Tracy Alloway: Hello and welcome to another episode of the Odd Thoughts podcast. I'm Tracy Aloway

Joe Weisenthal: and I'm Joe Weisenthal.

Tracy Alloway: Joe, [music] I have a prop for today. I prop episode.

Joe Weisenthal: A visual learning aid for a podcast. Uh I'm going to hold this up.

Tracy Alloway: Yeah.

Joe Weisenthal: Uh looks like a magenta marker.

Tracy Alloway: Magenta?

Joe Weisenthal: Yeah,

Tracy Alloway: it's pink. It's hot pink.

Joe Weisenthal: What's magenta?

Tracy Alloway: It's like purplish pink.

Joe Weisenthal: Really?

Tracy Alloway: Okay. Color is beside the point. It is indeed a highlighter. But more importantly, it is a result of a complex prochemicals supply chain.

Joe Weisenthal: You're right. It is. Magenta is more purplish. I don't know why I always thought it was a little bit more pinkish, but yes, you're correct. You're right. You're correct. You're totally correct.

Tracy Alloway: I didn't intend your major takeaway from this conversation to be the difference between pink and magenta. Okay.

Joe Weisenthal: But yes, you're right. And uh without advanced chemicals of all sorts and um oil and all that, you would never have the plastic shell of the marker and maybe even some aspects of what gives it color when you draw on something.

Tracy Alloway: All right. So, what is this plastic casing actually made of? This is a pop quiz

Joe Weisenthal: that I definitely have no idea.

Tracy Alloway: Okay. It starts from

Joe Weisenthal: Yeah.

Tracy Alloway: crude oil.

Joe Weisenthal: Yeah. That Okay. Yeah. That

Tracy Alloway: so crude oil distilled into [sighs and gasps]

Joe Weisenthal: Keep going.

Tracy Alloway: Napa.

Joe Weisenthal: Napa. Right. Napa.

Tracy Alloway: And then Napa is, this is a hint, cracked into

Joe Weisenthal: ethylene or propyline.

Tracy Alloway: Yeah. We've actually done a plastic.

Joe Weisenthal: I know. I know. I know. Yeah.

Tracy Alloway: Okay. And then it gets polymerized.

Joe Weisenthal: Yeah. Of course.

Tracy Alloway: Into polyethylene, right?

Joe Weisenthal: Polyropylene, right? And then it gets chopped up into tiny little plastic pellets, which are I know you know this one.

Tracy Alloway: What are they called? The little plastic pellets. One of my favorite words.

Joe Weisenthal: Go on.

Tracy Alloway: Nerdles.

Joe Weisenthal: Nerdles. I remember all of this from that episode that we did. Nerdles.

Tracy Alloway: The building blocks of highlighters and lots of other plastic products would be Nerdles. Okay. So, the reason we bring this up is obviously there's a situation in Iran. The Straight of Hormuz is still closed. We're recording this on March 24th and we're starting to see a lot of the disruptions in the oil market start to I guess ripple out into other petrochemicals,

Joe Weisenthal: right? And someone asked this on Twitter the other day and they were like, "Joe, are is the higher price of oil going to impact the price of plastics?" And I was like, I would be very surprised if it didn't. I mean, I don't really know for sure, but it would be very weird. like it would be hard for me to imagine a scenario in which the key input doesn't. The thing that I am very curious about and you described this sort of sequential chain of industrial processes from the oil to the nerdles and of course when we did the episode um one of the things that we've talked about is that there is a gap between the price of some of these end products and the implied price of crude oil. So crude oil, I don't know exactly where it is right now at this moment that we're recording it, but it's shot up. But these end products have shot up even more, and our guest Rory Johnson had a really good explanation, which is that the refineries do not want to shut down. And so they're rationing, they're slowing their input, their input, because it is very costly to shut down and ever restart should they ever run out, which is a prospect given that we're seeing a volumetric decline in the amount of oil available in the world. What I'm curious about, which I don't know the answer, is whether this applies to all of the different processing steps along the way, which is is there the sort of even greater price impact because the entities that do all these sequential industrial processes are slowing down because the shutdown and restart process is costly for them as well.

Philip Girtz: Well, I would say the added complication with a lot of petrochemicals is we are in fact seeing some closures already. So in a few crackers, as they're called, Asian crackers start to shut down their production and basically declare force majour. And so we are seeing fewer prochemicals get made in places like Japan and South Korea. I think the question we're kind of inching towards is whether or not this is just going to be a question of price. plastics or an actual supply in the sense that maybe you just can't get certain types of plastics or one other thing I would just add I think in the postcoid environment an underappreciated driver of inflation at that time was the cost of packaging that's right

Joe Weisenthal: because we did see the cost of plastics go up and if you think about what you're buying at a grocery store like okay it's a bunch of carrots but it's also a bunch of carrots in a plastic bag

Philip Girtz: in a plastic bag completely or a jar or whatever. And I would say in a lot of the cases of food stuffs in particular, you're mostly paying for the entire supply chain and the packaging of it, the actual food value is almost dirt cheap if nothing. And so, yeah. And are we just going to get outright shortages? What are the ripple effects? I don't think we have any idea. Probably one of these things that compounds the longer this war and closure goes on. Many questions that we have.

Tracy Alloway: All right. Well, I am happy to say we do in fact have the perfect guest to talk all things prochemicals. We're going to be speaking with Philip Girtz. He is the chemicals and oil analyst over at BEF and a guy who lives and breathes polymers. Hopefully not literally

Joe Weisenthal: not breathed hopefully [laughter] not breathes polymers.

Tracy Alloway: All right, Philip, thank you so much for coming on OddLods.

