Odd Lots - The Petrochemicals Shock That's Already Rippling Through Plastics

Episode Date: March 25, 2026

Everyone knows by now that war in Iran is curbing the flow of oil around the world. But oil isn't just a gasoline and jet fuel story, of course. It's also a crucial feedstock for a bunch of petrochemicals, including the building blocks of a variety of plastics. And we're already seeing polyethylene prices start to surge, with some producers in Asia declaring force majeure and curbing their output. So how much of the world's petrochemicals supply is now in danger? And what does it mean for the future of plastics and packaging, which is basically in everything nowadays? On this episode, we're joined by Philip Geurts, chemicals and oil analyst at BloombergNEF, to walk us through the numbers. Read more:Oil Crunch Threatens South Korea’s Garbage Bag, Ramen SupplyIsrael Says War Isn’t Ending Even as Trump Touts Peace Talks Only Bloomberg - Business News, Stock Markets, Finance, Breaking & World News subscribers can get the Odd Lots newsletter in their inbox each week, plus unlimited access to the site and app. Subscribe at  bloomberg.com/subscriptions/oddlots Subscribe to the Odd Lots NewsletterJoin the conversation: discord.gg/oddlotsSee omnystudio.com/listener for privacy information.

Bloomberg Audio Studios, Podcasts Radio News. Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Allaway. And I'm Joe Wisenthall. Joe, I have a prop for today. Prop episode. A visual learning aid for a podcast. Okay. I'm going to hold this up.

Yeah. What is this? Uh, it looks like a magenta marker. Magenta? Yeah. It's pink. It's hot pink. What's a magenta? It's like purplish pink.

Really? Okay. Color is beside the point. It is indeed a highlighter. But more importantly, it is a result of a complex petrochemicals supply chain. You're right. This magenta is more purplish. I don't know why I always thought it was a little bit more pinkish. But yes, you're correct. You're right. You're correct. You're totally correct. I didn't intend your major takeaway from this conversation to be the difference between pink and magenta. Okay. But yes, you're right. And without advanced chemicals of all sorts and oil and all that, you would never have the plastic shell of the marker and maybe even. even some aspects of what gives it color when you draw on something. All right.

So what is this plastic casing actually made of? This is a pop quiz. That I definitely have no idea. Okay. It starts from crude oil. Yeah. So crude oil distilled into. Keep going.

Naptha. Naptha. Right. Naphtha. And then naphtha is, this is a hint, cracked into ethylene or propylene. Yeah. We've actually done a plastics episode before. Yeah.

Okay. And then it gets polymerized into polyethylene. Right. And polypropylene. And then it gets chopped up into tiny little plastic pellets, which are, I know you know this one. What are they called? The little plastic pellets. One of my favorite words.

Go on. Nurtles. Nurtles. I remember all of this from that episode that we did, Nurtles. The building blocks of highlighters and lots of other plastic products would be Nurtles. Okay. So the reason we bring this up is, Obviously, there's a situation in Iran.

The Strait of Hormuz is still closed. We're recording this on March 24th. And we're starting to see a lot of the disruptions in the oil market start to, I guess, ripple out into other petrochemicals. Right. And someone asked this on Twitter the other day and they were like, Joe, is the higher price of oil going to impact the price of plastics? And I was like, I would be very surprised if it didn't. I mean, I don't really know for sure, but it would be very weird. Like, it would be hard for me to imagine a scenario in which the key input doesn't.

The thing that I am very curious about, and you described as sort of sequential chain of industrial processes from the oil to the nerdals. And, of course, when we did the episode, one of the things that we've talked about is that there is a gap between the price of some of these end products and the implied price of crude oil. So crude oil, I don't know exactly where it is. right now at this moment they're recording it, but it's shot up. But these end products have shot up even more. And our guest, Rory Johnson, had a really good explanation, which is that the refineries

do not want to shut down. And so they're rationing. They're slowing their input, their input because it is very costly to shut down and ever restart should they ever run out, which is a prospect, given that we're seeing a volumetric decline in the amount of oil available in the world. What I'm curious about, in which I don't know the answer, is whether this applies to all of the processing steps along the way, which is, is there the sort of even greater price impact because the entities that do all these sequential industrial processes are slowing down because the shutdown and restart process is costly for them as well. Well, I would say the added complication with a lot of petrochemicals is we are, in fact, seeing some closures already. So in Asia, we've had a few

crackers, as they're called Asian crackers, start to shut down their production and basically declare force majeure. And so we are seeing fewer petrochemicals get made in places like Japan and South Korea. I think the question we're kind of inching towards is whether or not this is just going to be a question of price, you know, prices for plastics go up or an actual supply shortage in the sense that maybe you just can't get certain types of plastics or packaging. And one other thing I would just add, I think in the post-COVID environment, an underappreciated driver of inflation at that time was the cost of packaging. That's right. Because we did see the cost of plastics go up. And if you think about what you're buying at a grocery store, like, okay, it's a

bunch of carrots, but it's also a bunch of carrots in a plastic bag. Completely or a jar or whatever. And I would say in a lot of the cases of food stuff in particular, you're mostly paying for the entire supply chain and the packaging of it. The actual food value is almost dirt cheap, if nothing. And so, yeah, are we just going to get outright shortages? What do the ripple effects? I don't think we have any idea. Probably one of these things that compounds the longer this war and closure goes on. Many questions that we have.

