Tracee Alloway (2:34)

What is this?

Joe Weisenthal (2:36)

It looks like a magenta marker.

Tracee Alloway (2:38)

Magenta?

Philip Gertz (2:39)

Yeah.

Tracee Alloway (2:39)

It's pink. It's hot pink. What's magenta it's like purplish pink.

Joe Weisenthal (2:43)

Really?

Tracee Alloway (2:44)

Okay. Color is beside the point. It is indeed a highlighter, but more importantly, it is a result of a complex petrochemicals system supply chain.

Joe Weisenthal (2:54)

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.

Tracee Alloway (3:00)

I didn't intend your major takeaway from this conversation to be the difference between pink and magenta. Okay.

Joe Weisenthal (3:05)

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 some aspects of what gives it color when you draw on something.

Tracee Alloway (3:18)

All right, so what is this plastic casing actually made of? This is a pop quiz that I

Joe Weisenthal (3:23)

definitely have no idea.

Tracee Alloway (3:24)

Okay. Okay. It starts from crude oil.

Joe Weisenthal (3:27)

Yeah, that I. Okay. Yeah.

Tracee Alloway (3:28)

So crude oil distilled into.

Joe Weisenthal (3:32)

Keep going.

Tracee Alloway (3:33)

Naphtha.

Joe Weisenthal (3:33)

Naphtha, Right, Naphtha.

Tracee Alloway (3:35)

And then naphtha is. This is a hint. Cracked into ethylene or propylene.

Joe Weisenthal (3:42)

Yeah.

Tracee Alloway (3:43)

We've actually done a plastic.

Joe Weisenthal (3:44)

Yeah, I know, I know, I know. Yeah.

Tracee Alloway (3:45)

Okay. And then it gets polymerized.

Joe Weisenthal (3:48)

Yeah. Of course.

Tracee Alloway (3:49)

Into polyethylene.

Joe Weisenthal (3:52)

Right.

Tracee Alloway (3:52)

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.

Joe Weisenthal (4:03)

Go on.

Tracee Alloway (4:04)

Nurdles.

Joe Weisenthal (4:05)

Nurdles. I remember all of this from that episode that we did. Nurdles.

Tracee Alloway (4:09)

The building blocks of highlighters and lots of other plastic products would be nurdles. 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 24, and we're starting to see a lot of the disruptions in the oil market start to, I guess, ripple out into other petrochemicals.

Joe Weisenthal (4:32)

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 nurdles. 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 that we're recording it, but it 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, and which I don't know the answer is whether this applies to all of the different processing steps along the way, which is, is there this 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.

Tracee Alloway (6:01)

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 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.

Joe Weisenthal (6:56)

In a plastic bag completely, or a jar or whatever. And I would say in a lot of the cases of foodstuffs 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, and are we just going to get outright shortages? What are 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.

Tracee Alloway (7:24)

All right. Well, I am happy to say we do in fact have the perfect guest to talk all things petrochemicals. We're going to be speaking with Philip Gertz. He is the chemicals and oil analyst over at bnf and a guy who lives and breathes polymers.

Joe Weisenthal (7:38)

Hopefully not literally not breathes, hopefully not breeds polymers.

Tracee Alloway (7:42)

All right, Philip, thank you so much for coming on Odd.

Philip Gertz (7:44)

Lots of thank you very much, Tracy and Joanne, it sounds very sad to introduce me with living and breathing polymers, but I'll take it. I'll take it for sure.

Tracee Alloway (7:52)

Well, we're all filled with microplastics now. Right. So you're not the only one.

Philip Gertz (7:55)

Exactly right.

Tracee Alloway (7:56)

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 can go on and on and on, but just broadly, why don't you tell us about the Gulf region and its role in the petrochemicals supply chain?