Philip Girtz: Thank you very much, Tracy and Joe. It sounds very sad to introduce me with living and breathing polymers, but I'll take it. I'll I'll [laughter] take it for sure. Well, we're all filled with microplastics now, right? So, you're not the only one. Exactly.

Tracy Alloway: So, I'm tempted to begin just by asking you to kind of list all the prochemicals affected by the straight of horm sort of like forest gump style, ethylene, propylene, polyethylene, you can go on and on and on. But just broadly, why don't you tell us about the Gulf region and its role in the prochemicals supply chain?

Philip Girtz: Right. Yeah. Lots to unpack here. So when it comes to chemicals at large, let's maybe establish three different categories. We have the feed stock like you already pointed out Tracy. Basically, you almost don't need me here. But you have the crude oil that's turned into nafta and liqufied petroleum gas which are butane and propane principally ethane. Those all the feed stocks that go into the so-called crackers and the crackers turn them in what we call base chemicals. There are technically six major base chemicals that come out of this, but for the sake of today's discussion, the major focus will probably be really around ethylene, propylene. If we want to get really fancy, we can talk about xylines, parasolene or butadine. But a lot of the really the majority of the bulk plastics that we talk about really come from ethylene and propyline and some from parasyline in terms of polyethylene or also more commonly known as polyester. So ethylene, propyline, xylene are turned into polyethylene, polyropylene and into polyethylene, terlate or polyester. Now you have a wide range of really different derivative chains. Even within polyethylene you have a lot of subcategories and within those subcategories you have other subcategories. Very simple terms, you have a three-way division into highdensity polyethylene, lowdensity polyethylene, and linear lowdensity polyethylene. Doesn't matter too much, but it's good to be aware of that when we talk about well in analyst terms about where the market is moving. We typically look at highdensity polyethylene, what's the supply demand there? Same goes for low density. Obviously, they have different applications and also within those larger buckets, there are a lot of subcategories. Now to circle back to the major theme here of what's the position of the Middle East Gulf. So within those three categories firstly the Middle East itself is a major exporter of polyethylene polyropylene etc etc especially of polyethylene and when I say major let's be specific indeed polyethylene polyethylene varieties that's about 12% of global capacity production would be slightly higher 13 14%. quite a significant chunk. To make that even more explicit, if you take those volumes, we're talking about 18 million tons 18 of production capacity. And Middle Eastern CRA or Middle Eastern facilities typically run at very high rates, 90 to 100%. So roughly an equivalent amount of production. If you take all of that, that's basically as much as Europe/slightly more consumes. So it's a lot, right? You have those volumes firstly being taken off the market directly. Although couple of asterisks here because technically polymers are exported differently than fuel. They're exported in a solid state which means theoretically there should be the possibility of diversion that's slightly easier than for oil nafta or oil products in general. Big aster there. But if you take all of that off the market, you basically have the entirety of what Europe consumes all of the sudden disappearing. So that's step number one. Emphasis here on this goes especially again for polyethylene varieties. Polyropylene is slightly lower. We're talking about 7ish% of global production. PVC polyphenol chloride which is used heavily in infrastructure even lower. That's 3 to 4%. Styrene which is another major value chain we're talking about again 6 to 7%. So the Middle East in terms of polymers that's really really a polyethylene story but not exclusively. So that's step number one, the direct polymer export. Step number two is and that I would argue is really where you see the biggest impact is on the feed stock side. Again, this is something you can subdivide into three [clears throat] categories. You have direct NAFTA exports. You have crude oil exports that are then turned into NAFTA amongst others. So the refineries run on it. And obviously if you have to cut refinary rates, you're also going to lose NAFTA output. And you have what's again called LPG, liqufied petroleum gas, which I'll just allude to well as LPG from now on, but that means propane butane. So you have those three. They almost exclusively go to Asia. And when I say Asia, we can go into the nitty-gritty details of how dependent each individual producer is exactly in those feed stock streams because there are quite huge differences there. But in very broad terms, polymer exports that's 12%. If we take the nafta nafta exports and the crude oil exports and we translate that into how much does ethylene and consequently polyethylene production would have to be cut in Asia that's probably around 15 to 17% of global production so that's really where predominant hit comes from that was fantastic first of all quick question so on NAFTA is that typically produced where the oil comes from how like tight is that if it's derived from crude oil is it typically right there or are there parts of the value chain where the oil gets shipped a long way and then the NAFTA is produced somewhere else?

Philip Girtz: It's basically the latter or rather it just depends right the same as as for refineries at large it just depends on where your refineries are located. So if you look at the Middle East for example or let's take Saudi okay

Tracy Alloway: Saudi produces around 10 to 11 million barrels of crude oil per day but if I'm not mistaken its refining capacity is around anywhere between 3 and 4 million barrels per day. So in that case

Joe Weisenthal: it refineses a relatively small amount of its total production capacity.

Tracy Alloway: So to Joe's point, why do places like Japan and South Korea, why do they have, you know, crackers who are refining Napa into other polymers at all?

Joe Weisenthal: Why does that make sense for them or is strategically important?

Philip Girtz: Well, history plays a huge role. Japan next to Europe and the US was really one of the front runners of the petrochemical industry. And that's also why at the same time, even before all of this happened, Japan was also on the front line of losing its chemical industry. That's another topic we can get into later. But basically, your question would also be then, why aren't those products exclusively produced in the Middle East and then shipped? Is that

Joe Weisenthal: why not just import them? Why even bother refining them domestically?