All right. Well, I am happy to say we do, in fact, have the perfect guests to talk all things petrochemicals. We're going to be speaking with Philip Goetz. He is the chemicals and oil analyst over at BNF and a guy who lives and breathes polymers, hopefully not literally. Not breathes. Hopefully not breathes polymers. All right, Philip, thank you so much for coming on all thoughts. Thank you very much, Tracy and Joe.

And it sounds very sad to introduce me with living and breathing polymers, but I'll take it. I'll take it for sure. Well, we're all filled with microplastics now, right? So you're not the only one. Exactly, right? So I'm tempted to begin just by asking you to kind of list all the petrochemicals affected by the Strait of Hormuz, sort of like forest gump style, ethylene, propylene, polyethylene, you go on and on and on.

But just broadly, why don't you tell us about the... the Gulf region and its role in the petrochemicals supply chain. Right. Yeah, lots to unpack here. So when it comes to chemicals at large, let's maybe establish three different categories. We have the feedstock, like you already pointed out, Tracy, basically you almost don't need me here. But you have the crude oil that's turned into nafta and liquefired petroleum gas, which are butane and propane, principally, ethane. Those are all the feedstocks that go into the so-called crackers. and the crackers turn them in what we call base chemicals.

There are technically six major base chemicals that come out of this, but for the sake of today's discussion, the major focus will probably be really around ethylene, propylene. If we want to get really fans, we can talk about xylines, parasolene, or but a lot of the, really the majority of the bulk plastics that we talk about really come from ethylene and propylene, and some from parasyline in terms of polyethylene-derat,

or also more commonly known as polyester. So ethylene, propylene, xylene are turned into polyethylene, polypropylene, and into polyethylene, terethylate, or polyester. Now, you have a wide range of really different derivative chains. Even within polyethylene, you have a lot of subcategories, and within those subcategories. You have other subcategories. Very simple terms, you have a three-way division into high-density polyethylene, low-density polyethylene, and linear low-density polyethylene. It doesn't matter too much, but it's good to be aware of that when we talk about, well, in analyst terms, about where the market is moving, we typically look at high-density

polyethylene, what's the supply demand there. Same goes for low-density. Obviously, they have different applications and also within those larger buckets. There are a lot of subcategories. Now, to circle back to the major theme here of what's the position of the Middle East Gulf. So within those three categories, firstly, the Middle East. itself is a major exporter of polyethylene, polypropylene, etc., especially of polyethylene.

And when I say major, let's be specific indeed, polyethylene, polyethylene varieties, that's about 12% of global capacity. Production would be slightly higher, 13, 14%, quite a significant chunk to make that even more explicit. If you take those volumes, we're talking about 18 million tons, 1-8, of production capacity, and Middle Eastern or Middle Eastern facilities typically run at very high rates, 90 to 100%, so roughly an equivalent amount of production. If you take all of that, that's basically as much as Europe slash slightly more consumes. So it's a lot, right? You have those volumes firstly being taken off the market directly, although a couple of asterix here, because technically polymers are exported differently

than fuel. They're exported in a solid state, which means theoretically, there should be the possibility of diversion that's slightly easier than for oil, NAFTA, or oil products in general. There's a big asterisk there. But if you take all of that off the market, you basically have the entirety of what Europe consumes all of the sudden disappearing. So that's step number one.

Emphasis here on this goes especially again for polyethylene varieties. Polypropylene is slightly lower. We're talking about 7-ish percent of global production. PVC, polyvinyl chloride, which is used heavily in infrastructure, even lower, that's 3 to 4%. Styrene, which is another major value chain

we're talking about against 6 to 7%. So the Middle East, in terms of polyethylene that's really, really a polyethylene story, but not exclusively. So that's step number one, the direct polymer exports. Step number two is, and that I would argue, is really where you see the biggest impact is on the feedstock side.

Again, this is something you can subdivide into three categories. You have direct NAFTA exports. You have crude oil exports that are then turned into NAFTA amongst others, so the refineries run on it. And obviously, if you have to cut refinery rates, you're also going to lose enough to output. And you have what's again called LPG, liquefied petroleum gas,

which I'll just allude to, well, as LPG from now on, but that means propane, butane. So you have those three. They almost exclusively go to Asia. And when I say Asia, we can go into the nitty-gritty details of how dependent each individual producer is exactly in those feedstock streams

because there are quite huge differences there. but in very broad terms, polymer exports, that's 12%. If we take the NAFTA exports and the crude oil exports, and we translate that into how much does ethylene, and consequently polyethylene production would have to be cut in Asia, that's probably around 15 to 17% of global production. So that's really where predominant hit comes from. That was fantastic, first of all.

Quick question. So on NAFTA, is that typically produced where the oil comes from? from how tight is that if it's derived from crude oil, is it typically right there or are parts of the value chain where the oil gets shipped a long way and then the NAFTA is produced somewhere else? It's basically the latter. Or rather, it just depends, right? The same as for refineries at large.

It just depends on where your refineries are located. So if you look at the Middle East, for example, or let's take Saudi. Okay. Saudi produces around 10 to 11 million barrels of crude oil per day. But if I'm not mistaken, that's refining capacity is around anywhere between three and four million barrels per day. So in that case, it refines a relatively small amount of its total production capacity. So to Joe's point, why do places like Japan and South Korea, why do they have, you know, crackers who are refining naphtha into other polymers at all? Why does that make sense for them,

or is strategically important? Well, history plays a huge role. Japan next to Europe and the U.S. was really one of the frontrunners of the petrochemical industry. And that's also why at the same time, even before all of this happened, Japan was also on the front line of losing its chemical industry. That's another topic we can get into later. But basically your question would also be then why aren't those products exclusively produced in the Middle East and then shipped? Why not just import them? Why even bother refining them domestically? Well, I mean, it's not only a question of NAFTA per se, right, but Japan also needs jet fuel, diesel, gasoline, etc. So all of those come into one supply chain.