Philip Gertz (8:17)

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 naphtha and liquefied 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 fancy, we can talk about xylenes, parasoline or butadiene. 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 paraxylene in terms of polyethylene terephthalate or also more commonly known as polyester. So ethylene propylene, xylene are turned into polyethylene, polypropylene and into polyethylene terephthalate 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 doesn't matter too much, but it's good to be aware 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. 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 crack 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 slightly more consumes. So it's a lot. Right. You have those volumes firstly being taken off the market directly, although couple of asterisks 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 naphtha or oil products in general. Big asterisk there. But if you take all of that off the market, you basically have the entirety of what Europe consumes all of a 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 7ish percent of global production. PVC, polyphenol 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 again 6 to 7%. So the middle east in terms of polymers, 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 naphtha exports, you have crude oil exports that are then turned into naphta amongst others. So the refineries run on it. And obviously if you have to cut refinery rates, you're also going to lose naphtha 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 naphtha 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 it predominant hit comes from.

Joe Weisenthal (12:59)

That was fantastic. First of all, quick question. So on nafta, is that typically produced where the oil comes from? How like tight is that? If it's derived from crude oil, is it typically right there or there parts of the value chain where the oil gets shipped a long way and then the NAFTA is produced somewhere else?

Philip Gertz (13:17)

It's basically the latter. Or rather it just depends. Right, okay. 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, Saudi produces around 10 to 11 million barrels of crude oil per day. But if I'm not mistaken, its refining capacity is around anywhere between 3 and 4 million barrels per day. So in that case, it refines a relatively small amount of its total production capacity.

Tracee Alloway (13:41)

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?

Philip Gertz (13:54)

Well, history plays a huge role. Japan, next to Europe and the US 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?

Tracee Alloway (14:18)

Why not just import Them, Why even bother refining them domestically?

Philip Gertz (14:22)

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 the US 44 million tons 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 there are such extraordinary oil producers next to chemical producers, and the chemicals they produce locally, by the way, are largely gas derived. We can get 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, why companies have chosen to also build out the refineries in Japan, South Korea, rather than all in the Middle east itself.

Joe Weisenthal (15:55)

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Joe Weisenthal (17:56)

So Tracy obviously started the conversation showing her hot pink highlighter.

Tracee Alloway (18:02)

That's right, you learned something.

Joe Weisenthal (18:03)

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 the end of the world, the world isn't going to come to a screeching end, etc. But I imagine some things are a little bit higher on the value chain. And so when we talk about NAFTA or 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? Oh, this could be a real problem.

Philip Gertz (18:38)

Oh, you guys had podcasts on fertilizers.

Joe Weisenthal (18:42)

Yeah, that's right.

Philip Gertz (18:43)

A very similar story here. My main concern, without a doubt 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.

Joe Weisenthal (19:10)

But I mean, 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, it's like, oh, what I do is the key thing holding modern day society together. They're not wrong. Okay, podcasts, maybe not, but like, they're not wrong. Like any one of these things go. And the whole thing goes. That was the lesson of 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.

Philip Gertz (19:39)

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 polyethylene and polyvinyl chloride, a lot of them go into infrastructure projects. Hence why you could see in India, for example, since 2018, 2019, huge surge 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. The 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 to learn.

Tracee Alloway (20:58)

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. Are we seeing prices start to rise? Are we seeing outright shortages? What are you observing in the market so far?

Philip Gertz (21:19)

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 polyethylene markets 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 majeures 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 majeures, 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.

Joe Weisenthal (23:59)

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 5 metric tons. So in USD, in the beginning of the year it looks like they were trading at around $925 for 5 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 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. Talk to us about pricing transparency that we have in this market.

Philip Gertz (25:00)

Yeah, love it. Just quick disclaimer here. There are subtopics that I know more of and there are subtopics that I know less about. This falls into the category of the 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 observation. I may be wrong. And in terms of the spot market, they're relatively small. But the spot market is.

Joe Weisenthal (25:26)

That's what I figured.

Philip Gertz (25:27)

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. Weeks.

Tracee Alloway (25:58)

Didn't that happen during COVID as well? Wasn't there a big arbitrage between polyethylene prices in Europe and the US versus Asia? There seem to be these big regional differences, 100%.

