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INSIGHT: Russia export disruptions to shift global trade flows, future capacities threatened

By Joseph Chang, Global Editor, ICIS

Disruptions to Russia’s chemicals and polymers exports will change trade flows, particularly to Europe and Asia, as international sanctions, lack of logistics and even “self-sanctions” limit volumes. 

While Russia’s capacities are relatively small on a global scale, they can still have a significant impact on regional markets if these exports are disrupted. 

Key Russia exports include methanol, polyethylene (PE), polypropylene (PP), styrene and paraxylene (PX). 

Russia has increased exports of high density polyethylene (HDPE) and polypropylene (PP) in particular in 2020 and 2021 as new capacity started up from SIBUR’s ZapSibNeftekhim complex in Tobolsk in 2020. 

Russia has ramped up HDPE exports from 160,000 tonnes/year in 2019 to over 850,000 tonnes in 2021, according to its own statistics in the ICIS Supply and Demand Database. 

Russia’s HDPE exports may be more insulated as China accounted for more than half of such exports in 2021. China has not levelled any sanctions against Russia. 

Other major destinations for Russia HDPE in 2021 included Turkey, Belgium, Poland, Kazakhstan and Belarus but none close to the scale of China.

Russia’s key chemical exports by destination in 2021 

Top five country destinations for Russian exports, compared with rest of world

*NL = Netherlands, KZ = Kazakhstan, LT = Lithuania, UZ = Uzbekistan, CH = Switzerland

SOURCE: ICIS Supply & Demand Database (2021 statistics)

MORE PE CARGOES TO CHINA?

“We expect more Russian PE cargoes will go to China. But Russia PE to the rest of Asia may not increase, as buyers there may have problems paying under sanctions,” said Amy Yu, senior analyst at ICIS based in Shanghai.

Russian PE accounted about 3% of China total PE imports in 2021 and mainly HDPE grades she noted.

While major new PE capacity is coming on in China, PE import dependence is still close to 40%, with large volumes coming in from the Middle East and the US, said Yu.

Russia’s ability to move cargoes will also depend on whether companies can open letters of credit (LCs) with banks, which appears unlikely, or whether Chinese banks are willing to step in, said ICIS senior Asia consultant John Richardson.

“But this then depends on the strength of the relationship between Russia and China,” he added, pointing to China’s decision to halt all business relating to Russia and Belarus via the Asian Infrastructure Investment Bank (AIIB) as a potential sign that China is recalibrating its relationship.

PP MORE PROBLEMATIC

However, PP could be more of an issue as Europe and Turkey took the lion’s share of Russia’s exports by far with China receiving minimal volumes. China has become much more self-sufficient in PP versus PE over the past several years.

Russia has ramped up PP exports from over 300,000 tonnes in 2019 to more than 800,000 tonnes in 2021, according to the ICIS Supply and Demand Database.

Major destinations for Russia PP exports in 2021 included Turkey, Poland, Belarus, Belgium, Italy and Ukraine.

ICIS senior analyst Lorenzo Meazza expects considerable changes in Russia export trade flows in the short term, and perhaps more significantly in the long term.

“In the short term, Europe should easily find alternatives to Russian volumes. Availability of PE is forecast to overall improve with abundant material available from the US and Middle East while Asia is increasing its PE supply,” said Meazza.

“On the other hand, Russia may try to sell more material to China, which is still very far from self- sufficient for PE. However, China is also considerably increasing its PE capacity and Chinese PE importers may also decide to avoid Russian volumes as long as the conflict and related sanctions continue,” he added.

ICIS SLASHES RUSSIA PE CAPACITY FORECAST

Bigger changes are expected for Russia’s future capacities as projects dependent on US and European technology will likely be delayed or cancelled, dashing the country’s ambitions of becoming a major exporter, the analyst noted.

The US on 2 March joined the EU in restricting exports of technology that support Russia’s refining industry.

Pre-war, ICIS expected Russia PE capacity to surge from around 3.4m tonnes/year in 2022 to more than 5m tonnes in 2025 and over 8.5m tonnes by 2027 with exports from the country expected to roughly triple in five years.

However, ICIS has now revised its forecast for Russia PE capacity from 3.4m tonnes/year in 2022 to less than 4m tonnes by 2027 – a massive difference of 4.5m tonnes that could tighten global markets if this is not replaced by other capacities.

BALTIC CHEMICAL COMPLEX IN DOUBT

Specifically in doubt is Russia’s €10bn Baltic Chemical Complex project, one of the world’s largest planned PE expansions at 3m tonnes/year in two phases, scheduled to start commercial production from mid-2024.

The first 1.5m tonnes/year had been planned to be onstream from mid-2024 and the second, with the same capacity, from 2025. There would be six PE reactors with US company Univation supplying the polymerisation technology.