And another asterisk here is the Middle East, again, the Middle East, is also a major producer of chemicals. If you look at ethylene, for example, the largest, by far, surprisingly, I don't need to turn this into a pop quiz. That's China. That's 61 million tons of ethylene, 25% of global capacity. Then comes to US, 44 million tons. A data, by the way, as of January 2026 provisionally. Then you have Saudi Arabia, 17 million tons, right?

So you already have a huge step down here. But Saudi Arabia is the third largest producer, or in terms of chemical ethylene capacity, at least. then you have South Korea of 13 million tons. So what I'm getting at here is the Middle East already Saudi as an example, produces a lot, has a lot of capacity, but because they're such extraordinary oil producers next to chemical producers, and the chemicals they produce locally, by the way, are largely gas-derived. We can also get into that later.

But they do both, right? They export a lot of polymers, a lot of chemicals, but they also export a lot of products. It's probably a bigger question in terms of the overall oil supply chain. and why companies have chosen to also build out the refineries in Japan, South Korea, where in it all in the Middle East itself. So Tracy obviously started the conversation showing her hot pink highlighter. That's right.

You learned something. But like, you know, if we have to go for a while without making highlighters or maybe we reduce the colors of the highlighters, it's not at the end of the world, the world isn't going to come to a screeching end, et cetera. But I imagine some things are a little bit higher on the value chain. And so when we talk about NAFTA, we talk about some of these other things, what end uses would you be most worried about now? Because the volume or the capacity numbers that you mentioned are pretty substantial.

So again, I'm not too worried if we go for a few months without making highlighters. What are the end-use cases that you're watching right now? They're like, oh, this could be a real problem. Oh, you guys had podcasts on fertilizers on this stage. Yeah, that's right. A very similar story. My main concern, without it, I would be food packaging. Okay.

I am not aware of any fungible products for polyethylene to be used at the same scale for food packaging as well, polyethylene. So I do not know whether there is a viable alternative. Maybe there is, and I'm just ignorant about it. But to me, without a doubt, food packaging and packaging at large, it's very cliche to take your own topic and talk about how incredibly important it is to modern day society. But this is the complexity of modern day society. This is actually a very important point, which is that you joke. And it's like, everyone jokes is like, oh, what I do is the key thing holding modern days society together.

Podcasting. But they're not wrong. But they're not wrong. Okay, podcasts and maybe not. But like, they're not wrong. Like any one of these things go and the whole thing goes, that was the lesson from COVID. So you're not. Absolutely.

So take the credit. You're at the center of the world right now. So yeah. All right. Talk about food packaging and what you're worried about. Yeah. Food packaging. Packaging at large.

I'm less worried about, let's say, infrastructure projects, right? Because if you take, let's say, high density, polyethylylylase, and polyvinyl chloride, a lot of them go into infrastructure projects. Hence, why you could see in India, for example, since 2018, 2019, a huge search in those chemicals demand, especially high-density polyethylene, because there were incredibly large infrastructure projects, especially on water pipelines, if I'm not mistaken.

So a lot goes into that. Still incredibly important, but if we talk about meeting really the urgent tasks of the day, which is making sure that everybody has access to their basic needs, I find it very hard to see how value chains can be constructed or how a shortage of polyethylene or other plastics can be circumvented, especially polyethylene here I'm concerned about because of the disproportionate impact. And we briefly touched upon, hey, if 12% of polymers are cut off,

polymer exports from the Middle East and if feedstocks are cut off. But that's only a part of the story. There are many angles here to take. Overall impact, obviously, without a doubt, will be sizable, how sizable time will tell. But I cannot think of alternatives to the problem we would be facing, which is packaging, getting stuff from A to B, making sure that stuff is conserved. So if anybody knows in the audience, please let us know in the comments or you have to learn. So, okay, on that note, what are we seeing now in terms of polyethylene availability? So I mentioned that we have seen some crackers in Asia who have had to reduce their refining output.

But are we seeing prices start to rise? Are we seeing outright shortages? What are you observing in the market so far? So I would kick this off by saying that everything happens with a significant delay. And especially now, voyages from the Middle East Gulf to South Korea, Japan, take about 18 to 25 days. And while we're kind of now entering that period, so if you look at crude oil imports that went to South Korea, for example, you could see them still spiking in the second week of March, just because a lot of ships. departed in late February, whether or not in anticipation of this happening, but there is a spike in the second week of March. So on the physical side, to me, it seems we have seen comparatively little impact yet. I think most of this will really materialize around early April, and from there on it gets worse pretty quickly. Also, one important side note here, and people can again pitch in in the comments, but polyathlete markers are relatively opaque when it comes to the exact availability. So we talk a lot about run rates, even demand, right? One very cliche topic that's regurgitated a lot is demand in Europe is

lukewarm. But if you look at apparent demand, which is trade plus some production run rate assumptions that are reasonable and based on company statements, you see that demand is pretty stable. So my point here is that demand how much is consumed in the first place is a relatively obscure topic in the world of polyethylene and plastics. Because if you look at what polyethylene consumption, means you have a lot hundreds thousands per market of small plastic converters they take those pellets and they turn them into usable plastics and to me it seems the data collection there may not be as well developed as for let's say oil refiners or maybe I'm just ignorant about it but that's been my observation so far in the industry that demand numbers are hard to get by so circling

this back to where we're at right now three four weeks into this scenario I'd be careful with any concrete data points you're seeing or any general statements about demand being down, about supply, being cut. Force measures for sure. We've seen an incredible high amount of statements of production being cut. We can also get into the details of which markets, how much. But if you look at across Asia, you've had about 30 to 40 crackers probably that have made statements in one way, shape, or form. Quite often, though, that just pertains to production curtailments, not per se a full shutdown. Or force measures, meaning that they cannot guarantee that they can supply, their contractors with whatever the contract stipulates.

