Analysts speculate on impact of Saudi drone attacks on global resin market

Drone attacks on two of Saudi Aramco's facilities in eastern Saudi Arabia have resin sector analysts speculating on the impact on global resin prices, especially polyethylene and polypropylene.

Over the weekend, a number of companies announced feedstock supply disruptions as a result of the Sept. 14 attacks, which forced Aramco to reduce crude supply by around 5.7 million barrels per day, or about 50 percent of its total production.

Key producers, including Saudi Basic Industries Corp.; Sahara International Petrochemical Co. (Sipchem); Advanced Petrochemical Co.; National Industrialisation Co. (Tasnee); Yanbu National Petrochemical Co. (Yansab); and Saudi Kayan Petrochemical Co., all disclosed "curtailment" of feedstock supply, ranging between 30 percent to 50 percent.

The Saudi situation "will clearly help the U.S. polyolefins business by making exports even more competitive," according to Robert Bauman, president of at Polymer Consulting International in Ardsley, N.Y.

"Volumes should increase, which is critical given the amount of new polyethylene capacity coming on stream in 2019," he added. "If Asian prices increase dramatically, the U.S. may even be able to export into China."

Bauman also said that if exports volumes increase and PE and PP operating rates are high, he would expect domestic prices to also increase.

"It's a sad commentary when disasters are needed to improve polyolefins performance," Bauman said. "In 2017 and 2018, it was Hurricane Harvey. In 2019 and 2020 it's the Saudi attack."

A key to the impact on the North American market will be how much crude oil prices rise, even though most commodity resins in the region are made from natural gas, not oil.

North American resin producers already have a feedstock cost advantage. The Aramco disruption could make that even more pronounced.

"This is a significant reduction in crude oil production that could have a shocking impact to all products if not resolved quickly," James Ray, senior consultant with ICIS in Houston, said.

"How high this will drive oil prices yet to be seen. Higher oil prices increase the U.S. shale oil and associated gas advantage globally, but passing on price increases is always a challenge and can temporarily reduce seller margins, while higher prices can dampen consumer demand."

Ray added that the further down the value chain a product is, the less impact crude oil prices have. In the case of U.S. PE resin, Ray said, crude oil has a very low correlation to the U.S. market price, because a large share of that price is margin.

That margin, in turn, is driven by billions of dollars of investments made to utilize low-cost ethane feedstock, along with supply and demand.

In general, he added, on commodity polymers, a $10 change in crude oil might drive an estimated 2-4 cents per pound change in market price, depending on the type of resin.

Phil Karig, managing director of Mathelin Bay Associates L.L.C. in St. Louis, added that since the price of crude oil-based feedstocks often determines the break-even point for many high-cost global resin producers, feedstock-advantaged U.S. polyethylene producers should benefit from "a bump in exports."

"While the oil market can certainly recover from a short-term dislocation ... geopolitical risks are very likely to add a price premium to oil prices for some time to come," Karig said.

Karig added that U.S. PE makers should benefit from the opportunity to selectively increase prices if domestic resin capacity utilization gets tighter.

"The immediate impact from (resin) suppliers to the Asia markets has been to withdraw offers that were in place before the loss of Saudi production," Nick Vafiadis, plastics vice president at IHS Markit in Houston, said. "However, most have refrained from offering new prices due to uncertainties around the magnitude and duration of the outages."

He added that IHS Markit still is assessing the extent of the damage. Vafiadis said that it is important to note that Saudi Arabia represents about 9 percent of global PE resin capacity and about 6 percent of global PP capacity.

As a result, he added, any prolonged disruption—or any prolonged spike in crude oil prices—is likely to support higher resin prices.

Companies impacted

In a statement, Sipchem said feedstock supply to its operations had been cut by around 40 percent and that it was working on evaluating the final effects of the cut in financial terms.

In a similarly worded statement, Tasnee also said that it was calculating the impact of a 41 percent cut in its feedstock supplies to its petrochemical affiliates in Jubail, eastern Saudi Arabia.

Advanced Petrochemical Co., with the capacity to produce 630,000 metric tons per year of propylene and 500,000 tons per year of PP, also disclosed 40 percent cuts in feedstock supplies on Sept. 14.

According to a Sept. 15 report by chemical news website ChemWeek, Saudi Arabia's leading petrochemicals firm Sabic also cut the supply of feedstock to some of its largest production subsidiaries.

Sabic company Yansab has had its feedstock supply cut by approximately 30 percent, according to the report. The company produces 400,000 tons of propylene and 900,0000 of PE each year.

Another key Sabic affiliate, Saudi Kayan has had its feedstock supplies reduced by approximately 50 percent. Kayan, according to ChemWeek, operates low and high density PE units at Jubail with capacity for 300,000 tons each, as well as a 350,000 PP plant.

London consulting firm Wood Mackenzie warned of the "dent in petrochemical margins" as crude oil prices spike.

Saudi Arabia, according to S&P Global Platts, has a combined capacity to produce 17.5 million metric tons per year of ethylene, or around 9 percent of total global capacity. The kingdom also has a combined PE production capacity of around 9 million tons per year, or around 8 percent of global capacity.

Shahrzad Pourriahi of Plastics News Europe contributed to this report.