Plastic Industry Under Pressure Amidst Double Blow of Cold Wave and Red Sea Shipping Risks

Recently, the convergence of global extreme weather and geopolitical turbulence has been continuously reshaping the energy market landscape. Consequently, the plastics industry, which is closely tied to energy, is facing an unprecedented dual impact. Severe cold snaps across North America and East Asia have surged demand for heating fuels such as natural gas and LPG, driving prices upward. Meanwhile, ongoing shipping risks in the Red Sea have further inflated the transportation costs of energy and plastic raw materials. With these dual headwinds overlapping, the entire plastics supply chain is under comprehensive pressure, and the industry is undergoing a significant phase of testing.

Firstly, extreme cold waves have directly driven a surge in energy prices, leading to a substantial increase in the cost of the plastics industry. Ethylene and propylene, the core raw materials for the plastics industry, are primarily produced from natural gas and LPG, with energy costs accounting for over 60% of their total cost. Recently, North America has experienced unusually severe cold, and temperatures in many parts of East Asia have hit new winter lows, leading to a concentrated explosion in residential heating demand, which directly boosted the demand for natural gas and LPG. Data shows that US natural gas prices have cumulatively risen over 63% in the past six trading days, and the main LPG futures contract in China surged over 4% on January 26th alone, closing at 4340 yuan/ton, a cumulative increase of 7.05% compared to January 20th. The skyrocketing energy prices have directly passed through to the plastics raw material end, with ethylene and propylene prices rising in tandem, significantly increasing production costs for plastics companies and continuously squeezing their profit margins.

Secondly, heightened geopolitical tensions in the Middle East and the persistent Red Sea shipping risks further exacerbate supply chain disruptions and cost pressures in the plastics industry. The Middle East Red Sea serves as a core channel for global chemical maritime transport, handling 15% of global maritime traffic and acting as a key hub for the import and export of plastic raw materials and finished products. Currently, the safety risks in the Red Sea shipping lane remain unabated, with most shipping companies opting to detour around the Cape of Good Hope, leading to shipping times extending by 10 days to 1 month and a significant surge in transportation costs. As of now, the freight rate for a 40-foot container on the Asia-Europe route has risen to $8,764, a substantial increase compared to pre-crisis levels. Among these, the shipping costs of very large liquefied gas carriers transporting plastic raw materials have also climbed in tandem, further pushing up import costs. For domestic plastic companies that are highly dependent on imported raw materials, delays in raw material arrivals and increased import costs not only exacerbate the tight supply of raw materials but also further increase production and operating costs.

Under dual pressures, the upstream and downstream sectors of the plastics industry chain are experiencing differentiated stress. Some small and medium-sized upstream enterprises are forced to reduce operating rates due to high costs and insufficient raw material supply, leading to a slight recent decrease in domestic plastic operating rates, with some greenhouse film manufacturers in the north even halting production. Although large enterprises are barely maintaining full capacity production, their profitability has significantly declined. In the midstream trade sector, raw material price fluctuations have intensified, leading to a strong wait-and-see attitude among traders, low inventory willingness, and decreased market activity. For downstream enterprises, the cold wave has slowed down industries such as real estate and outdoor construction, resulting in weak traditional demand for plastic woven products and pipes. Specifically, the operating rate of PE downstream industries decreased by 1.4% month-on-month to 39.53%, and the average operating rate of PP downstream industries decreased by 0.19% month-on-month to 49.55%, both at relatively low levels for the same period in recent years. Although demand from express packaging and cold chain packaging offers some support, it is insufficient to offset the overall sluggish demand.

In conclusion, the pressure on the plastics industry is likely to persist in the short term. The impact of the extreme cold wave has not yet subsided, energy demand remains high, and prices are prone to rise rather than fall. It will still take time to alleviate the shipping risks in the Red Sea, and supply chain disruptions are unlikely to be eliminated in the short term. However, in the medium to long term, as the cold wave subsides and heating demand declines, energy prices are expected to gradually return to rationality. Furthermore, with some shipping companies gradually resuming trial voyages on the Red Sea route, pressure on shipping costs may be alleviated.