Very long story, slightly less long. So far, my take is the impact has been relatively limited on the material front. We have seen price increases, by the way, especially on the NAFTA front in Asia. But I would be very surprised if this does not deteriorate very significantly over the next two to three weeks. By the way, I genuinely wasn't sure about this. There is polyethylene futures that trade on the Dalian commodity. exchange. We have quotes on this. You can see they're traded in lots of five metric tons. So in USD, in the beginning of the year, it looks like they were trading at around $925 for five metric

tons of polyethylene, now around $1,300. So the price has already surged massively. I'm curious, though, like, when we think about the market for some of these kinds of. chemicals that you track. How much is it sort of open liquid markets versus long-term contracts, et cetera, that, you know, sort of dark prices that the public would never see because it's an arrangement between a producer and a specific buyer, et cetera, versus more clearinghouse model. Like, talk to us about pricing transparency that we have in this market. Ooh. Yeah, I love it.

Just quick disclaimer here. There are subtopics that I know more of and are sub-topics that I know less about. This falls into the category of the last market. latter. But to my understanding, when it comes to prices and contracts in the polymer markets, the vast majority is stipulated via contracts, although they're typically relatively short-lived on a monthly, quarterly basis. That's my observation. I may be wrong. And in terms of the spot market, they're relatively small, but the spot market is usually... That's what I figured. But the spot market is usually where you see those price distortions firstly showing up, right? And when

it comes to the first three to four weeks, especially this week has been relatively... This week actually had quite a phenomenon because I just checked the prices an hour ago. And I was surprised by polyethylene in East Asia, apparently stagnating over the past week, which to me, either something is wrong with the prices that I was looking at, or some of my theoretical underpinnings are slightly off. So I'm curious about that for the next couple of days slash weeks. Didn't that happen during COVID as well? Wasn't there a big arbitrage between like polyethylene prices in Europe and the US versus Asia?

There seem to be these big regional differences. 100%. It depends on which part of the value chain you look at and whether you're looking at margins, which is what most companies are really curious about, right? How much profit can I actually make out of this versus prices? So if you talk about polyethylene prices, for example, they're comparatively low in Asia compared to Europe.

The US is also low, but the US also only pays a fraction of the production costs because US is ethane or gas-based. Asia and Europe are largely NAFTA-based. The reason, by the way, this is an important nastric, almost going into a side tension here. But it's very common within our industry to talk about how ethane, gas-based production is more competitive, is cheaper. But one of the principal reasons why this is the case is because you only need 1.2 tons of ethane to produce one ton of ethylene. Whereas if you produce ethylene via nafta, you need about 3.2 tons of nafta. So you just need a lot more feedstock.

And obviously, you get a lot of byproducts. But then for nafta cranking in Europe and Asia, their competitiveness also hinges a lot on, on what the price movements are of those byproducts just as a side net. By the way, I'm looking at the European naphtha swap. This trades in the NYMEX. That is at $842 per metric ton right now. But that was around $496 at the beginning of the year. So all of these different chemical polymers that you're talking about,

massive spikes, obviously, in the big spike, obviously, since the start of the war. What does it mean when force measure is declared? What is that actually entail? You tell me. No, it depends a lot. Usually, again, we like to talk a lot in certain terms. I think a force major colloquially is implied to mean, oh, production is fully cut. It kind of depends.

So to give you one concrete example. One chemical in China has, amongst others, two very large crackers, is 2.2 million tons in total in Yantai, Shandong region, hopefully not butchering the pronunciation too much, they declared force majeure for their supplies to the Middle East. So I looked at this. And I was like, well, what does this mean? So you dig further, I tried to find something specific.

The only thing I could find publicly announced is they're declaring force major on their supplies to the Middle East, which to me was very interesting because in the first place, very few Chinese producers are suppliers to the Middle East of certain chemicals in the first place. So the bottom line here being that when you read force major, at least that's what I'm doing, If I don't find anything specific, it's a big question mark, and I usually assume it means reduced run rates. The question is then also by how much. Kind of a floor for a lot of crackers is 50 to 60 percent of their total capacity below that

it quite often is said it gets uneconomical. But it is a big question mark to me at least. So this came up in the context of jet fuel, but the implied barrel price of jet fuel is higher than what a barrel of oil is trading for right now because of this dynamic where the refiners are running slow because it's costly to actually have to straight up shut down. Can you talk about that in the context of some of these chemicals? Does the same phenomenon apply that it is a very costly business choice to actually shut down the refinery? And do we see a widening spread between where the price of oil is right now and the implied

price of oil by the end product price? Yeah, that's a great question. If I'm not mistaken, the spread has increased a lot over the past three weeks, both in Europe and in Asia. but especially NAFTA price in Asia have searched. So here are the following hypothesis. To me, it seems, based on what we've talked about earlier, how chemicals are used with a lot of it going into packaging, and let's define actually how much.

