Military action leading to closure of the Strait of Hormuz between Iran and Saudi Arabia could seriously disrupt global trade in chemicals and oil products, with a knock-on effect for the world’s already fragile manufacturing economy.
The US killing of General Qasem Soleimani, head of the Iranian Revolutionary Guards’ overseas forces, on 3 January 2020 threatens to further stoke up tensions in the Middle East. Iran retaliated on 8 January with missile strikes against US forces in Iraq.
The Strait of Hormuz is an important shipping lane, linking Middle East oil and chemical exporters to the rest of the world. More than 20% of global petroleum liquids and a significant proportion of chemicals are transported through the Strait.
According to ICIS senior consultant, Asia, John Richardson, quoting ICIS Supply & Demand database forecasts for polyolefins exports in 2020, this includes 4.1m tonnes of Middle East high-density polyethylene (HDPE) production due to be exported via the Strait.
This accounts for 38% of total global net exports amongst all the regions that are in net export positions – where exports are higher than imports.
Supply risk is greater in linear low density polyethylene (LLDPE) where 51% of global net exports – 4.7m tonnes – appears to be exposed. Low-density PE (LDPE) is most at risk, with Middle East exports via the Strait accounting for 3.1m tonnes of net exports, 68% of the global total.
Other important products heavily exposed to disruption to shipping in the Strait of Hormuz include monoethylene glycol (MEG), ethylene and methanol.
In an all-out war scenario the Strait could close completely, cutting off regional chemical exports for a prolonged period. A lesser conflict could lead to periodic disruption to traffic through the Strait.
For chemical markets already in oversupply, such as polyolefins, isocyanates and MEG, any supply shock from the Middle East will have less impact as capacities elsewhere can be ramped up in response. This happened after the attack on a Saudi Arabian oil processing facility in September 2019 which cut feedstock supplies to regional chemical facilities.
This chart shows the most potentially impacted chemicals in terms of percentage of global production capacity.
Oil prices spiked 5% to more than $70bbl following the US attack and Iran’s response before dropping back slightly. They remain well above levels prior to the incident.
Higher oil prices act as a brake on consumer spending, so any sustained hike is likely to hurt global economic growth. The manufacturing economy is already fragile, with purchasing managers indices in negative territory for the US and Europe.
Business and consumer sentiment soured during 2019 as the US-China trade war deepened and growth slowed in major economies. This is likely to be hurt further by any Middle East conflict.
For Rhian O’Connor, lead analyst, Market Demand Analytics, ICIS, the main impact on petrochemicals is sentiment.
“The demand side remains very weak for manufactured goods with pessimism high and investment low. The potential for conflict will further dampen global producers desire to invest. Higher raw material prices will thin margins as producers struggle to pass this through the chain. Any consumer price increases could soften end market demand, at a fragile time.”