Analysts ruled out the possibility that the disruption of petrochemical exports through the Strait of Hormuz would lead global buyers to permanently abandon Middle Eastern suppliers, saying low production costs and large industrial capacities continue to support the competitiveness of Gulf producers, despite companies’ move to diversify their sources of supply to limit supply risks.
Middle East dominates polyethylene exports
The Middle East accounted for more than 40% of global polyethylene exports last year, while markets in Asia, Europe and Latin America rely on the region’s products for packaging, consumer goods and a range of industries.
Data from S&P Global Market Intelligence showed that the closure of the Strait of Hormuz, following the outbreak of the US-Israeli war on Iran in late February, brought nearly 20% of global ethylene production capacity to a halt. As much as 40% of Asian naphtha supplies were also disrupted, pushing prices higher.
Feedstock advantage supports Gulf producers
Saudi Arabia, the United Arab Emirates and Qatar retain a competitive position in the petrochemicals industry, benefiting from low-cost hydrocarbon feedstocks as well as massive industrial investments accumulated over decades. A spokesperson for German company BASF said the recent disruptions had reinforced the importance of diversifying supply chains.
However, the spokesperson ruled out a long-term decline in the importance of the Middle East, given its production advantages and low costs. Analysts said prices remain the decisive factor in purchasing decisions for basic chemicals, making it difficult for alternative suppliers to compete with Gulf producers on a sustained basis.
Shipping disruptions drive supplier diversification
Shipping disruptions accelerated companies’ shift towards relying on multiple suppliers. The share of local and regional suppliers rose to about 20% of demand among some buyers, after standing at near-zero levels before the war.
Analysts at Morningstar believe concerns about supply reliability could temporarily increase demand for petrochemicals from North America, but they do not expect a permanent shift away from the Middle East.
By contrast, producers in North America and Europe benefited from the global supply shortage, raising operating rates at ethylene production units to meet demand and take advantage of higher prices. Dow chief financial officer Jeff Tate said in July that polyethylene prices had risen by more than 40% since late February because of supply disruptions.
Eastman Chemical, in turn, reported a roughly 10% increase in revenue during the second quarter, supported by sales growth and a 4% rise in average selling prices.
Analysts estimate that the Hormuz disruptions could affect trade patterns and supply chains without eroding the economic advantages that make the Middle East a leading global petrochemical supplier.