So polyethylene consumes about 60 to 70% of ethylene, which again is the main product that we're getting from NAFTA cracking. So let's just say close to more than half of NAFTA in one way, shape, or form is used for polyethylene and those type of chemicals that are used for packaging. So half of it is pretty much dictated-ish by the packaging sector. Now, in reality, it's more complicated and maybe we can cut it to one-third or so. It's a huge chunk out of way. And to me, again, that sector seems pretty non-fungible.

It's very hard to really destroy a lot of demand within an industry. If we talk about jet fuel diesel and gasoline, on the other hand, we can introduce carless Sundays. We can introduce, or people will at the end of the day, if flight tickets just become too expensive to not go on vacation. Or cancel flights just period. Exactly. Yeah, yeah. Right. So to me, it seems that diesel, gasoline, and jet fuel have more wiggle room for demand destruction than NAFTA. That's my current hypothesis.

And again, maybe I may be proven wrong on that because it's also the first time for me being in such a scenario. I mean, for all of us in a way. Yeah. But so when it comes to the spread between crude oil and NAFTA for both Asia and Europe, my expectation is that, well, the argument seems to be very strong that that will increase over the next week's, potentially months. For NAFTA, a big question here also that I'm just throwing into the room is, how viable is it for refineries to actually shift more toward NAFTA production, both from an economical and just engineering perspective, right? Because within the industry, we often talk about those things as a given. NAFTA production is kind of fixed, which to an extent is true, but also not true. At a certain point, and maybe there are some chemical engineers here that know this better than I do, but at a certain point, it may even become feasible to switch some road fuel production toward NAFTA production, if,

indeed, demand destruction on gasoline become stronger than NAFTA. I want to go back to, you mentioned China for a second, and I remember seeing headlines about China's petrochemical boom and worries about a glut in the market. And I think some of those headlines were like

two months ago. Yeah. Can China pick up some of this production? I assume it's getting some naphtha from, I would guess, Russia or Iran at this point. Like, what's going on there? Yeah, big question. Short term, no. Short term minus, if you would have a lot of production within refinery shifting away from gasoline to NAFTA, minus that scenario. And again, I don't know how technically feasible that is or economically for a lot of refiners. But other than that, I don't see any possible way where you could compensate for that, right? Because let's be specific. So we're talking about, again, assuming a full disruption here. We talk about roughly 17, 18 million tons disappearing from the Middle East. We talk about,

South Korea, Japan, so major Asian players need to be specific. We have South Korea first, Japan, Taiwan, Singapore, India, Thailand, and Malaysia, and Indonesia. Those, I think, should be eight. Now, if you take them together, they probably have an athlete in production capacity of around 45 million tons-ish. So China and them together is about 100 million tons, China's 60 million. Those others are there's about 40 million together. out of just 40 million, depending on again, what happens, but probably around 30 million you could potentially discard.

Don't quote me on that exact number, but just to give a ballpark, right? I don't see any possible way how you could compensate for that. You have some wiggle room because some cracking facilities were operating at lower rates. You can compensate there in the US especially. But if you assume, for example, that the US was running at about 85% before and they would go all the way up to 95, 100% now, so 10 to 15% difference, that's about 4 to 6 million tons added. So that's basically one-tenth of what more, one-eighth of what would be lost in the most extreme scenario.

And when it comes to China, the thing is that those crackers are large projects. They take time. And the world at large had an incredibly large pipeline for 2026, which is ironic, and which is why I emphasize polyathleen so much, because the amount of projects, like world-scale projects that are very well-covered, and no unethical. uncertainty about whether they would come online or not until now. They were set to come, and now they seem largely either off the table or a big question mark. So I don't see any way in the short term to compensate for such an extreme shortfall, if that were really to manifest

to deal at most extent. That's a really good example of how these short term disruptions can linger for years and years and years. Okay, one other question on trying to fill the gap in supply. What about recycling existing plastics? I mean, we've been told for years and years and years, the world is a wash in plastics. Like, okay, let's do something like that. Yeah, that's an excellent question. I don't see why recycling should not get a major boost from this if this persists. To me, that seems like a very reasonable solution.

There are obviously a lot of asterisks where recycling has its own fair share of complications in terms of having to firstly distill the different types of streams. You also need production facilities for this, which also, again, needs time to be built. I'm utterly unaware of the existing utilization. rate or of the utilization rates of existing recycling facilities. Which probably tells you something about the importance of recycling in a petrochemical analyst career. But yeah.

Exactly, right? It's very much on the fringes. I'm very peripherally aware of it. But when I think about recycling facilities that I read on more anecdotally, they're usually in the range of a couple of tens of thousands to maybe 100,000 tons per year of production capacity, which compares to a world scale cracker. that's usually one to two million tons, right? So that's an order of magnitude lower.

That said, if you look at the total share of global polymers that are in circulation that come from recycling, I find it hard to give an exact number, but maybe one-tenth or so because it depends on the substream. And again, it's not my forte per se. It's a reasonable amount. And I could definitely see, especially within the timeframe of a couple of months, that this would gather a lot of speed or it would become priority to fill some gaps somewhere. But again, it probably fell short very significantly from really fixing the problem.

When we did a recent episode about natural gas, one of the winners, at least in the short term, was coal. And that countries that can't get natural gas, they're going to turn to coal for energy. And you see coal prices creeping up. What about coal liquefaction? In the short or medium term, I mean, you could turn coal into oil. The Germans did that during World War II, and that's still a thing. can that in the medium term be just derive our plastics from coal? Medium term, sure, but I don't think medium term is the problem here.