Philip Girtz: Well, I mean, it's not only a question of NAFTA, per se, right? But Japan also needs jet fuel, diesel, gasoline, etc. So, all of those come into one supply chain. And another asterric here is the Middle East. Again, the Middle East is also a major producer of chemicals. If you look at ethylene, for example, the largest by far, surprisingly, I don't need to turn this into a pop quiz. That's China. That's 61 million tons of ethylene, 25% of global capacity. Then comes the US, 44 million tons. A data, by the way, as of January 2026 provisionally. Then you have Saudi Arabia, 17 million tons, right? So you already have a huge step down here. But Saudi Arabia is the third largest producer or in terms of chemical ethylene capacity at least. Then you have South Korea of 13 million tons. So what I'm getting at here is the Middle East already Saudi as an example produces a lot has a lot of capacity but because they're such extraordinary oil producers next to chemical producers and the chemicals they produce locally by the way are largely gas derived. We can get also get into that later but they do both right. They export a lot of polymers, a lot of chemicals, but they also export a lot of products. It's probably a bigger question in terms of the overall oil supply chain, why companies have chosen to also build out the refineries in Japan, South Korea rather than all in the Middle East itself.

Joe Weisenthal: So Tracy obviously started the conversation showing her hot pink [laughter] highlighter.

Tracy Alloway: That's right. You [clears throat] learned something.

Joe Weisenthal: But like, you know, if we have to go for a while without making highlighters or maybe we reduce the colors of the highlighters, it's not the end of the world. The world isn't going to come to a screeching end, etc. But I imagine some things are a little bit higher on the value chain. And so when we talk about NAFTA or we talk about some of these other things, what end uses would you be most worried about now? Because the volume or the capacity numbers that you mentioned are pretty substantial. So again, I'm not too worried if we go for a few months without making highlighters. What are the end use cases that you're watching right now? They're like, "Oh, this could be a real problem."

Philip Girtz: Oh, you guys had podcasts on fertilizers. I understand a very similar story here. My main concern without a doubt would be food packaging.

Joe Weisenthal: Okay. I am not aware of any funible products for polyethylene to be used at the same scale for food packaging as well polyethylene. So I do not know whether there is a viable alternative. Maybe there is and I'm just ignorant about it. But to me without a doubt food packaging and packaging at large. It's very cliche to take your own topic and talk about how incredibly important it is to modern [laughter] day society. But I mean

Philip Girtz: but this is the complexity of modern day society. This is actually a very important point which is that you joke and it's like everyone jokes is like oh what I do is the is the key thing holding modern day society together but they're not wrong but they're not okay podcasting maybe not but like they're not wrong like any one of these things go and the whole thing goes that was the lesson from co so you're not absolutely

Joe Weisenthal: so take the take the credit you're at the center of the world right now so yeah all right talk about food p packaging and what you're worried about

Philip Girtz: yeah food packaging packaging at large I'm less worried about let's infrastructure projects right because if you take let's say highdensity polyethylene and polyvinyl chloride a lot of them go into infrastructure projects hence why you could see in India for example since 2018 2019 a huge surge in those chemicals demand especially highdensity polyethylene because there were incredibly large infrastructure projects especially on water pipelines if I'm not mistaken so a lot goes into that still incredibly important but if we talk about meeting really the urgent tasks of the day which is making sure that everybody has access to their basic needs I find it very hard to see how value chains can be constructed or how a shortage of polyethylene or other plastics can be circumvented especially polyethylene here I'm concerned about because of the disproportionate impact and we briefly touched upon hey if 12% of polymers are cut off polymer exports from the Middle East and if feed stocks are cut off but that's only a part of the story there are many angles here to take the overall impact obviously without a doubt will be sizable how sizable Time will tell, but I cannot think of alternatives to the problem we would be facing, which is packaging, getting stuff from A to B, making sure that stuff is conserved. So, if anybody knows in the audience, please let us know in the comments or leave it to learn.

Tracy Alloway: So, okay, on that note, what are we seeing now in terms of polyethylene availability? So, I mentioned that we have seen some crackers in Asia who have had to reduce their refining output. Are we seeing prices start to rise? Are we seeing outright shortages? What are you observing in the market so far?

Philip Girtz: So, I would kick this off by saying that everything happens with a significant delay. And especially now, voyages from the Middle East Gulf to South Korea, Japan take about 18 to 25 days. And well, we're kind of now entering that period. So if you look at crude oil imports that went to South Korea for example, you could see them still spiking in the second week of March just because a lot of ships departed in late February whether or not in anticipation of this happening but there is a spike in the second week of March. So on the physical side to me it seems we have seen comparatively little impact yet. I think most of this will really materialize around early April and from there on it gets worse pretty quickly. Also one important side note here and people can again pitch in in the comments but polyathlete markets are relatively opaque when it comes to the exact availability. So we talk a lot about run rates even demand right one very cliche topic that's regurgitated a lot is demand in Europe is lukewarm but if you look at apparent demand which is trade plus some production run rate assumptions that are reasonable and based on company statements you see that demand is pretty stable. So my point here is that demand, how much is consumed in the first place is a relatively obscure topic in the world of polyethylene and plastics. Because if you look at what polyethylene consumption means, you have a lot, hundreds, thousands per market of small plastic converters. They take those pellets and they turn them into usable plastics. And to me, it seems the data collection there may not be as well developed as for, let's say, oil refiners. Or maybe I'm just ignorant about it, but that's been my observation so far. in the industry that demand numbers are hard to get by. So, circling this back to where we're at right now, 3 4 weeks into this scenario, I'd be careful with any concrete data points you're seeing or any general statements about demand being down, about supply being cut, force measures for sure. We've seen an incredible high amount of statements of production being cut. We can also get into the details of which markets how much. But if you look at across Asia, you've had about 30 to 40 crackers probably that have made statements in one way, shape or form. Quite often though, that just pertains to production curtailments, not per say a full shutdown or force measures, meaning that they cannot guarantee that they can supply their contractors with whatever the contract stipulates. Very long story, slightly less long. So far, my take is the impact has been relatively limited on the material front. We have seen price increases by the way, especially on the NAFTA front in Asia, but I would be very surprised if this does not deteriorate very significantly over the next two to three weeks.

