The Iran war has benefited ethane-rich U.S. chemical manufacturers that are taking advantage of the natural-gas-derived feedstock amid tight oil supplies.

Major producers, like Dow and LyondellBasell, reported significant quarterly earnings gains due to their advantaged position over petrochemical producers that rely on oil-based naphtha to make ethylene.  

But many downstream specialty chemical manufacturers are struggling to pass those costs on to consumers as the war drags on, said Al Greenwood, deputy news editor at petrochemical market intelligence firm ICIS.

It’s been more than five months since Iran announced its retaliatory Strait of Hormuz blockade. Chemical Processing recently spoke with Greenwood to better understand the current situation and its impact on the sector. The following is an edited version of that conversation.

CP: Major players in the chemical sector recently announced their quarterly earnings, and at least domestically, here in the U.S., it looks like the conflict in Iran has boosted profits. Is that what you're seeing?  

AG: Well, first of all, yes, commodity chemical producers are enjoying larger margins, but the magnitude of that increase is not as big as the start of the war. And that's because markets are adjusting. One, oil demand is not as strong as it was during the start of the conflict. OPEC just lowered its forecast for oil demand. The IEA expects oil demand to fall. And keep in mind for U.S. commodity chemical producers, they benefit in a high oil price environment and a low price for natural gas. Their costs are determined by natural gas prices, or they reflect natural gas prices. Our producers use ethane as a feedstock, but their sales prices tend to rise and fall with oil prices, so when we're seeing a more subdued oil environment, those margins are going to fall, and we're seeing that. Secondly, supply chains are also changing.

They're accommodating the war. Sabic remarked that they're moving product by truck from the east coast to the Red Sea coast of Saudi Arabia so not all their products, but certainly a lot more products are able to reach the market. Huntsman has a joint venture in Saudi Arabia. They also remarked that they're relying on trucks to move some of that product out, so supply chains are also changing. We're getting more supply into the global market. And of course, when you have more supply, that's going to cause sales prices to be more subdued.

And don't forget China. China has feedstock flexibility. They import ethane from the United States, so they're still able to produce ethylene. They have this whole coal-to-chemicals value chain. They've been able to continue producing chemicals using coal-based feedstock. Now, when you look at the export figures, you just see this phenomenal spike in exports for some of the commodity plastics and chemicals.

Polyethylene exports from China just really went through the roof during the war. Same, to a lesser degree, for PVC. And so again, that goes back to increases in supply, which is causing the sales prices to be a little more subdued.

And we're getting anecdotes about demand destruction. Now, granted, we're getting two different stories about the prospects for demand. When you hear executives talk, they say they're not seeing demand destruction. However, when our analysts talk to the market, we're getting these various anecdotes in Europe and Asia about demand destruction. So again, lower demand is going to cause sales prices to be a little bit more subdued. You put all of this together: Yes, U.S. producers are going to continue to enjoy larger margins. They're going to be more elevated than at the start of the year. We're just not going to see the same extent as we did at the start of the war. And again, that just goes back to markets have adjusted.

CP: What are you seeing in the specialty chemical segment? 

AG: The opposite. And you see that in the stock markets. Whenever there's a spike in oil prices, you see commodity chemical share prices rise, specialty chemical share prices decline. They have been squeezed. Keep in mind, they purchase commodity chemicals. When commodity chemical prices are higher, they have to initially absorb the cost and try to pass through the higher costs to their customers. That process takes time. And we've heard some of the specialty chemical producers say, “Yeah, we're still trying to pass through those higher costs.” So that's one headwind for specialty chemical producers. The second one is weaker demand. They're closer to the customers. Consumers are having to spend more money on fuel prices, so there's less money for consumers to spend on things like housing renovation, so certain end markets continue to be weak. Residential construction, DIY, remodeling, automobiles, durable goods, those still haven't recovered.

And again, that's being reflected in the comments we hear from specialty-chemical producers. There are some bright spots for end markets [like] AI, aerospace, infrastructure.

CP: You've touched on this already, but can you talk a little more about how some chemical producers are adjusting their supply chain strategies to deal with this disruption?

AG: Yes, I can talk about U.S. commodity chemical producers. That's what I'm closest to. They are running their plants full out. Westlake commented during their earnings call that they're trying to maximize production rates. All the producers have plans to run their plants as hard as possible to take advantage of one: the feedstock advantage of U.S. producers. And two: granted, supply chains have adjusted worldwide—but disruptions persist. There are still plants that have shut down. There are still plants globally that are running at lower production rates, so this is an opportunity for U.S. producers to gain market share and sell their products at a higher price. The big reaction that we're seeing on the commodity side is that they're running their plants at higher utilization rates to take advantage of this market opportunity. Among specialty chemical producers, the big trend we heard during earnings calls is initiatives to pass costs through as quickly as possible to stay on top of cost inflation.

On the U.S. side, that's what we're hearing: Commodity chemical producers running full out to take advantage of this market opportunity. Specialty chemical producers are trying their hardest to pass through their elevated costs.

CP: What's the outlook if disruptions persist or escalate?

AG: Well, that's the interesting point. For now, it's commodity chemical producers in the United States should continue to benefit from this elevated pricing environment. In time, specialty chemical producers will successfully pass through the higher costs. But oil, we only have finite oil inventories. There's a real danger of them declining to critical levels. And we've been talking about this at ICIS: When you think about oil stocks, when you think about inventories, you shouldn't think about absolute volumes. You should think about accessibility. If the oil is not accessible to where the demand is, it really doesn't matter what the headline stock level or number is. If you can't access the oil, you can't operate, so there is a danger that some consumers of oil will run out sooner than that headline number would indicate if the disruptions continue. If that happens, we'll see a spike in oil prices.

And if that spike happens, it would initially benefit commodity chemical producers in the United States—with fatter margins. But we're already seeing demand destruction, at least anecdotally.

If prices get high enough, stay high long enough, we're going to see demand destruction. Those advantages that we've been talking about are going to go away. It doesn't matter how high prices are; if nobody's buying, you're not selling. That's the big question: If the war continues, if the Strait remains closed, how long will oil inventories last?