Yeah. If we define medium term as what's the same. Right, right. That's not going to help us in that right. But like, you know, if we say like, you know, this is going to reshate, like, you know, like the longer that this goes on and we don't know how long that this is going to go on. Could coal at some point in the short to medium term be part of the solution? for the origin of our plastics? Beautiful question.

I think the bigger question here is, well, twofold. Firstly, if this continues, will it reshape how the global chemical industry works? And the second part is maybe have we already reached that point? Because I think even if things were to quote unquote normalize, whatever that may mean right now, I think one major problem that we face is that the perceived risk of passing through the strait of Hormuz has changed. Yeah. And a lot of Asian producers were already undigured. cusp of closing their business. And by a lot, I mean South Korea, Japan, Taiwan, Singapore,

especially. If you take them together, we talk about South Korea has 13 million tons, Japan's 6 million tons, Singapore and Taiwan, both 3 to 4 million tons. So collectively close to 30 million tons. It's a lot. Not all of it was said to be closed, but to me, if I looked at the fundamentals, it seemed reasonable to assume that by 2030, about 30 to 50 percent of this could disappear. So... Wait, sorry, why? Very long story short, because the overcapacity that was in the pipeline, especially for polyethylene, was so severe that the case was very hard to make for some units to stay in business.

My hypothesis here is that what's happening currently, the increased perception of risk through the Strait of Hermuz for an industry in a market that was already perceived to be, well, really going downhill. Pretty much could really lead a lot of facilities to just close down over the next couple of months quarter. I would be very surprised if that does not happen. Then the question becomes what, well, two questions here. Firstly, what happens afterward if things indeed normalize? And then secondly, for the entire pipeline that exists for the next four to five years, a lot of it was also in Asia or the Middle East and hinged on feedstocks coming from the Middle East.

What happens to that? And to go full circle here into your coal question, that's something I looked into and that I wondered. So to put it into perspective, China right now has 60 million. tons of ethylene capacity. Roughly 50 million tons of this is oil or gas-based. So it comes from cracking. 10 million tons comes from coal slash methanol. Side note here also that because how it works is that coal is converted to methanol,

which is then converted to ethylene or propylene. Methanol is also imported from the Middle East. So that could also cut into that production there. But when it comes to coal, it would need a really huge push. So now we have 10 million tons of ethylene. We have another roughly three to four million tons in the pipeline because China has been revitalizing that already before the war. But the push again would be extremely significant. You would be talking about basically three to fourfold quadrupling the sector over the next couple of years, right, which in theory could happen, especially for a country such as China, which has proven in the past time and time again that it's very much capable of completely revamping industries.

But it would be a big push. I think what's more likely to happen is three things. So firstly, renewed, again, also depends obviously on how long the supply disruption is, but I think we're well on our way. I think one renewed interest in the Western Hemisphere. Using Western Hemisphere here more broadly, because I would say for the US, there are also a couple of asterisks in terms of the political environment, whether that is not considered to be too volatile.

That out of the way, though, if you talk about chemicals and the potential there, there was a significant slowdown because of this overcapacity, but US producers right now are having a heyday. And even if this does not continue for a long time, I think again that this heightened risk or this heightened perception of risk at Hormuz really shifts a lot of production potentially to the US. So I'd be surprised if we would not see a lot of renewed interest in US ethane, in US chemicals. Yeah, this was going to be my next question, actually. So I'm looking at a chart right. This is going back to the beginning of our conversation. So this is a chart of sensitivity of different oil or fuel products to demand destruction.

I'm cheating like on an exam. I'm like, you can't see it. I'm in the studio. I'm leaning over and looking at Tracy's laptop. It's like, I need to get a look at this. So it actually, it has. It's a JP Morgan chart. JP Morgan, yeah.

So it has, you know, jet fuel is pretty sensitive because as we were talking about earlier, if the price of jet fuel goes up, flights tend to get curtailed. It also says that naphtha is pretty sensitive. And one of the reasons naphtha apparently is sensitive is because if prices for naphtha go up, then petrochemical plants can substitute ethane, which it seems we're starting to see. I'm also reading a Bloomberg story. I'm doing my research for this episode. Wow. We're in the middle of the episode.

But regardless of that, there's a Bloomberg story saying that U.S. producers of polyethylene are buying more. to make plastics. What's the substitutability of ethane versus naphtha? Because you touched on this earlier, but I really want to drill down on this point. Not very high. Okay. So two things here. I realize I like making a lot of lists without completing them, but maybe you can get full circle on the other topics later. But on this two things, so first is just technical substitution. So the furnaces that are used for ethane and nafta, they're pretty different in a lot of ways that they're configured. So switching between those two is pretty difficult. Very specifically, one major problem is the type of products that you get from both, right? So if you crack

ethane, you principally only get ethylene in notable amounts. Whereas if you crack NAFTA, you get ethanol, you get propylene, you get butidion, you get benzene. The byproducts you mentioned earlier. Exactly, right? And they need to be separated and there is a whole post, this cracking section for that, that just vastly differs for NAFTA cracker versus ethane. I think one common point of confusion is, so you have three major oil or gas feedstock streams, you have NAFTA, you have LPG and ethane. And I would group LPG and NAFTA as being more together than LPG and ethane, despite the fact that LPG and ethane are colloquially kind of referred to as being gas-based. But LPG also gives a lot of byproducts. So the substitution possibility there is