Joe Weisenthal: By the way, I wasn't sure. I genuinely wasn't sure about this. There is polyethylene futures um that trade on the DLON commodity exchange. We have quotes on this. You could see they're traded in lots of five metric tons. So in USD and in the beginning of the year, it looks like they were trading at around $925 for 5 metric tons of polyethylene. Now around $1,300. So the price has already surged massively. I'm curious though, like when we think about the market for some of these chemicals that you track, how much is it sort of um open liquid markets versus long-term contracts, etc., that you know, sort of dark prices that the public would never see because it's an arrangement between a producer and a specific buyer, etc., versus more clearing house model like talk to us about pricing transparency that we have in this market. Ooh, yeah. I love it. Just quick disclaimer here. There are subtopics that I know more of and there are subtopics that I know less about. This falls into the category of the latter, but to my understanding, when it comes to prices and contracts in the polymer markets, the vast majority is stipulated via contracts, although they're typically relatively short-lived on a monthly quarterly basis. That's my observation. I may be wrong.

Philip Girtz: And in terms of the spot market, they're relatively small, but the spot market is That's what I figured. But the spot market is usually where you see those price distortions firstly showing up, right? And when it comes to the first three to four weeks, especially this week has been relatively this this week actually had quite a phenomenon because I just checked the prices an hour ago and I was surprised by polyethylene in East Asia apparently stagnating over the past week, which to me either something is wrong with the prices that I was looking at [laughter] or some of my theoretical underpinnings are slightly off. So I'm I'm curious about that for the next couple of days weeks.

Tracy Alloway: Didn't that happen during COVID as well? Wasn't there a big arbitrage between like polyethylene prices in Europe and the US versus Asia? There seem to be these big regional differences.

Philip Girtz: 100%. It depends on which part of the value chain you look at and whether you're looking at margins, which is what most companies are really curious about, right? How much profit can I actually make out of this versus prices? So if you talk about polyethylene prices for example, they're comparatively low in Asia compared to Europe. The US is also low, but the US also only pays a fraction of the production cost because US is ethane or gas-based. Asia and Europe are largely NAFTA based. And the reason, by the way, this is an important asterric almost going into a side tention here, but it's very common within our industry to talk about how ethane gas-based production is more competitive, is cheaper. But one of the principal reasons why this is the case is because you only need 1.2 tons of ethane to produce one ton of ethylene. Whereas if you produce ethylene via NAFTA, you need about 3.2 tons of NAFTA. So you just need a lot more feed stock and obviously you get a lot of byproducts. But then for NAFTA cranking in Europe and Asia, their competitiveness also hinges a lot on what the price movements are of those byproducts. Just as a side note,

Joe Weisenthal: by the way, I'm looking at the European NAPA swap. This trades in uh the NYSE that is at $842 per metric ton right now,

Tracy Alloway: but that was around $496 at the beginning of the year. So all of these different chemicals, polymers that you're talking about, massive spikes obviously in the big spike obviously since the start of the war. What does it mean when force measure is declared? What does that actually entail?

Philip Girtz: Uh you tell me. No. Uh [laughter] it's it's it it depends a lot. Usually again we like to talk a lot in certain terms. I think a force major colloally is implied to mean oh production is fully cut. It kind of depends. So to give you one concrete example okay one chemicals in China has amongst others two very large crackers 2.2 million tons in total in Yantai Shandong region. Hopefully not butchering the pronunciation too much. They declared force majour for their supplies to the Middle East. So I looked at this and I was like, what does this mean? So you dig further, tried to find something specific. The only thing I could find publicly announced is they're declaring forced major on their supplies to the Middle East, which to me was very interesting because in the first place, very few Chinese producers are suppliers to the Middle East of certain chemicals in the first place. So the bottom line here being that when you read force majour, at least that's what I'm doing. If I don't find anything specific, it's a big question mark and I usually assume it means reduced run rates. Question is then also by how much kind of a floor for a lot of crackers is 50 to 60% of their total capacity. Below that it quite often is said it gets uneconomical but it is a big question mark to me at least. So this came up in the context of jet fuel, but the sort of the implied barrel price of jet fuel is higher than what a barrel of oil is trading for right now because of this dynamic where the refiners are running slow because it's costly to actually have to straight up shut down. Can you talk about that in the context of some of these chemicals? Does the same phenomenon apply that it is a very costly business choice to actually shut down the refinery? And do we see a widening spread between where the price of oil is right now and the implied price of oil by the end product price?

Philip Girtz: Yeah, that's a great question. If I'm not mistaken, the spread has increased a lot over the past 3 weeks. Okay,

Tracy Alloway: both in Europe and in Asia, but especially now that price in Asia have surged.