Philip Gertz (26:11)

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 asterisk almost going into a side tangent 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 1 ton of ethylene. Whereas if you produce ethylene via naphtha, you need about 3.2 tons of naphtha. So you just need a lot more feedstock and obviously you get a lot of byproducts. But then for naphtha cranking in Europe and Asia, their competitiveness also hinges a lot on what the price movements are of those by products. Just as a side note, by the

Joe Weisenthal (27:11)

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 chemicals, polymers that you're talking about, massive spikes obviously, and the big spike obviously since the start of the war. What does it mean when force measure is declared? What does that actually entail?

Philip Gertz (27:40)

You tell me. No, it's. It depends a lot. Usually, again, we like to talk a lot in certain terms. I think a force majeure colloquially is implied to mean, oh, production is fully cut. It kind of depends. So to give you one concrete example, okay, one, Hua Chemicals in China has, amongst others, two very large crackers, 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, what does this mean? So you dig further, try to find something specific. The only thing I could find publicly announced is they're declaring force majeure 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 majeure, 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. Question is then also by how much kind of a floor for a lot of crackers is 50 to 60% 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.

Joe Weisenthal (28:52)

So this came up in the context of jet fuel, but the sort of 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?

Philip Gertz (29:25)

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 naphtha price in Asia have surged. So here 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 naphtha cranking. So let's just say close to more than half of naphtha 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 either 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 Carlos Sundays, we can introduce or people will at the end of the day if flight tickets just become too expensive to not or cancel flights, just period. 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 weeks, 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 naphtha production, both from an economical and just engineering perspective. Right. Because within the industry we often talk about those things. As a given, naphtha 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 naphtha production, if indeed demand destruction on gasoline becomes stronger than nafta.

Tracee Alloway (31:36)

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.

Philip Gertz (31:49)

Yeah.

Tracee Alloway (31:50)

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?

Philip Gertz (32:00)

Yeah, big question. Short term, no short term, minus if you would have a lot of production within refineries, 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. 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 here, 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 ethylene production capacity of around 45 million tonnes. Ish. So China and them together is about 100 million tons, China 60 million, those others about 40 million together. Out of those 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 Kraken facilities were operating at lower rates. You can compensate there in the U.S. especially. But if you assume, for example, that the U.S. was running at about 85% before and they would go all the way up to 9,500% now. So 10 to 15% difference, that's about 4 to 6 million tons added. So that's basically one tenth of what, or one eighth of what would be lost in the most extreme scenario when it comes to China thing is that those crackers are large projects, they take time. And the world at large had an incredible, incredibly large pipeline for 2026, which is ironic and which is why I emphasize polyethylene so much. Because the amount of projects, like world scale projects that are very well covered, no 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 the utmost extent.

Tracee Alloway (34:16)

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 awash in plastics like, okay, let's do something with them.

Philip Gertz (34:32)

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, but which probably tells

Tracee Alloway (35:03)

you something about the importance of recycling in a petrochemical chemical analyst career, but yeah, exactly right.

Philip Gertz (35:10)

It's, 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 1 to 2 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 1/10 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 time frame 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.

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Joe Weisenthal (38:19)

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?

Philip Gertz (38:49)

Medium term, sure, but I don't think medium term is the problem here. Yeah, if we define medium term, sure, yeah, I guess.

Joe Weisenthal (38:54)

Right, right. That's not going to help us. But like you know, if we say, like, you know, this is going to reshape, 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?

Philip Gertz (39:16)

Beautiful question. I think the bigger question here is, well, twofold. Firstly, if this continues, will it reshape how the global chemical industry works?

Joe Weisenthal (39:24)

Yeah.

Philip Gertz (39:25)

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.

Joe Weisenthal (39:38)

Yeah.

Philip Gertz (39:39)

And a lot of Asian producers were already on the cusp of closing their business. And by a lot, I mean South Korea, Japan, Taiwan, Singapore especially. If you take them together, you talk about South Korea's 13 million tons, Japan, 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% of this could disappear.

