Oil prices that were inching up already since the beginning of the year have been sky-rocketing since Russia-Ukraine war commenced. Against this backdrop, the petrochemical producers particularly in Asia are finding it hard to keep up with the rising costs due to record high naphtha prices. The volatility in crude oil prices has pushed up naphtha prices - making it difficult for producers to bear the cost as they look for alternate feedstock than those from petroleum-derived naphtha. This is pulling down margins downwards.

Soaring feedstock prices for petrochemical industry is despite the production and operation cut by producers and petrochemical companies in late 2021, which eased the resulting naphtha demand from regional crackers. Also, this is happening right when the industry was still recovering from the supply chain challenges of last year.

The current scenario- the rise in feedstock cost and rising ethylene prices due to rising crude oil prices – have pushed up PVC and PTA prices.

A research note by Alfalah CLSA highlights this, saying that ethylene prices are up due to supply constraints as well as the fluctuating and rising international crude oil prices. The only respite in ethylene prices would come from decline in crude oil prices, which is expected from the talks between Russia and Ukraine to control the escalated war. It also points out to the additional ethylene capacities that are expected to come online around the world especially in North America this year, which would also ease ethylene prices.

PVC prices are likely to remain high in the short term at least, due to soaring feedstock prices as well as supply constraints coming up in shape of plant revamp and closures. However, the research notes that some respite in PVC prices can be expected due to lower demand.

PTA prices have also been rising due to the higher feedstock cost as its key ingredient paraxylene is also moving in tandem with crude prices.

Overall, the higher price of feedstock is giving tough time to margins of the sector. And while some respite in prices can come from talks between Russia and Ukraine, the decline in demand in China could be another factor for subdued demand. Alfalah CLSA mentions that along with the Covid situation in China, some scheduled capacity expansions in China’s PX and PTA markets are anticipated to come online this year, which could control prices to some extent.