Philip Girtz: So here the following hypothesis to me it seems based on what we've talked about earlier how chemicals are used with a lot of it going into packaging and let's define actually how much. So polyethylene consumes about 60 to 70% of ethylene which again is the main product that we're getting from nafta cracking. So let's just say close to more than half of nafta in one way shape or form is used for polyethylene and those type of chemicals that are used for packaging. So half of it is pretty much dictated by the packaging sector. Now in reality it's more complicated and maybe we can cut it to one/ird or so. It's a huge chunk right away. And to me again that sector seems pretty nonfgeible. It's very hard to really destroy a lot of demand within that industry. If we talk about jet fuel, diesel and gasoline on the other other hand we can introduce carless Sundays. We can introduce or people will at the end of the day if flight tickets just become too expensive decide to not

Joe Weisenthal: cancel flights just period that Yeah. Yeah. Right. So, so to me it seems that diesel, gasoline and jet fuel have more wiggle room for demand destruction than NAFTA. That's my current hypothesis. And again, maybe I I may be proven wrong on that because it's also the first time for me being in such a scenario. I mean, for all of us in a way.

Philip Girtz: Yeah.

Philip Girtz: But so when it comes to the spread between crude oil and NAFTA for both Asia and Europe, my expectation is that well the argument seems to be very strong that that will increase over the next weeks, potentially months. for NAFTA. A big question here also that I'm just throwing into the room is how viable is it for refineries to actually shift more toward NAFTA production both from an economical and just engineering perspective. Right? Because within the industry we often talk about those things as a given. Nafta production is kind of fixed which to an extent is true but also not true. At a certain point, and maybe there are some chemical engineers here that know this better than I do, but at a certain point, it may even become feasible to switch some road fuel production toward NAFTA production if indeed demand destruction on gasoline becomes stronger than NAFTA.

Joe Weisenthal: I want to go back to you mentioned China for a second and I remember seeing headlines about China's prochemical boom and worries about a glut in the market and I think some of those headlines were like two months ago.

Tracy Alloway: Yeah. Can China pick up some of this production? I assume it's getting some NAPA from I I would guess Russia or Iran at this point. Like what's going on there?

Philip Girtz: Yeah, big question. Short-term, no. Short-term minus if you would have a lot of production within refineries shifting away from gasoline to NAFTA minus that scenario. And again, I don't know how technically feasible that is or economically for a lot of refiners, but other than that, I don't see any possible way where you could compensate for that. Right? Because let's be specific. So, we're talking about again assuming a full disruption here. We talk about roughly 17 18 million tons disappearing from the Middle East. We talk about South Korea, Japan. So, major Asian players here to be specific. We have South Korea first, Japan, Taiwan, Singapore, India, Thailand, and Malaysia and Indonesia. Those, I think, should be eight. Now, if you take them together, they probably have an ethylene production capacity of around 45 million tonsish. So, China and them together is about 100 million tons, China 60 million, those others about 40 million together. out of this 40 million depending on again what happens but probably around 30 million you could potentially discard is it's don't quote me on that exact number but just to give a ballpark right [gasps] I don't see any possible way how you could compensate for that you have some wiggle room because some Kraken facilities were operating at lower rates you can compensate there in the US especially but if you assume for example that the US was running at about 85% before and they would go all the way up to 95 500% now. So 10 to 15% difference. That's about four to six million tons added. So that's basically onetenth of what or 1/8 of what would be lost in a in the most extreme scenario. Then when it comes to China thing is that those crackers are large projects. They take time and the world at large had an incredible incredibly large pipeline for 2026 which is ironic and which is why I emphasize polyethylene so much because the amount of projects like worlds scale projects that are very well covered and no uncertainty about whether they would come online or not until now they were set to come and now they seem largely either off the table or a big question mark. So I I don't see any way in the short term to compensate for such an extreme shortfall if that were really to manifest

Joe Weisenthal: to the utmost extent.

Tracy Alloway: That's a really good example of how these short-term disruptions can linger for years and years and years. Okay, one other question on trying to fill the gap in supply.

Joe Weisenthal: What about recycling existing plastics? I mean, we've been told for years and years and years the world is a wash in plastics. Like, okay, let's do something with them.

Philip Girtz: Yeah, that's an excellent question. I don't see why recycling should not get a major boost from this if this persists. To me, that seems like a very reasonable solution. There are obviously a lot of asterisks where recycling has its own fair share of complications in terms of having to firstly distill the different types of streams. You also need production facilities for do for this which also again needs time to be built. I'm utterly unaware of the existing utilization rate or of the utilization rates of existing recycling facilities but

Joe Weisenthal: which probably tells you something about the importance of recycling in [laughter] a prochem chemical analyst career but yeah

Philip Girtz: exactly right it's very much on the fringes I'm very peripherilally aware of it

Philip Girtz: but when I think about recycling facilities that I read on more anecdotally they're usually in the range of a couple of tens of thousands to maybe 100 thousand tons per year of production capacity, which compares to a world scale cracker that's usually 1 to [clears throat] 2 million tons, right? So that's an order of magnitude lower. That said, if you look at the total share of global polymers that are in circulation that come from recycling, I find it hard to give an exact number, but maybe one/tenth or so because it depends on the substream and again it's not my forte per se. It's a reasonable amount and I could definitely see especially within the time frame of a couple of months that this would gather a lot of speed or it would become priority to fill some gaps somewhere. But again, it probably falls short very significantly from [music] really fixing the problem.

Tracy Alloway: When we did a recent episode about natural gas, one of the winners, at least in the short term, was coal. and that countries that that can't get natural gas, they're going to turn to coal for energy. And you see coal prices creeping up. What about coal liquefaction? And is in the short or medium-term, I mean, you could turn coal into oil. The Germans did that during World War II, and that's still a thing.

Joe Weisenthal: Can that in the medium term be uh just derive our plastics from coal?

Philip Girtz: Medium-term, sure. But I don't think medium-term is the problem here. Yeah. If we define medium term,

Joe Weisenthal: I guess, right? Right. That's not going to help us

Philip Girtz: in right

Joe Weisenthal: but like you know if we say like you know this is going to reshape like you know like the longer that this goes on and we don't know how long that this is going to go on

Tracy Alloway: could coal at some point in the short to medium term be part of the solution for the origin of our plastics?

