross each day, and may also demand tolls, payment of which could put international shipping firms in violation of US sanctions on Iran, unless exceptions are made. Many shippers – and perhaps more importantly their insurers – remain understandably tentative to risk their cargoes until such details are clarified.
Even when the hundreds of ships backed up in the Gulf do begin to make their way out, most will take weeks to reach their intended destinations in Europe and Asia. There is also no guarantee – even if a more lasting peace deal is reached – that exports from the region will be able to return to pre-war levels. Damage to oil and gas production and processing infrastructure in various countries across the Gulf will take months to years to repair. There are also knock-on effects for by-products including helium and sulfur, with significant uncertainty over recovery timelines.
Refineries, polymer and chemical production plants fed by Gulf oil and naphtha have already cut production drastically as their feedstock supplies ran low. While many such plants will ramp production back up once their feedstock supplies recover, it’s possible that the conflict will accelerate a deeper shake-up of the global petrochemicals landscape.
Before the war, production of several basic petrochemicals – particularly ethylene, propylene and derivatives thereof – had been structurally oversupplied for several years, owing predominantly to massive production expansion in China, alongside weak growth in demand. With prices depressed, higher-cost producers in Europe and parts of Asia were struggling to maintain profit margins, with several plants across the UK and Europe closing, and Japan and South Korea’s petrochemicals industries undergoing government-directed restructuring and consolidation.
How those industries in various countries, alongside their governments, approach their recovery from the acute stress of the war will be a significant factor in determining the longer-term outlook.
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