higher than for ethane. And also if you just look at the practicality of it, they're comparatively outside of the US and the Middle East. They're not that many cranked. that use ethane. And if they use ethane, they typically fully use ethane, not exclusive leader, some exceptions, such as, I think, the one Chau Chemical Yantai cracker that I mentioned earlier, one of those actually runs on ethane, partially on NAFTA. But typically, if a cracker fully runs on ethane, it fully runs on ethane. Whereas for a lot of NAFTA crackers, they play around with their LPG share depending on the price movements. I've learned a lot from this conversation. I would be lying if I didn't say that, you know, I'm going to have to go back and

look at what some of these things are, whatever. But just to help me conceptualize what some of these things are, I remember from Liberation Day, the trade fights in 2025, one of the few things that the U.S. exports to China in mass, other than soybeans, is ethane. I don't know. What is it? Can you just explain that why do we have a lot of extra ethane?

Why does China need to get it from a lot of us? And what does it go into? It all depends on what we. mean by a lot. That's a very relative term. I just know that about half of all U.S. exports of ethane, which is extracted from U.S. shale gas, which probably explains why we have a lot, head to China. So what are they, what's the deal with that? Yeah. So firstly, that mainly comes because the U.S. is a very large producer of shale gas, which yields a lot of ethane LPG. And because the U.S. has, well, basically exceeded in its LPG ethane production, what it domestically

needs, it has started to export a lot. And that's still ongoing. We still have some new terminals coming up in 2026 and beyond. It will increase the capacity for LPG and ethane to be exported. But the reason why I answered this question skeptically initially is because if you look at the total volumes, you talk about China, if I'm not mistaken, in 2025 imported around five or six million tons of ethane. And you can make, well, around five to six million tons of ethylene from that, which is about 10% of China's production capacity, right? So is that a lot? Kind of isish?

I see you're saying. It's kind of a lot relative to U.S. industry, but it's not really a lot in the grand scheme of how much China is using and produced. And even for the U.S., this is probably, if we convert this into barrels per day, it's probably around 200 to 300,000 barrels per day, which is... Even this article I'm saying says about half of all U.S. exports of E-thing go to China, which means this is just a fraction of total ethane production in the U.S. Exactly.

Okay. So that's, I think the entire ethane story is relatively, if I can use the word, overhyped. Because I think if you just read the articles, it seems like there's a huge wave of new ethane crackers in Europe and in Asia, et cetera. But if you really double down on which facilities they are in Europe, it's one. We're busting the ethane hype on watch. It's like all these people going around. This ends now.

Yeah, the ethane hype. is now. By the way, by the way, guys, to actually finish one of my list, because I was mentioned how there are two points on US and ethane and how much flexibility there is there. I think another thing is just production volumes. That goes up, but it goes up steadily. To me, it seems very unlikely that production could search by that much that you could really substitute for any notable amounts. So that's the second point on ethane substituting for NAFTA. There's just their limited supplies for now that can go up, but also that takes time. I have an informal gauge of how bad things are, and it's the sort of cocktail party question type thing.

But, you know, when you're going out and speaking to people now as a petrochemicals analyst, how many people are starting to actually get very interested in the future of plastics and maybe get very worried when they talk to you? Both assume I go out and speak to people. We'll stop there. No, pooh. I think the conversations have changed. I mean, more on an informal note here, right?

because I've been in the industry for four years, like I mentioned, oil, more broadly, two years and petrochemicals two years. During the first two years, and maybe that was also more did sideguise back then, 2022, 2023. A lot of the conversations were about the morality of working as an oil analyst. Now, a lot of that has dissipated, or maybe I just don't talk to those people anymore, I'm not sure. But I think nowadays, people, to my observation, approach those questions a lot more practically. And a lot of people are, well, about petrochemicals, I think a lot of people are more curious about the baseline understanding of how the industry works, if they're curious at all, right? Because, I mean, quite frankly, for a lot of them, I struggle. I talk to people from time to time, but very rarely actually about petrochemicals.

Also, because it takes kind of a baseline denominator to get into it. And I feel that you need to bombard the counterparty with a lot of baseline information to kind of get to an interest. point, to which I'm like, they're probably also not that interested in that. Well, I have one last question, which is just tell us about the next several weeks. And what are you looking out for? And how bad could it get? And what is the time frame for that? Give us your sort of outlook at telling clients.

They ask, how bad is it? What's going on? And let's suppose we, none of us know when the war is going to end. It could, we're recording this March 24, 9.53 a.m. It could end by the time this episode comes out. But let's just say we don't know. The war is going on in a moment. month supposed. What are we looking at? Still one asterisk there. Whether the war continues or not,

which we talk about in binary terms, it does not mean that the Strait of Hermuz will become accessible again. You're right. Just an important caveat. So that's when I look over the next weeks or months. Again, I usually abstain from giving any political commentary. But to me as an analyst, just looking at baseline assumptions over the next weeks or months, the assumption that the Strait of Hermuz will become passable again, to me is very hard to make. So that's my first really major takeaway. At least when I look at my own forecast outlooks, which partially have become completely obsolete, I need to overhaul. But I'm very inclined to make that assumption, still waiting for a couple of days, weeks to see how things develop. But that's my first really

major thing that I just find the argument that the Strait of Hormuz, that things return to normal in terms of shipping, incredibly hard to make. So point number one. Now, when it comes to chemicals, firstly spread between NAFTA and crude oil, especially in Asia. I expect to search, especially to search in early April. The reason being because Asia still has to tap into its inventories, NAFTA inventories. They're not a lot, but they can carve a little bit of ground. We again still have to see the impact of the voyages. I think we've just bought that time.

