INDUSTRY INSIGHTThought Leadership

Red Sea crisis causes logistic snarls impacting plastics business

By Kaushik Mitra, Executive Director, EMEA, Polyolefins; Fabrizio Galie, Associate Director, EMEA Polypropylene; and Utpal Sheth, Executive Director, Asia Plastics and Polymers, Chemical Market Analytics by OPIS

Recent attacks on ships going through the Red Sea is causing concern about movement of shipping traffic via the key Suez Canal, through which close to a 10%-12% of global container traffic moves. The attack caused alarm in the shipping industry sending freight and insurance rates soaring. Traffic dropped more than 50% by early January through the Suez Canal, and many shipping companies rerouted cargoes via the Cape of Good Hope, adding roughly 15-20 days to normal transit time between East and West and requiring extra fuel.

This disruption is bringing back memories of supply chain disruption that occurred in 2021, when the Evergreen ship got stuck across the Suez Canal. Supply chain disruptions at the time lasted well over a year when freight rates in some routes vaulted X10 times and caused significant delays in transit and weighed on plastics business in terms of cost inflation and supply dislocation.

In this piece, we’ll review:

  • How serious is the Red Sea crisis?
  • How significant will be the impact on the PE/ PP business in terms of dislocation of supplies, cost inflation, and demand displacement?
  • Which regions and markets will face maximum impact?
  • How will the markets rebalance to absorb this shock?
  • What can the industry do to manage the risk and minimize the impact on business?

Current status

After the initial attacks that were targeting Western shipping assets, major shipping firms decided to reroute cargoes via the longer Cape of Good Hope route, which is 6,500 km (4,039 miles) longer. So far, the attacks have avoided energy carriers, yet some of the major operators and owners of energy assets have voluntarily shifted to the longer route. Currently ideas about the longevity of the crisis vary, but there is a consensus that these may last a few weeks at the least. Some key highlights:

  • The freight rate from East to West has roughly doubled or even tripled. This has weighed on low value added exports from East to West as these products are price sensitive, causing slowdown in shipment, hold ups, and cancellations.
  • For medium and high value products there may not be a significant impact; these include semi-finished and finished goods, and components.
  • The energy sector has priced in the disruption with limited volatility due to various factors, such as the existing global balance between weak demand and smooth supply, and it may not see huge swings. This should provide stability for the polyolefins business from a cost point of view.
  • Some car makers in Europe (such as Tesla and Volvo) have suspended production for a few weeks due to shortage of components coming from import.
  • The longer route via Cape of Good Hope adds around 30 days for a round trip. This may cause bottlenecks in terms of container and vessel availability in the medium term.
  • Major impact has been felt in movement of goods in the Middle East, with Turkey and the Eastern Mediterranean countries becoming dislocated from the regular supply chain network.
  • Export from the Middle East, especially from the GCC to Europe is facing hurdles marked by delays and cost inflation.

Possible impact on polyolefins: The depth and breadth of the impact from the Red Sea crisis on polyolefins would depend on how long the crisis lasts and if the intensity of the attack escalates or ebbs. Our analysis is based on the current level of activity which is moderate and sporadic.

Impact on the Middle East: The Middle East is a major exporter of PE and PP. The disruption in the Red Sea is having a severe impact in terms of exports from Western Saudi Arabian ports of Rabigh and Jeddah that are in the closest vicinity of the affected area, although some recent report says the exports to Europe and Turkey have resumed. For the rest of the production sites in Eastern Saudi Arabia and countries such as the UAE, Qatar, Kuwait, Iran, and Oman there is no constraint in terms of exports so long it skirts the channel near Yemen. In general exports to Asia, the Indian sub-continent poses no challenge. Export to Europe and North Africa is posing challenges in terms of freight costs, route, and transit time. From West of Saudi Arabia, some producers are opting to move goods to Eastern ports via road route before exporting. While considering the possible impact, we have factored heavy spring turnaround that is expected to sideline 20-25% of PE and PP production in the Middle East region from February to May:

  • Middle East exports to Europe could face significant issues, while export to Asia poses no risk of disruption.
  • Export volumes to Europe, factoring the cost of inflation, disruption and cancellation, could dip 20-30%, which will be much smaller than that suffered during post-Covid supply chain disruption.
  • The export dip will be absorbed by the production drop during turnaround and may not have severe impact, by itself. Middle East producers could choose to ship more material to Asia to compensate for loss of European market access. This could mean 5-10% higher export volume to the Asian market than normal at a time of significant length, which could depress prices in Asia. However, loss of European market access would mean being forced to optimize in Asia, which from a netback point of view is less attractive. This means Middle East suppliers will face significant margin and profitability pressure in the short term.
  • Middle East producers are also facing issues accessing Turkey and the Eastern Mediterranean markets through the land routes, due to security issues which along with shipping constraints would limit their footprint in these markets. Prices have jumped sharply in Turkey and EMED, so the limitations to export PE/PP volumes to these markets mean a loss of opportunity for better netback for Middle East producers. In the GCC case, the price uptick was modest and no major supply chain issue was visible.
  • If the crisis lasts beyond May, when full capacity will return in the Middle East, the result will be significant length and inventory pressure for local producers, forcing them to export more aggressively to Asia and other destinations.

Summary

The Red Sea crisis has heighted short term market volatility by raising freight and insurance rates that is felt in PE/PP markets. If the crisis does not extend beyond a few weeks, then the fallout will be limited. In case of longer duration, the impact is likely to have a lingering effect. Middle East suppliers and some Asian suppliers for exports to Europe are facing longer transit time and cost inflation. East Saudi Arabian producers are facing additional cost and delays for moving material on land to skirt the troubled route. The Eastern Mediterranean and Turkish market is facing serious price upside due to dislocation of sea and land routes and may switch to US and European suppliers.

Disclaimer: The views express in this article is solely that of the author and do not reflect the views of GPCA.