Owned by RusGazDobycha which itself is owned by National Gas Group, the project would target Russia’s domestic market as well as export destinations including Europe, Asia, Latin America and Africa.

“If new PE projects in Russia are affected, they may not provide the large exports that had been expected. There may be more new investments in Asia, especially China, as demand grows,” said ICIS senior analyst Yu.

METHANOL ‘SELF-SANCTIONS’

Russia’s top chemicals export is methanol to the tune of 1.9m tonnes in 2021 with the bulk going to Europe.

ICIS is reporting buyers in Europe avoiding Russia-origin product even as there are no sanctions in place on Russian methanol exports to Europe.

“Energy markets are already starting to not want to take Russian product, whether it’s crude oil or gas. I think methanol is following that,” said a seller.

“Thankfully these energy products aren’t sanctioned yet, but it’s a self-sanction thing,” said the seller who also noted there were no bid-offers for Russian methanol.

While some companies have declared their stance on business with Russia, it is currently unclear how much of the European methanol market will self-sanction.

“Overall there’s a lot of players thinking about… not because it’s forbidden by any sanctions or government laws but for ethical reasons, not to purchase any longer Russian material. There are some players who seem to avoid this,” said a producer.

The sidestepping of Russian spot volumes has added to the rapid increase in spot prices which have surged 22% in the week through Thursday 3 March.

Players expect the supply gap from Russia to be filled by imports from elsewhere – the typical other sources being from the US, Trinidad, Venezuela, Equatorial Guinea and the Middle East.

PARAXYLENE HALTED

Market sources indicate that paraxylene (PX) and orthoxylene (OX) exports from Russia will be close to zero in the near future as a consequence of the invasion, as buyers fear the impact of new sanctions or simply choose to boycott Russia-origin material.

Several traders and producers in Europe said they received new requests from buyers who used to import from Russia.

RUSSIA STYRENE STILL AVAILABLE

Meanwhile, Russia styrene is reportedly available in Europe and there is no rush to secure volumes with the spot market very quiet.

Of Russia’s over 90,000 tonnes of styrene exports in 2021, over 80% went to Finland, according to the ICIS Supply and Demand Database. Most is used internally for expandable polystyrene (EPS), styrene butadiene (SB) latex and polyester resins (UPE).

The energy-intensive European styrene market faces growing challenges from higher heating costs stemming from natural gas prices, which have also surged in the wake of the Ukraine invasion.

“If the gas remains at this level it will be a big problem as we will lose money on the total envelope of whatever derivative we sell,” a Europe-based styrene producer said.

“We are talking double the cost of energy to make styrene monomer, so now 10x the normal energy cost versus 5x until just over a week ago,” the producer added.

CRUDE OIL RISKS RISE

Meanwhile, crude oil prices continue to rise, putting pressure on chemicals margins across the board, especially in Europe and Asia where oil-based naphtha is the primary feedstock for petrochemicals production.

“The risk of a reduction in Russian oil exports is the primary reason behind the oil price spike in recent weeks. Russia exports around 4.5m-5m bbl/day of crude, and around 2.5m bbl/day to non-European countries – much of this heads east to Asian buyers such as India, South Korea, Japan and China,” said Ajay Parmar, ICIS senior crude oil analyst.

On 3 March, a group of US lawmakers introduced legislation that would ban Russia energy imports.

“The manner in which the sanctions are designed will be critical to their success. If western sanctions on Russian oil exports only apply to western crude buyers, Russia will feel short-term pain, but will likely be able to still find willing buyers in Asia, as the oil market is especially tight at present,” he added.

However, if sanctions are broadened, the impact on Russia’s energy exports would be significant with the number of willing buyers of Russian crude very small.

“One such buyer will of course be China, which will gladly take Russian crude at an $18.65/bbl discount to Dated BFOE, as recently reported by ICIS. But even then, the logistics of re-routing such significant volumes of oil trade will cause temporary pain for Russia,” said Parmar.

The only major reprieve from high oil prices would come from a nuclear deal with Iran, which could allow an additional 1.3m bbl/day of crude onto the market.

“It should be noted that it would take 3-6 months for Iran to fully reach this production level, but just the news of a completed nuclear deal itself will help quell the current price rise,” said Parmar.

“If this deal does not come to fruition, expect oil prices to remain elevated for the foreseeable future,” he added.

Additional reporting by Eashani Chavda, Miguel Rodriguez-Fernandez, Fergus Jensen and Will Beacham For more analysis of the Russia/Ukraine war’s impact on chemicals, fertilizers and energy markets, visit our Topic Page.

