What's New

After years of bleak margins and stock performance, the U.S. chemicals companies have suddenly turned bullish on the prospects of the industry.

Cheap and abundant feedstock amid soaring plastics prices make U.S. chemicals producers the immediate winners in the global competition as the Iran war is constraining raw materials and capacity in other regions, which depend on Middle Eastern supply.

Higher-cost Asian petrochemicals makers are announcing reductions in capacity runs as their naphtha supply is either too expensive or trapped at the Strait of Hormuz. Higher energy costs and inputs continue to pressure the European chemicals industry, which has been rationalizing and idling capacity since the 2022 energy crisis.

While Asia and Europe suffer and the Middle East has no way of sending its raw materials or plastics production out of the Strait of Hormuz, the U.S. chemicals giants are running at capacity, raising the prices of plastics, and expecting strong margins and earnings at least until the end of the year.

Of course, the surge in plastics prices and other materials made of petroleum derivatives is already filtering through to consumer goods, raising inflation.

U.S. Chemicals Thrive amid Feedstock Supply Shock

The supply crunch elsewhere is boosting the shares of America’s chemicals giants.

After years of underperformance versus the main index, shares in Dow (NYSE: DOW) have soared by more than 70% year to date. LyondellBasell (NYSE: LYB) stock has jumped by over 80% year to date, both vastly outperforming the S&P 500 index, which is down by 3% since the beginning of the year.

Shortly after the war in the Middle East began, the top executives of both companies spoke at the J.P. Morgan Industrials Conference in mid-March. Both chemical giants signaled marked optimism th

By Tsvetana Paraskova for Oilprice.com

at the petrochemical woes in other regions due to constrained Middle Eastern feedstock supply are placing American firms at an advantage.

U.S. chemicals producers mostly use ethane, which is derived from natural gas liquids, to turn it into ethylene, the building block of many plastic products. Producers in Asia and Europe use naphtha and propane, whose supply from the Middle East has crashed, while costs have surged.

Across Asia, shortages of naphtha and other key petrochemicals feedstocks due to the Iran war have already forced petrochemicals firms to curb output. Asia’s petrochemicals sector is highly dependent on naphtha, liquefied petroleum gas (LPG), and methanol from the Persian Gulf.

The higher cost of feedstock for Asia has hit polyethylene producers who are on the high end of the cost curve, Agustin Izquierdo, Executive VP and CFO at LyondellBasell, said at the JP Morgan Industrials Conference.

“Now with propane being much more expensive and operating rates coming down in Asia and material being trapped in the Middle East, we have really an opportunity even to start exporting out of North America. And it's very, very leveraging for us,” LyondellBasell’s executive noted.

“And it's becoming obvious that North America is an advantaged region in terms of feedstock, and we'll continue to take advantage of that going forward.”

LyondellBasell’s presentation at the JP Morgan conference noted that the company is “well-positioned to capture value in a volatile market” as North American production is increasing in value amid constrained Asia and Middle East capacity.

North American chemicals producers are maximizing operating rates to meet global supply shortfalls, while the cost-advantaged feedstocks continue to support improving margins, LyondellBasell’s management reckons.

Dow’s chief executive Jim Fitterling said at the same conference that the utilization rates at the North American crackers to make ethylene derivatives were already above 90% even before the war, with further upside in the coming months.

“Everything that we've got running is going to be flat out for the rest of the year. Already in the Americas, every asset that we had was running full out,” Fitterling said.

“The demand for the export's going to be strong, so any increment that was in the US Gulf is going to be there.”

U.S. polyethylene producers, running mainly on ethane feedstock, are in a stronger position than their naphtha?reliant global peers, analysts at commodity analytics firm ICIS said last month.

The ethane and NGL crackers on the U.S. Gulf Coast now gain an immediate cost advantage over the other regions, while high U.S. exports will continue to prop up domestic operating rates, the ICIS analysts added.

Soaring Prices Threaten Runaway Inflation

U.S. chemicals producers see a major upside in the current operating environment, with plastics prices soaring and higher-cost competitors shutting down because of a lack of feedstock.

While American chemicals giants will see bumper margins, consumers are in for an inflation shock as everything containing plastics – and that’s almost every basic consumer product – would see upward price pressure.

“In my career of almost 30 years of covering chemicals, I have never, ever seen price hikes this steep and this quick,” Hassan Ahmed, a partner at Alembic Global Advisors, told the Wall Street Journal.

Ultimately, the packaging producers, medical supply manufacturers, toy and cosmetics manufacturers—basically nearly every supply chain linked to consumer goods—will feel the pinch and pass on the higher prices onto consumers.