The global petrochemical industry, as a first flagged up in early 2022 and discussed again last week, is in a deep and long-term structural downturn (the result of getting Chinese demand and capacity additions wrong) which has a few more years to run.
Despite all the sound and fury of the trade war, however, polyethylene (PE) margins in Northeast and Southeast Asia have yet to be made any worse by events since Liberation Day, as I discussed in last week’s post. The same applies across many petrochemicals and polymers. See today’s third slide for how the patterns in NEA and SEA margins, which I detailed for PE last week, are mirrored in polypropylene (PP).
But the Israel-Iran crisis could be something altogether different, which is theme of today’s post. Here is my first pass at three headline scenarios about what the crisis could mean for the global economy, and thus of course petrochemicals. Watch this space as events develop.
In this most optimistic outlook, we see a swift reduction in direct confrontation, potentially spurred by robust international mediation efforts. Any retaliatory actions are carefully calibrated to be limited and symbolic, avoiding critical infrastructure or major civilian casualties. The focus would then shift back to diplomatic channels, perhaps even reigniting stalled negotiations on broader regional security or Iran’s nuclear programme.
What this means for the global economy:
- Oil Prices: Expect a rapid return to pre-crisis levels. Any initial price spikes would be short-lived, with markets quickly recovering.
- Inflation: Minimal sustained impact. Stable energy costs would allow central banks worldwide to continue with their planned monetary policies without additional inflationary pressures.
- Supply Chains: Any disruptions, like temporary flight cancellations in the immediate region, would be minor and quickly resolved. Critical shipping routes, such as the vital Strait of Hormuz would remain fully open and secure.
- Investment: Investor confidence would rebound quickly, leading to a recovery in risk assets and a reversal of safe-haven flows.
Essentially, the economic world breathes a sigh of relief, and the focus returns to established growth trajectories.
This scenario represents a more prolonged and uncertain period. While a full-blown direct war might be averted, the underlying tensions remain acutely high. Instead of direct confrontation, Israel and Iran engage in an intensified “shadow war” or escalate proxy conflicts across the wider region – think Syria, Iraq, Yemen, or through groups like Hezbollah in Lebanon. Occasional targeted strikes or cyberattacks might occur, but generally stop short of triggering a wider, direct military engagement. Diplomatic efforts would be ongoing but slow, largely ineffective in achieving a lasting resolution.
What this means for the global economy:
- Oil Prices: Expect elevated and volatile prices. This is driven by a persistent geopolitical risk premium and constant concerns about potential supply disruptions in a region that controls a significant portion of the world’s oil.
- Inflation: Sustained upward pressure on global inflation. Higher energy costs would feed into various sectors, complicating central bank efforts to control prices and potentially leading to a more hawkish monetary stance.
- Supply Chains: We’d likely see increased shipping insurance premiums and minor rerouting of some commercial vessels due to perceived risks in certain waterways. This translates to higher logistics costs, which ultimately get passed on to consumers.
- Investment: Increased risk aversion would dominate global markets, leading to more volatile equity performance and continued safe-haven demand for assets like gold and the US dollar. Foreign direct investment into the broader Middle East region could decline.
This path leads to persistent economic headwinds and greater uncertainty for businesses and consumers alike.
Direct military conflict between Israel and Iran spirals out of control, drawing in other regional powers and potentially even major global players. Iran might attempt to close or severely disrupt shipping through the Strait of Hormuz – a chokepoint through which a significant percentage of the world’s oil passes. Widespread attacks on critical energy infrastructure across the Gulf region would also be a real possibility.
What this means for the global economy:
- Oil Prices: A big surge, depending on the extent and duration of disruption, especially to the Strait of Hormuz.
- Inflation: Hyperinflationary pressures globally would become a severe concern as energy costs skyrocket and supply chains completely break down. We could face a significant cost-of-living crisis across the world.
- Supply Chains: Widespread and severe disruptions would paralyze global trade. Blockades, attacks on shipping, and prohibitive insurance costs could lead to severe shortages of goods and a halt in many manufacturing processes worldwide.
- Global Recession/Depression: The high probability of a severe global recession or even a depression would loom large, as economic activity grinds to a halt under the weight of soaring energy prices, rampant inflation, and collapsing supply chains.
- Financial Markets: Extreme volatility would grip financial markets, with sharp declines in stock markets worldwide. Even traditional safe-haven assets might struggle in a truly systemic crisis.
While this scenario is considered by many analysts to be a last resort due to its immense costs for all parties, the risk escalates with every step closer to broader conflict. It is the outcome that policymakers and markets dread most.
Conclusion
While we hope for the best-case scenario, understanding the full spectrum of possibilities is crucial for petrochemical companies, governments, and individuals to prepare for potential economic ripple effects. The interconnectedness of our global economy means that even “medium” level tensions can have significant and widespread consequences far beyond the immediate conflict zone.
Source: ICIS
