Olefins and downstream may change balance as European Natural Gas breaks charts

On Tuesday, Natural gas prices in Europe climbed to new record levels where prices were assessed in excess of 40 MMBtu. Yamal Europe pipeline, a critical natural gas pipeline of Gazprom, reversed flow from westwards to eastwards limiting supply of natural gas to the European nations. Gazprom has clarified that the move to reverse the flow is only commercial in nature while political pundits and industry experts claimed of political undertones behind the switching of gas direction.

Decline in flow rate of natural gas to Europe was first reported on Saturday (17^th December 2021) which culminated into complete stoppage on 21^st December 2021. Yamal pipeline occupies a vital cog in the European natural gas equation.

Impact on Olefins and their Downstream :

Impact of natural gas price spike may not be only limited to energy security of Europe it is likely that prolonged periods of such robust prices of natural gas will have a bearing on downstream olefins. Ethylene and propylene which depend for their origin on ethane and propane, components of natural gas.

Versatility of olefins makes them ideal for several plastic resins and various essential elastomers. Polymers such as polyethylene and polypropylene, form by polymerization of co-monomers ethylene and propylene. European polymer market has been in the doldrums for a major part of the year which may get further exacerbated with this upsurge in natural gas prices and recent uptick in polymer prices vindicate the above fact. In lieu of that buyers may have to bear the brunt of rising costs as manufacturers are expected to keep their margins.

Ethylene and propylene also form raw material for EPDM rubber, a crucial elastomer. EPDM rubber market sentiment may also get deterred and lopsided if the energy cost remained resolutely high for sustained periods which will increase overall cost of production and may cause turmoil in the nascent recovery in EPDM market dynamics in Europe. EPDM market has remained strong throughout the year where economic recovery in European nations further the consumption of EPDM rubber derivatives.

As per ChemAnalyst, “recent upheaval in natural gas prices has been periodic where H2 of Q4 usually observes a turmoil in Natural gas however in the current context, perception of this price surge appears to be more glaring. Furthermore, prolonged period of this price climb may impact downstream value chains of natural gas.”