European gas prices surged this week after Russia closed Nord Stream indefinitely. The supply cuts are ostensibly due to “maintenance” issues, but as the Kremlin has all but made it clear, this is actually part of its economic war against the West.
Fragile gas supplies and volatile prices are wreaking havoc on businesses across Europe, especially energy-intensive ones. The chemical industry, built on years of access to cheap Russian gas, is particularly vulnerable.
This week, German chemical giant BASF warned that it may have to cut production further due to fuel constraints. Another German chemical giant, Covestro, warned last month that “the entire supply and production chain will collapse” if natural gas supplies continue to decline.
A boom time for chemicals in China?
For China, the world’s largest chemical producer, Europe’s predicament presents a potentially lucrative business opportunity. As brokerage Donghai Securities put it in the title of a new report (link in Chinese) on the near-term prospects of China’s chemical industry: “The sun rises in the east and rains in the west.”
According to brokerage firm Huachuang Securities data, China will gain in the short and long term during the European energy crisis. In the short term, Chinese chemical companies will benefit from energy, analysts at Huachuang wrote in a report this week. Drop fees. Analysts noted that even if European gas prices retreat from their current highs, they are unlikely to return to previous levels, the analysts wrote.
“As Europe and Russia decouple, Europe must say goodbye to cheap energy,” Huachuang analysts pointed out, and industrial production capacity will shift to China. “This is an excellent opportunity for China’s chemical industry to upgrade.”
China’s chemical industry takes off
That optimism is driving up the shares of numerous Chinese chemical makers. For example, an exchange-traded fund tracking the industry rose more than 3.5% earlier this week, while shares of Sinochem Group, a state-owned company that makes industrial and agricultural chemicals, surged more than 10%.
In contrast, the Shanghai Composite and Shenzhen Composite have edged up 1.5% and 0.3%, respectively, since the close last week. The two indices track stocks traded on exchanges in their respective cities.
Other companies with similar double-digit gains include Longxing Chemical and Rubber, which makes carbon black for tires products; Jiangxi Heimao carbon black; and Guangzhou Lushan New Materials, which produce functional polymers.
Mary Hui
However, China is not without its own challenges
With factories, enterprises and residential areas in almost Locked down without warning, its zero-virus policy continues to create uncertainty. For companies, unpredictability means production disruptions, which also makes it harder to plan new investments. Both Huachuang and Donghai Securities pointed to the risk of sluggish domestic demand resulting from continued zero-epidemic restrictions, affecting the revenue and profits of chemical companies.
Last week, Chengdu, Sichuan province, was put on lockdown after multiple coronavirus cases were detected. It’s unclear when the restrictions will be lifted: the lockdown affecting most of the city’s 21 million residents was due to end yesterday (September 7), but was extended indefinitely today. Just a few weeks ago, a historic heat wave and drought forced many factories in Sichuan – a hub for the production of chemical raw materials – to temporarily suspend operations.
For example, several manufacturers in Sichuan had to limit production of urea, phosphorus and titanium dioxide last month due to heat-induced power constraints, according to Chinese media reports.