Philip Girtz: Beautiful question. I think the bigger question here is well twofold. Firstly, if this continues, will it reshape how the global chemical industry works?

Joe Weisenthal: Yeah.

Philip Girtz: And the second part is maybe have we already reached that point because I think even if things were to quote unquote normalize, whatever that may mean right now, I think one major problem that we face is that the perceived risk of passing through the strait of Hermus has changed.

Joe Weisenthal: Yeah.

Philip Girtz: And a lot of Asian producers were already on the cusp of closing their business. And by a lot, I mean South Korea, Japan, Taiwan, Singapore especially. If you take them together, you talk about South Korea has 13 million tons, Japan 6 million tons, Singapore and Taiwan both 3 to four million tons. So collectively close to 30 million tons. It's a lot. Not all of it was said to be closed, but to me if I looked at the fundamentals, it seemed reasonable to assume that by 2030 about 30 to 50% of this could disappear. So

Joe Weisenthal: wait, sorry, why? very long story short because the overcapacity that was in the pipeline especially for polyethylene was so severe that

Tracy Alloway: okay

Philip Girtz: the case was very hard to make for some units to stay in business right my hypothesis here is that what's happening currently

Philip Girtz: the increased perception of risk through the straight of hormus for an industry in a market that was already perceived to be well really going downhill pretty much could really lead a lot of facilities to just close down over the next couple of months quarters I would be very surprised if that does not happen. Then the question becomes what h well two questions here. Firstly, what happens afterward if things indeed normalize and then secondly for the entire pipeline that exists for the next four to five years a lot of it was also in Asia or the Middle East and hinged on feed stocks coming from the Middle East what happens to that

Philip Girtz: and to go full circle here into your coal question that's something I looked into and that I wondered. So to put it into perspective, China right now has 60 million tons of ethylene capacity. Roughly 50 million tons of this is oil or gas-based. So it comes from cracking. 10 million tons comes from coal.

Joe Weisenthal: Okay.

Philip Girtz: Side note here also that because how it works is that coal is converted to methanol which is then converted to ethylene or propyline. Methanol is also imported from the Middle East. So that could also cut into that production there. But when it comes to coal, it would need a really huge push. So now we have 10 million tons of ethylene. We have another roughly 3 to 4 million tons in the pipeline because China has been revitalizing that already before the war. But the push again would be extremely significant. You would be talking about basically three to four-fold quadrupling the sector over the next couple of years, right? which in theory could happen especially for a country such as China which has proven in the past time and time again that it's very much capable of completely revamping industries but it would be a big push. I I think what's more likely to happen is three things. So firstly renewed again also depends obviously on how long the supply disruption is but I think we're well on our way. I think one renewed interest in the western hemisphere using western hemisphere here more broadly because I would say for the US there also a couple of asterisks in terms of the political environment whether that is not considered to be too volatile. That out of the way though, if you talk about chemicals and the potential there, there was a significant slowdown because of this over capacity. But US producers right now are having a heyday. And even if this does not continue for a long time, I think again that this heightened risk or this heightened perception of risk at Hormus really shifts a lot of production potentially to the US. So I'd be surprised if we would not see a lot of renewed interest in US ethane and US chemicals. Yeah, this was going to be my next question actually. So, I'm looking at a chart, right? This is going back to the beginning of our conversation. So, this is a chart of sensitivity of different oil or fuel products to demand destruction.

Joe Weisenthal: I'm cheating like on an exam. [laughter] I'm like, you can't see it. I'm in the studio. I'm leaning over and looking at Tracy's laptop like I need to get a look at this.

Tracy Alloway: So, it actually it has now

Joe Weisenthal: JP Morgan chart.

Tracy Alloway: JP Morgan. Yeah. So it has, you know, jet fuel is pretty sensitive because as we were talking about earlier, if the price of jet fuel goes up, flights tend to get curtailed. It also says that Napa is pretty sensitive. And one of the reasons Napa apparently is sensitive is because if prices for Napa go up, then prochemical plants can substitute ethane, which it seems we're starting to see. I'm also reading a Bloomberg I'm doing my research for this episode while we're in the middle of the episode. But regardless of that, there's a Bloomberg story that saying that US producers of polyethylene are buying more ethylene to make plastics. What's the substitutability of ethane versus Napa? Because you touched on this earlier, but I really want to drill down on this point.

Philip Girtz: Not very high.

Tracy Alloway: Okay,

Philip Girtz: so two things here. I realize I liked making a lot of lists without completing them, but maybe we can get full circle on the other topics later. But on this two things, so first is just technical substitution. So the furnaces that are used for ethane and nafta, they're pretty different in a lot of ways that they're configured. So switching between those two is pretty difficult. Very specifically, one major problem is the type of products that you get from both, right? So if you crack ethane, you principally only get ethylene in notable amounts. Whereas if you crack NAFTA, you get ethylene, you get propyline, you get butadine, you get benzene.

Joe Weisenthal: The byproducts you mentioned earlier.

Philip Girtz: Exactly. Right. And they need to be separated and there's a whole post this cracking section for that that just vastly differs for NAFTA cracker versus ethane.