We're now entering the phase where you really see more material shortages. I think all of that will peak in early April. And then again, technically depends on what happens next. It's point number one. Point number two, what I'm really looking out for is any announcements on projects that were in the pipeline from China. And technically the Middle East, but the Middle East I have already kind of provisionally done away with, with, well, that's probably not going to work out in 2026, 2027. Any projects for planned for 2026, what happens there? Point number three, what is China's strategy here at large going forward? Because China is in a very interesting

position. It's not as badly affected as South Korea or Japan. But, but, it still changes a lot of things. Because, well, for a lot of new facilities, for example, so China had about 20 million tons of new athlete capacity in a pipeline, almost all of which coming from cracking, almost all of which coming from NAFTA, a lot of which hinging on crude oil coming from the Middle East. What happens to that? That's a big question mark to me. And I'm curious to see, indeed, where are we going to see a shift more toward new coal-based

facilities? I think that would take a couple of months rather than weeks, but that's something I'm looking out for. And in the same vein, two more points, one being Western Hemisphere, US, will we see a researched interest in investments, and Western Hemisphere, Latin America, Bolivia, Peru, Venezuela, which had a lot of interest in their chemical industries in the past, but it was dropped again. Will we see a renewed interest there and potentially in Argentina with a lot of shale gas? And then lastly, Europe. Europe is very interesting because up until recently, I've been going on and on about how Europe's chemical industry is in decline. And it was. Now, ironically, and this is a big topic of debate, but I take the stance that all of this happening, very much more likely than not is a net benefit for a lot of chemical produce in Europe.

And this is a big topic to unpack, maybe for another time. But I would definitely be watching indeed whether this turns out this way for European producers. Philip Gertz, thank you so much for coming on. All Thoughts. Really enjoyed the conversation. That was a lot of fun. Thank you, too, guys. Joe, that was a lot of fun. I always appreciate analysts who come. with the numbers, just memorized, right? And just rattle off like, well, there's a difference between production versus capacity, all of that. Right. Or there's like, okay, South Korea, Malaysia, Japan, Indonesia, right?

Singapore, I could say, to 44 million. Yeah, now people who can do that, those are the people that always know their stuff and the details matter. But the last question you asked about, you know, what Philip is looking out for and his answer. I wrote about this in the All Thoughts Newsletter yesterday, which is why it's on my mind. But like when we're talking about the closure of the Strait of Hormuz, we're basically talking about like the choke point of all choke points in the global economy. And obviously oil is a big part of that. But as we just learned in this episode, so is petrochemicals. So as fertilizer.

We've done previous episodes on that. And so it strikes me as almost inevitable that people are going to come away from this experience. no matter how long it goes on for with the intention to build out their own capacity or secure their own supply. And it was interesting, even in a place like Europe, which we tend to think of sometimes as in structural decline, certainly in terms of its chemicals industry. Yeah. Even there, like you could see a revival as a result of this, even, you know, three weeks worth of disruption. Yeah, I really think this is the main story. It was the main story before the start of the Iran war and now. clearly an accelerant to this story, which is just every country wanting to have greater capacity

domestically and to be less reliant on choke points. And look, if we knew for a fact that the straight of Hormuz was A, going to reopen, just as it was a month ago, and B, never close again, how would you possibly know that? Then he's like, oh, we don't need to do anything. But, like, we're in a state. We know now that, like, it is closable. We know it's closed. Not only do we know that it's closable. We know that it's closable without a particularly large military effort that you fire a few drones or missiles a day, not even a particularly costly effort. And you can bring so many industries and so many countries and so much activity basically to a halt. That fact can never be unknown again, basically. That's sort of what Taleb talks about when he, that is sort of the

significant of a black swan that word gets abused a lot because every time an event happens a black swan. But the key insight where I find it actually to be a useful phrase is if you think all swans are white and you see a black swan, then you know for the rest of your life, then you know that they exist. And so it is a black swan in the sense that if the straight of Hormuz can be closed, which is something that people have contemplated before, with relatively little effort, you're going to know that the rest of your life and that's going to change planning for rest of your life. And it'll be really interesting to see. It's also just interesting, I think, his point about how because of Chinese supply, so many of these Korean, Japanese, et cetera,

crackers were already in trouble. Yeah. And now what's going to happen there? I mean, that is also a really big structural shortage, this sort of a, the milkshake of economic activity pouring into China relative to everywhere else. So lots of things going on at once. Well, also the non-substitutability of polyethylene, especially packaging. Yeah, yeah. Like the idea that we're not all suddenly going to switch to burlap bags and bring our own, like, wooden crates to pick up, like, beams from the crew. Yeah, I could see that being an aesthetic choice. But that's not a scalable solution.

But not scalable. No. All right. Shall we leave it there? Let's leave it there. This has been another episode of the Oddlots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.

And I'm Joe Wisenthal. You can follow me at the stalwart. Follow our producers, Carmen Rodriguez, at Carmen Armand, Dashobin at DashBet at DashBot, and Kail Brooks at Kail Brooks. And for more OddLots content, go to Bloomberg.com slash OddLots for the daily newsletter and all of our episodes. And you can chat about all of these topics 24-7 in our Discord. Discord.org.G. slash oddlots. And if you enjoy OddLots, if you like it when we talk about nerdles and other polymers, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes. So it's absolutely ad-free.

All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.