Asian petrochemical prices fell on Tuesday following a peace deal between the US and Iran on 15 June, alongside a decrease in oil prices by over 4% – a situation that will further weigh on producer margins.
- Weak demand in China shifts products abroad at falling prices
- At least one S Korea producer considering shutdown amid squeezed margins
-Inflationary risks on Asian economies to ease but physical supply recovery may take six months
Raw material supply for ethylene (C2) is expected to recover in the remainder of June and in the coming months with the Strait of Hormuz – through which crude and naphtha feedstock flows primary to Asia – anticipated to reopen before July, ICIS senior data analyst Amy Yu said.
Demand from end-users is weak, especially in China, and domestic producers there have shifted to being net exporters for chemicals such as carbide-based polyvinyl chloride (PVC) and styrene.
China has been ramping up its chemical exports to fill in gaps left by falling production caused by the Middle East war, with a huge rise in volumes sent to the rest of Asia since the conflict began.
However, the depreciation of some Asian currencies such as the Indian rupee (Rs) against the US dollar has pushed up import costs, severely suppressing restocking willingness, Yu said.
Supply recovery compared with the start of the Middle East conflict in March is likely to weigh further on prices across Asian petrochemical markets, pressuring producer margins – prices have already begun correcting ahead of the announcement, ICIS senior analyst Ann Sun added.
The reopening of the Strait of Hormuz would also likely accelerate an existing downtrend, but the pass-through to downstream chemicals will not be immediate, so the market could see a period of dislocation and heightened volatility, Sun said.
“Much like the panic-buying seen in March and April, there is now a risk of overselling as sentiment rapidly unwinds risk premiums, even though logistics constraints may persist. The geopolitical risk premium has not disappeared – it is simply being temporarily priced out,” Sun added.
Prices have already begun to fall after the news.
China methanol futures prices plunged by more than 8% on 15 June from its settlement price on 12 June after the announcement, on expectations that methanol supplies from the Middle East to China and the rest of Asia will recover.
The polyester market, notably in feedstocks such as purified terephthalic acid (PTA) and monoethylene glycol (MEG), is also experiencing price pressures amid ample supply and weak demand, even though most polyester plants in China and India have been running at reduced rates.
Poor sales in end-user industries have also made buyers cautious to purchase more as inventories remain high.
“Since the ceasefire declaration, the overall market conditions have continued to deteriorate,” a South Korea-based ethylene vinyl acetate (EVA) producer said.
While customers are “definitely” expecting lower prices, the reality is that manufacturers have absolutely no room to drop them further, the producer said.
Regardless, prices must be lowered further just to keep the shipments moving, even though it means taking a hit.
“It’s a tough spot, and I expect petrochemical companies to face significant losses from June through August,” the producer added.
The company is also considering a shutdown in July amid these unfavorable economics, the source said.
The wider Asian market, notably net crude importers such as Thailand, Philippines, India and South Korea, will look positively on the deal if the strait reopens as inflationary pressures will ease with the recovery in crude oil supplies, Japan’s Nomura said in a note on 15 June.
Around 10 million barrels/day of oil supply has been lost since the conflict began, with Asian crude importers bearing the brunt of the impact with higher energy costs, forcing some central banks to hike interest rates to stem inflation, according to the International Energy Agency (IEA).
However, the physical recovery in crude supplies might not be a reality until 2027.
“The war stopping will eventually benefit economies, but this will not happen overnight,” a market player said.
ICIS projects the crude oil market will take around six months to normalize from the time the strait opens, under its ‘Extended’ scenario which has the conflict ending in June 2026.
The time needed for mine clearing, Gulf state field production restarts, vessel repositioning to transit and insurance re-issuance would stretch the recovery to a projected six months to January 2027, said Kojo Orgle, ICIS analyst for US oil, gas and natural gas liquids (NGLs).
There is also a “high risk” that the strait does not open immediately as the US and Iran may still return to a conflict scenario if their memorandum of understanding (MoU) is not signed on 19 June, according to Fitch Ratings on 15 June.
“The peace deal is still fragile, but if it proves durable and commodity prices stay benign, this would positively impact Asia’s economic outlook, as the region is a large net energy importer and has been the most adversely impacted from the Middle East energy shock,” Nomura said.