Philip Girtz: I think one common point of confusion is so you have three major oil or gas feed stock streams. You have nua, you have LPG and ethane. And I would group LPG and NAFTA as being more together than LPG and ethane despite the fact that LPG and ethane are colloally kind of referred to as being gas-based. But LPG also gives a lot of byproducts. So the substitution possibility there is higher than for ethane. And also if you just look at the practicality of it there comparatively outside of the US and the Middle East there not that many crackers that use ethane. And if they use ethane they typically fully use ethane. Not exclusively. There are some exceptions such as I think the one hua chemical Yantai cracker that I mentioned earlier, one of those actually runs partially on ethane, partially on NAFTA, but typically if a cracker fully runs on ethane, it fully runs on ethane. Whereas for a lot of NAFTA crackers, they play around with their LPG share depending on the price movements.

Joe Weisenthal: I've learned a lot from this conversation. I would be lying if I didn't say that, you know, I'm going to have to go back and look at what some of these things are, whatever. But just to help me conceptualize what some of these things are, I remember from uh liberation day, the trade fights in 2025, one of the few things that the US exports to China in mass ex other than soybeans is ethane. I don't know what is it. Can you just explain that? Why do we have a lot of extra ethane and why does China need to get it from a lot of us and what does it go into?

Philip Girtz: It all depends on what we mean by a lot. That's a very relative term.

Joe Weisenthal: I just know that we about half of all US exports of ethane which is extracted from US shell gas which probably explains why we have a lot head to China. So what do they what what's the deal with that?

Philip Girtz: Yeah. So firstly that mainly comes because the US is a very large producer of shell gas which yields a lot of ethane LPG and because the US has well basically exceeded in its LPG ethane production what it domestically needs it has started to export a lot and that that's still ongoing. We still have some new terminals coming up in 2026 and beyond that will increase the capacity for LPG and ethane to be exported. But the reason why I answered this question skeptically initially is because if you look at the total volumes, you talk about China, if I'm not mistaken, in 2025 imported around five or six million tons of ethane and you can make well around 5 to 6 million tons of ethylene from that, which is about 10% of China's production capacity, right? So is that a lot kind of is really? So

Joe Weisenthal: that's kind of a lot relative to US industry, but it's not really a lot in the grand scheme of how much China is using and producing.

Philip Girtz: And even for the US, this is probably if we convert this into mil into barrels per day, it's probably around 200 to 300,000 barrels per day, which is which

Joe Weisenthal: even this article I'm saying about half of all US exports of Ethan go to China, which means this is just a fraction of total ethane production in the US.

Philip Girtz: Exactly. Okay. So that's I think the entire ethane story is relatively if I can use the word overhyped because I think if you just read read the articles yeah

Joe Weisenthal: it seems like there's a huge wave of new ethane crackers in Europe and in Asia etc. But if you really double down on which facilities they are in Europe it's one it's project

Tracy Alloway: we're busting the ethane hype all these people going around. Yeah the ethane hype ends now I think. Yeah. By the way, by the way guys, to actually finish one of my list because I was mentioning earlier how there are two two points on US and ETH and how much flexibility there is there.

Philip Girtz: I think another thing is just production volumes that goes up but it goes up steadily.

Joe Weisenthal: Yeah,

Philip Girtz: to me it seems very unlikely that production could surge by that much that you could really substitute for any notable amount. So that's the second point on ethane substituting for NAFTA. There's just their limited supplies for now that can go up but also that takes time. H I have an informal gauge of how bad things are and it's the sort of cocktail party question type thing. But you know when you're going out and speaking to people now as a prochemicals analyst,

Tracy Alloway: how many people are starting to actually get very interested in the future of plastics and maybe get very worried when they talk to you?

Philip Girtz: Bus assume I go out and speak to people. [laughter] We'll stop there. No, I think the conversations have changed. I mean more on an informal note here right because I've been in the industry for four years like I mentioned oil more broadly two years and petrochemicals two years during the first two years and maybe that was also more the sidegeist back then 2022 2023 a lot of the conversations were about the morality of working as an oil analyst very

Philip Girtz: now a lot of that has dissipated or maybe I just don't talk to those people anymore I'm not [laughter] sure but I think nowadays people to my observation approach those questions a lot more practically and a lot of people are well about petrochemicals I think a lot of people are more curious about the baseline understanding of how the industry works if they're curious at all right because I mean quite frankly for a lot of [laughter] I struggle I I talk to people from time to time but very rarely actually about petrochemicals also because it takes kind of a baseline denominator to get into it and I feel that you need to bombard a counterparty with a lot of baseline information to kind of get to an interesting point to which I'm like they're probably also not that interested in that.

Joe Weisenthal: Well, I I have one last question which is just tell us about the next several weeks and what are you looking out for and uh how bad could it get and what is the time frame for that? Give us your sort of the outlook you're telling clients. They ask how bad's it what's going on and let's suppose we none of us know when the the war is going to end. It could we're recording this March 24th at 9:53 a.m. It could end by the time this episode comes out. But let's just say we don't know the war is going on in a month. Suppose what how what are we looking at?

Philip Girtz: Still one asterric there whether the war continues or not which we talk about in binary terms. It does not mean that the trade of Hermus will become accessible again. Just an important caveat.

