Iran conflict lifts chemical earnings

The supply crunch caused by the on-again, off-again war in Iran and closure of the Strait of Hormuz is bringing burgeoning profits at major US and European chemical makers, which have been able to raise their own selling prices ahead of escalating raw material and energy costs.

LyondellBasell Industries’ second-quarter earnings, excluding unusual items, were $1.4 billion—up nearly 600% from the same quarter last year and 760% from the first quarter. 

In a recent call with stock analysts, Peter Vanacker, CEO of the US polymer and petrochemical company, didn’t dance around the notion that the war has created a windfall. “The global disruption in the petrochemical markets from the conflict in the Middle East impacted production, feedstock availability, logistics, and trade flows across the industry,” he said. “It also led to substantially improved earnings performance for LYB [LyondellBasell] in the second quarter.”

The conflict has created production shortfalls in some regions. For example, Vanacker said that 20–25% of Middle Eastern polyethylene capacity has been damaged and isn’t likely to restart until 2027. Polyethylene inventories in China have been drawn down by about 30% since the war began, and plant operating rates there are only around 75%.

Meanwhile, an April polyethylene price increase was the largest on record, noted Kim Foley, LyondellBasell’s executive vice president for olefins and polyolefins and trading. In regions less impacted by the conflict, the company is pushing its plants hard to capitalize on the higher prices. For example, its ethylene crackers in North America are running at 95% of capacity, and its European operations are hitting 85% utilization.

Higher prices also boosted earnings at LyondellBasell rival Dow, which reported a 19.7% increase in sales for the quarter and a flip in earnings to a profit after a loss the year before.

The chemical industry is adjusting to the ever-changing scenario in the Middle East. For instance, in their recent earnings announcements, two local petrochemical producers, Sabic and Borouge, said they made substantial progress in avoiding the Strait of Hormuz logjam by shipping via different routes.

“In March, the situation in the Middle East was very difficult to gauge for everybody. There was a huge amount of insecurity,” BASF CEO Markus Kamieth said in a conference call with analysts. “Today, I think that the markets have more or less accepted the level of underlying volatility and insecurity around the Middle East crisis. So that’s why I would say there’s a certain lower nervousness overall.”

BASF’s profits rose 167% in the quarter as sales increased by 16% on both higher prices and sales volumes.

Chemical executives realize that the boom is only temporary and that the sector will pivot back to a state of oversupply when hostilities end and markets return to normal. “We are witnessing a warm summer rain,” Evonik Industries CEO Christian Kullmann says in an announcement of an 85% earnings improvement. “But unfortunately, this does not change the fundamental challenges for our industry.”

And executives are concerned about the long-term effects the war will have on the global economy. “As ongoing conflicts in the Middle East seemingly move weekly from a cease fire to all-out war, moving energy prices, stock markets, and consumer sentiment with each action, we continue to keep a wary eye on inflation and consumer spending, especially on durable goods,” Huntsman CEO Peter Huntsman said during a recent conference call. “It seems much of this turbulence will continue through the third quarter.”