Joe Weisenthal (40:08)

Sorry, why?

Philip Gertz (40:09)

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 Hormuz 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. I would be very surprised if that does not happen. Then the question becomes, well, two questions here. Firstly, what happens afterward if things indeed normal? 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 and to 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 3 to 4 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, 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, rather, 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 U.S. ethane and U.S. chemicals.

Tracee Alloway (43:00)

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.

Joe Weisenthal (43:15)

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 laptops. Like, I need to get a look at this.

Tracee Alloway (43:23)

So it actually, it has now 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 Naptha is pretty sensitive. And one of the reasons Naptha apparently is sensitive is because if prices for Naptha go up, then petrochemical plants can substitute ethane, which it seems we're starting to see. I'm also Reading a Bloomberg. 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 that saying that us producers of polyethylene are buying more ethylene 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.

Philip Gertz (44:13)

Not very high. Okay, so two things here. I realize I liked making a lot of lists without completing them, but maybe we 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 naphtha, 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 naphtha, you get ethylene, you get propylene, you get butadiene, you get benzene.

Tracee Alloway (44:47)

The byproducts you mentioned earlier.

Philip Gertz (44:48)

Exactly right. And they need to be separated. And there is a whole post, this cracking section for that that just vastly differs. For naphtha cracker versus ethane, I think one common point of confusion is so you have three major oil or gas feedstock streams, you have naphtha, you have LPG and ethane. And I would group LPG and naphtha 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. 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, there are not that many crackers that use ethane. And if they use ethane, they typically fully use ethane. Not exclusively. There are some exceptions, such as I think the one HUA Chemical Yantai cracker that I mentioned earlier, one of those actually runs partially on ethane, partially on Naphta. But typically if a cracker fully runs on ethane, it fully runs on ethane. Whereas for a lot of naphtha crackers, they play around with their LPG share depending on the price movements.

Joe Weisenthal (45:52)

I've learned a lot from this conversation. I would be lying if I didn't say that. I'm going to have to go back and look at what some of These things are or 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 US exports to China en masse, 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 and why does China need to get it from a lot of us and what does it go into?

Philip Gertz (46:27)

It all depends on what we mean by a lot. That's a very relative term.

Joe Weisenthal (46:32)

I just know that about half of all US exports of ethan which is extracted from US shale gas, which probably explains why we have a lot head to China. So what do they. What's the deal with that?

Philip Gertz (46:43)

Yeah, so firstly, that mainly comes because the US is a very large producer of shale gas, which yields a lot of ethane lpg. And because the US 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 that will increase the capacity for LPG and ethane to be export. 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 5 or 6 million tons of ethane, and you can make well around 5 to 6 million tons of ethylene from that, which is about 10% of China's production capacity. Right. So is that a lot? Kind of ish.

Joe Weisenthal (47:30)

I see. So that's kind of a lot relative to US industry. But it's not really a lot in the grand scheme of how much China is using and producing.

Philip Gertz (47:40)

And even for the us this is probably. If we convert this into barrels per day, it's probably around 200 to 300,000 barrels per day.

Joe Weisenthal (47:50)

Even this article, I'm saying, says about half of all US exports of ethane go to China, which means this is just a fraction of total ethane production

Philip Gertz (47:59)

in the U.S. exactly. Okay, so that's. I think the entire ethane story is relatively effective. 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

Joe Weisenthal (48:17)

one that's Project one busting the ethane hype on all these people going around. Yeah, the ethane hype ends now, I think.

Philip Gertz (48:26)

Yeah, by the way, by the way, guys, to actually finish one of my lists because I was mentioning earlier how there are two points on us and ethane and how much flexibility there is there. I think another thing is just production volumes. Debt goes up, but it goes up steadily. To me, it seems very unlikely that production could surge by that much, that you could really substitute for any notable amounts. That's the second point on ethane substituting for naphtha. There are limited supplies for now that can go up, but also that takes time.