Joe Weisenthal: Correct. So, so that's when I look over the next weeks or months. Again, I usually abstain from giving any political commentary, but to me as an analyst, just looking at baseline assumptions over the next weeks or months,

Philip Girtz: the assumption that the straight of Hermus will become passable again to me is very hard to make. So, that that's my first really major takeaway. At least when I look at my own forecast outlooks, which partially have become completely obsolete. We need I need to overhaul, but I'm very inclined to make that assumption. still waiting for a couple of days, weeks to see how things develop. But that's my first really major thing that I I just find the argument that the straight of Hermuz that things return to normal in terms of shipping incredibly hard to make. So point number one now when it comes to chemicals [sighs] firstly spread between NAFTA and crude oil especially in Asia I expect to surge especially to surge in early April. The reason being because Asia still has to tap into its inventories NAFTA inventories. They're not a lot, but they can cover a little bit of ground. We again still have to see the impact of the voyages. I think we've just bought that time. We're now entering the phase where you really see more material shortages. I think all of that will peak in early April. And then again, technically depends on what happens next. That's point number one. Point number two, what I'm really looking out for is any announcements on projects that were in the pipeline from China. and technically the Middle East, but the Middle East I've already kind of provisionally done away with with well that's probably not going to work out in 2026 2027 any projects for planned for 2026 what happens there point number three what is China's strategy here at large going forward because China is in a very interesting position it's not as badly affected as South Korea or Japan but it still changes a lot of things because well for a lot of new facilities for example so China had about 20 million tons of new ethylene capacity in the pipeline, almost all of which coming from cracking, almost all of which coming from NAFTA, a lot of which hinging on crude oil coming from the Middle East. What happens to that? That's a big question mark to me. And I'm curious to see indeed whether we're going to see a shift more toward new coal based facilities. I think that would take a couple of months rather than weeks. But that's something I'm looking out for. And in the same vein, two more points. One being Western Hemisphere, US, will we see a researched interest in investments? And Western Hemisphere, Latin America, Bolivia, Peru, Venezuela, which had a lot of interest in their chemical industries in the past, but it was dropped again. Will we see a renewed interest there and potentially in Argentina with a lot of shell gas? And then lastly, Europe. Europe is very interesting because up until recently, I've been going on and on about how Europe's chemical industry is in decline. And it was. Now, ironically, and this is a big topic of debate, but I take the stance that all of this happening very much more likely than not is a net benefit for a lot of chemical producing Europe. And this is a big topic to unpack maybe for another time, but I would definitely be watching indeed whether this turns out this way for European producers.

Tracy Alloway: Philip GS, thank you so much for coming on Odd Thoughts. Really enjoyed the conversation. That was a lot of fun.

Philip Girtz: Thank you too, guys.

Joe Weisenthal: Joe, that was a lot of fun. I always appreciate analysts who come with the numbers just memorized, right? And just rattle off like, well, there's difference between production versus capacity, all of that,

Tracy Alloway: right? Or or there's like, okay, South Korea, Malaysia, Japan, Indonesia, right? Singapore that gets you to 44 million that Yeah. Now, people who can do that, those are the people that always know their stuff and uh details matter.

Joe Weisenthal: But the last question you asked about, you know, what Philip is looking out for and his answer, I wrote about this in the All Thoughts newsletter yesterday, which is why it's on my mind, but like when we're talking about the closure of the straight of Hormuz, we're basically talking about like the choke point of all choke points in the global economy, right? And obviously oil is a big part of that, but as we just learned in this episode, so is petrochemicals. So is fertilizer. We've done previous episodes on that. And so it strikes me as almost inevitable that people are going to come away from this experience, no matter how long it goes on for

Tracy Alloway: with the intention to build out their own capacity or secure their own supply. And it was interesting even in a place like Europe which we tend to think of sometimes as in structural decline certainly in terms of its chemicals industry even there like you could see a revival as a result of this even you know 3 weeks worth of disruption.

Joe Weisenthal: Yeah I I really think this is the main story. It was the main story before the start of the Iran war and now clearly an accelerant to this story which is just every [snorts] country wanting to have greater capacity domestically and to be less reliant on choke points. And look, if we knew for a fact that the straight of Hormuz was a going to reopen just as it was a month ago and b never close again, how would you possibly know that? Then he's like, "Oh, we don't need to do anything." But like we are in a state we know now that like it is closable. We know it's clos not only do we know that it's closable.

Joe Weisenthal: We know that it's closable without a particularly large um military effort that you fire a few drones or missiles a day. Not even a particularly costly effort. And you can bring so many industries and so many countries and so much activity basically to a halt. That fact can never be unknown again. Basically, that's sort of what um Taleb talks about when he that is sort of the significant of a black swan. That that word gets abused a lot because every time an event happens, a black swan. But the key insight where I find it actually to be a useful phrase is if you think all swans are white and you see a black swan, then you know for the rest of your life, then you know that they exist. And so it is a black swan in the sense that if the straight of hormuz can be closed, which is something that people have contemplated before with relatively little effort, you're going to know that the rest of your life and that's going to change planning for the rest of your life. And it'll be really interesting to see. It's also just interesting, I think, his point about how because of Chinese supply, so many of these Korean, Japanese, etc. crackers were already in trouble. Yeah. And now what's going to happen there? I mean that is also a really big structural shortage, this sort of a the milkshake of economic activity pouring into China relative to everywhere else. So lots of things going on at once. Well, also the nons substitutability of polyethylene, especially packaging.

Joe Weisenthal: Like the idea that we're not all suddenly going to switch to burlap bags and bring our own like wooden crates to to pick up like beans from the Yeah, I could see that being an aesthetic choice.

Joe Weisenthal: Not scalable. All right. Shall we leave it there?

Tracy Alloway: Let's leave it there.

Tracy Alloway: This has been another episode of the Odd Thoughts podcast. I'm Tracy Aloway. You can follow me at Tracy Aloway.

Joe Weisenthal: And I'm Joe Weisenthal. can follow me at the stalwart. Follow our producers Carmen Rodriguez at Carmen Armano Bennett at Dashbot and Kalebrooks at Kalebrooks. And for more OddLots content, go to bloomberg.com/odlots for the daily newsletter and all of our episodes. And you can chat about all these topics 24/7 in our Discord, discord.gg/odlotss.

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