Tracy Alloway and Joe Weisenthal host this episode featuring Philip Gertz, chemicals and oil analyst at BNEF, discussing the petrochemicals supply chain disruption caused by the Strait of Hormuz closure.

The conversation explores how a simple highlighter represents a complex supply chain from crude oil to naphtha to ethylene to polyethylene pellets called 'nurdles' - the building blocks of plastic products.

With the Middle East producing 12% of global polyethylene capacity and Asian crackers heavily dependent on Middle Eastern feedstocks, the discussion examines potential shortages in food packaging and other critical applications.

The analysis covers regional production differences, substitution possibilities between ethane and naphtha feedstocks, and the long-term structural changes this crisis may trigger in global petrochemicals manufacturing.

The Petrochemicals Supply Chain from Crude to Plastics

The supply chain starts with crude oil distilled into naphtha, then cracked into base chemicals like ethylene and propylene, finally polymerized into plastics like polyethylene and polypropylene.

"The Middle East itself is a major exporter of polyethylene... about twelve percent of global capacity. Production will be slightly higher thirteen fourteen percent" - Philip, representing 18 million tons annually.

Beyond direct polymer exports, Middle Eastern feedstock disruptions could force 15-17% cuts in Asian ethylene production, affecting countries from South Korea to Indonesia.

Asian Crackers Face Unprecedented Feedstock Shortage

South Korea, Japan, Taiwan and Singapore collectively operate 30+ million tons of ethylene capacity, with many facilities already declaring force majeure or production cuts.

"Voyages from the Middle East Gulf to South Korea Japan take about eighteen to twenty five days" - Philip, meaning physical impacts are just beginning to materialize in early April.

Many Asian crackers were already struggling with overcapacity before the crisis, with 30-50% of capacity potentially closing by 2030 due to Chinese competition.

Food Packaging Emerges as Critical Vulnerability

"My main concern, without a doubt, would be food packaging. I am not aware of any fungible products for polyethylene to be used at the same scale" - Philip.

Polyethylene consumes 60-70% of ethylene production, with much going to packaging that has no viable substitutes for food preservation and transport.

Unlike jet fuel or gasoline where demand destruction is possible through reduced travel, food packaging demand appears highly inelastic and non-substitutable.

Price Surges Reflect Supply Chain Stress

Naphtha prices in Asia jumped from $496 to $842 per metric ton since January, while polyethylene futures rose from $925 to $1,300 for five metric tons.

"The spread has increased a lot over the past three weeks... both in Europe and in Asia, but especially NAFTA price in Asia have surged" - Philip.

Most polymer markets operate on monthly or quarterly contracts rather than spot markets, with spot prices showing distortions first before contract renegotiations.

Limited Substitution Options for Feedstocks

US ethane-based production requires only 1.2 tons of feedstock per ton of ethylene versus 3.2 tons for naphtha-based production, but substitution is technically difficult.

"The furnaces that are used for ethane and NAFTA, they're pretty different... switching between those two is pretty difficult" - Philip, due to different byproduct streams requiring separate processing.

Even maximum US production increases of 10-15% would only add 4-6 million tons, roughly one-eighth of potential Middle Eastern losses.

China's Coal Alternative Faces Scale Challenges

China currently produces 10 million tons of ethylene from coal-to-methanol-to-ethylene processes, representing about 16% of its 60 million ton total capacity.

"You would be talking about basically three to four fold quadrupling the sector over the next couple of years" - Philip, to meaningfully replace Middle Eastern feedstocks.

China had 20 million tons of new ethylene capacity planned, mostly naphtha-based and dependent on Middle Eastern crude oil imports, now in question.

Long-term Structural Shifts in Global Production

"Even if things were to quote unquote normalize... the perceived risk of passing through the strait of hormuz has changed" - Philip, permanently altering investment decisions.

Philip expects renewed interest in Western Hemisphere production, including US ethane-based facilities and potentially Latin American projects in Bolivia, Peru, and Venezuela.

European chemical producers, despite structural decline, may benefit as a "net benefit for a lot of chemical producing Europe" due to reduced Middle Eastern competition.