Tracee Alloway (48:54)

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?

Philip Gertz (49:15)

Bolt. Assume I go out and speak to people. We'll stop there. No, 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 the zeitgeist 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 all 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 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 counterparty with a lot of baseline information to kind of get to an interesting point to which I'm like, they're probably also not that interested in that.

Joe Weisenthal (50:28)

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 timeframe for that? Give us your sort of the outlook. You're telling clients. They ask, how bad is it? What's going on? And let's suppose none of us know when the war is Going to end. We're recording this March 24th at 9:53am 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 month. Suppose, what are we looking at?

Philip Gertz (50:57)

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 Hormuz will become accessible again. 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 Hormuz 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 Naphta and crude oil, especially in Asia, I expect to search especially to surge in early April. Reason being, because Asia still has to tap into its inventories, NAFTA inventories, they're not a lot, but they can cover 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. That'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've already kind of provisionally done away with, with. Well, that's probably not going to work out in 2026, 2027, any projects 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 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 ethylene capacity in the 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 whether we're 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 producing Europe. And this is a big topic to unpack, maybe for another time, but I would definitely be one watching indeed whether this turns out this way for European producers.

Tracee Alloway (54:04)

Philip Garth, thank you so much for coming on. Odd Thoughts. Really enjoyed the conversation. That was a lot of fun.

Philip Gertz (54:09)

Thank you too, guys.

Tracee Alloway (54:23)

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 versus capacity, all of that.

Joe Weisenthal (54:34)

Right? Or there's like, okay, South Korea, Malaysia, Japan, Indonesia, Singapore. That gets you to 44 million. Yeah. Now people who can do that, those are the people that always know their stuff and details matter.

Tracee Alloway (54:49)

But the last question you asked about what Philip is looking out for and his answer, I wrote about this in the Odd Lots newsletter yesterday, which is why it's on my mind. But 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. Right. And obviously oil is a big part of that. But as we just learned in this episode, so is petrochemicals, so is 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.

Joe Weisenthal (55:39)

Yeah.

Tracee Alloway (55:40)

Even there, like, you could see a revival as a result of this, even, you know, three weeks worth of disruption.

Joe Weisenthal (55:46)

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 Strait 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 close. 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 significance of a black swan. That word gets abused a lot because every time an event happens, the 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 Strait of Hormuz can be closed, which is something that people have contemplated before, with relatively little effort, you're gonna know that the rest of your life, and that's gonna change planning for the rest of your life. And it'll be really interesting to see. It' is interesting. I think his point about how because of Chinese supply, so many of these Korean, Japanese, et cetera, crackers were already in trouble, and now what's going to happen there? I mean, that is also a really big structural shortage. This sort of the milkshake of economic activity pouring into China relative to everywhere else. So lots of things going on at once.

Tracee Alloway (57:48)

Well, also the non substitutability of polyethylene, especially packaging, like the idea that we're not all suddenly gonna switch to burlap bags and bring our own, like, wooden crates to pick up, like, beads from the crate. Yeah, I could see that being an aesthetic choice, but that's not a scalable solution. Not scalable, no. All right, shall we leave it there?

Joe Weisenthal (58:08)

Let's leave it there.

Tracee Alloway (58:09)

This has been another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me Racialaway and I'm Jill Weisenthal.

Joe Weisenthal (58:16)

You can follow me Hestalwar Follow our producers Carmen Rodriguez at CarmenArman, Dashiell Bennett at Dashbot, and Kale Brooks at Kalebrooks. And for more Odd Lots content, go to bloomberg.com oddlots for the daily newsletter and all of our episodes and you can chat about all these topics 24. 7 in our Discord, Discord, GG Oddlots.

Tracee Alloway (58:35)

And if you enjoy Odd Lots, 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 absolutely ad free. All you need to do is find the Bloomberg Channel on Apple Podcasts and follow the instructions there. Thanks for listening.

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