Infographic by Yashas Mudumbai

Additional reporting by Stephanie Wix

Brexit: Assessing the UK’s imports and exports

How will Brexit impact the UK’s trade? It’s the question burning in every businessperson’s mind, and it doesn’t seem to be getting an answer any time soon.

According to the Independent, many companies are struggling to decide on importing and exporting in light of confusion over the direction Brexit will take businesses. But what is the current state of the nation’s trading with the wider world?

In this article British brand Gola, that is renowned for its silver trainers, take an in-depth look at the UK’s imports and exports, from the items we sell the most of to what we’re buying in, as well as which countries are our top import and export locations… 

The key terms to know! 

Before we delve further into what the UK has to offer in terms of trade, let’s break down some of the terminology: 

  • Single market — The European Single Market is a single market that guarantees the free movement of goods, services, capital, and labour within the EU. 
  • Customs Union — A customs union is where a group of states or countries agree to charge the same import duties to each other. 
  • Import and export — an easy one to start with, imports are items and goods we buy into the country. Exports are items and goods we sell to other countries. 
  • Trade deficit and trade surplus — these two terms come under the umbrella of the balance of trade. It is essentially the difference between monetary value of a country’s exports and imports. If a country is importing more goods than it is exporting, then the country has a trade deficit. A trade surplus occurs if a country is exporting more than it is importing. Generally, a trade deficit is considered concerning as it is seen as the country being unable to produce enough goods to supply its people, requiring them to import more.  
  • “Special relationship” — The oft-cited “special relationship” with the US boils down to our trade relationship. In 2016, the UK exported £100 billion worth of goods and services to the US, running a trade surplus with the US of £34 billion. 

It is important to note that, regarding the “special relationship” with the US, the UK does export more to the US than any other country. However, when considering the EU as a whole with the same trade laws etc, rather than 27 separate countries, the EU imports more from the UK than the US by far.

What does the UK export? 

According to the Observatory of Economic Complexity (OEC), in 2016 the UK’s top export item was cars, which accounted for 12% of the overall $374 billion export value that year.

Other popular UK products were gas turbines (3.5%), packaged medicaments (5.2%), gold (4.0%), crude petroleum (3.4%), and hard liquor (2.1%). We also export a fair amount of food and drink, with items such as whisky and salmon popular abroad. 

The BBC also points out that exports and imports are not just physical goods. In this digital age, it’s easier than ever to offer services as exports too, and the UK does just that, via financial services, IT services, tourism, and more. 

Where exactly is the UK exporting to? 

In 2016, our top export destinations were: 

  1. United States (14%)
  2. Germany (9.5%) 
  3. The Netherlands (6.0%) 
  4. France (6.0%) 
  5. Switzerland (5.1%) 

China, one of the countries the UK is eyeing up for a potential trade deal after Brexit, accounted for 5%. Again, it is worth considering that Europe as a whole accounted for 55% of our top export destinations. 

What does the UK import? 

We are importing rather similar items as we’re exporting. Top imports into the UK in 2016 included gold (8.2%), packaged medicaments (3.1%), cars (7.8%) and vehicle parts (2.5%). 

Where does the UK import from? 

For 2016, the top origins of the UK’s imported products were: 

  1. Germany (14%) 
  2. China (9.8%) 
  3. United States (7.5%) 
  4. The Netherlands (7.3%) 
  5. France (5.8%) 

The UK’s trade deficit and trade surplus 

Despite our popular products, the nation is sitting with a trade deficit to the EU — we import more from the EU than we sell to the EU. In 2017, we exported £274 billion worth to the EU, and imported £341 billion’s worth from the EU. In fact, the only countries in the EU that bought more from us than we bought from them were Ireland, Sweden, Denmark, and Malta. Our biggest trade deficit is to Germany, who sold us £26 billion more than we sold to them. 

The UK also has a trade deficit with Asia, having sold £20 billion less in goods and services than we bought in. 

As previously mentioned, we have a trade surplus with the United States, as well as with Africa. 

A trade deficit is generally viewed in a poor light, as it is basically another form of debt: the UK imported $88.4 billion from Germany in 2016. Germany imported $35.5 billion from the UK, making a difference of $52.9 billion owed by the UK to Germany. 

With uncertainty abound about the impact of Brexit on imports and exports, it remains to be seen how UK businesses will continue to trade abroad, and if focuses will shift.

Sources: 

https://atlas.media.mit.edu/en/profile/country/gbr/

https://www.ons.gov.uk/businessindustryandtrade/internationaltrade/articles/whodoestheuktradewith/2017-02-21

https://www.bbc.co.uk/news/business-41413558

https://www.independent.co.uk/news/business/news/brexit-uk-imports-exports-uncertainty-british-import-export-business-a8589796.html

https://www.investopedia.com/articles/investing/051515/pros-cons-trade-deficit.asp

https://fullfact.org/europe/what-trade-deficit-and-do-we-have-one-eu/

https://www.dw.com/en/is-germanys-big-export-surplus-a-problem/a-18365722

Manufacturers in industrial product supply sector want ‘continued regulatory alignment with the EU’

An overwhelming majority of UK industrial product manufacturers want continued regulatory alignment with the EU after Brexit, a new industry survey has revealed.

Responding to a survey by the advisory body EURIS and independent experts at The UK Trade Policy Observatory (UKTPO), 83% of industrial product manufacturers support continued regulatory alignment in order to remain competitive in a global market with respondents overwhelmingly saying they see no benefit in moving away from the EU regulatory system for industrial and manufactured products.

UK companies told the survey that their supply chains have already been disrupted by post-referendum currency changes and that EU27 companies have started to select non-UK suppliers amidst the ongoing uncertainty of post-Brexit arrangements.

Industrial manufacturing representatives are calling for a Withdrawal Agreement to be reached with the European Commission at the earliest opportunity to give clarity to industry; they warn that a no-deal Brexit will cause severe damage and must be avoided.

The survey results are published today in ‘Securing a competitive UK manufacturing industry post Brexit’, a report on the impact of a no-deal Brexit on the industrial product supply sector by the University of Sussex-based UKTPO and EURIS, which represents companies with a collective turnover of £148 billion and with 1.1 million employees.

EURIS notes that the negotiations on the future relationship between the UK and the EU27 are the most important for its members since the formation of the single market in 1993. The advisory body warns a ‘no deal’ outcome would have lasting impacts on the industrial product supply sector, and its ability to contribute to the UK economy. This report provides specific information and guidance on the significant dangers of the ‘no deal’, and the opportunities that a ‘business friendly’ deal will bring.

Key findings in the report include:

  • EU Regulation enables industry to remain competitive in a global market. 83% of survey respondents support continued regulatory alignment with the EU. Product regulation has a critical role in ensuring that a high standard of safe and compliant goods are placed on the EU market. There is no benefit in moving away from the EU regulatory system for industrial and manufactured products.
  • Imports account for over half of total costs for 44% of companies. Any increase in barriers to trade will have significant impact on the UK’s global competitiveness. Our competitive advantage in non-EU markets depends on the UK having barrier free-trade for intermediary products and components with the EU. Notably, 52% of EURIS survey respondents stated that over half their sales were intermediate inputs for other companies.
  • The longer the uncertainty over the Brexit process continues, the more long-lasting damage will be incurred by our businesses. EU 27-member states have been warned to ‘prepare for the worst’ and review their supply chains. For most companies changing suppliers is a significant decision, and one very rarely reversed and some EU27 companies have already started to select non-UK suppliers. One third of EURIS survey respondents are already thinking about or have already changed suppliers due to Brexit – sales have already been lost.
  • It is not a choice of exporting to Europe or the rest of the world. If we become less competitive in the EU we will be less competitive in other international markets. The UK Government’s target to develop stronger trading relationships with other non-EU countries is a positive move, but this can only be achieved if we maintain a strong alignment with EU regulations and supply chains.

Other key conclusions from the survey include:

  • Four in ten companies say they will face a skills shortage without EU workers.
  • 15% of firms believe even a two hour delay at customs would impose additional costs on their business
  • Just 4% of respondents had no concerns about any element of Brexit impacting their business.
  • Approximately 1/3 of respondents have already seen a fall in investment due to Brexit with only 2% reporting an increase.

Dr Howard Porter, EURIS Chair, said: “Our industry needs clarity and a Withdrawal Agreement confirmed with the European Commission in the Autumn. As this report and our member survey clearly show, further delays and the risk of no-deal will result in significant long-term damage to the UK manufacturing sector and will put at risk the industrial product supply sector’s £148 billion contribution to the UK economy.”

Professor L Alan Winters, Director of the UK Trade Policy Observatory, said: “The challenges of a ‘no deal’ Brexit have been much discussed, including by the UKTPO, but this survey brings them to life. This critical sector is already starting to hurt and if its needs for frictionless trade with the European Union are ignored, a quarter of UK goods trade will be vulnerable to cuts. The threat to jobs is alarming.”

Mike Hughes, Zone President Schneider Electric UK & Ireland, said: “EURIS’ report ‘Securing a competitive UK manufacturing industry post Brexit’, highlights that the UK will always be closely tied to the EU as our primary trading partner. Our potential to develop trade links with non-EU countries is dependent on accepting this. As an industry, we believe it is essential that the UK maintains strong regulatory alignment for our sector with the EU, and continued membership and involvement in the creation of EU and International standards for the industry.” (Schneider Electric are a member of BEAMA who are a member of EURIS).