The ultimate inflation "assassin"! The US-Iran conflict ignites a "petrochemical bomb"—will all downstream commodities rise?

When discussing the economic inflation triggered by the US-Iran conflict and the blockade of the Strait of Hormuz, the prices of petroleum derivatives—namely petrochemical products—may not have kept people awake at night, but the terrifying “multiplier effect” they bring may indeed be worth paying attention to.

As gasoline and crude oil prices rise in tandem, the costs of petrochemical products are also climbing. Compared to the increase in oil prices, the price fluctuations in this midstream industry may ultimately have a more profound impact on consumers.

The list of ingredients for petrochemical products sounds like a “review guide” from a high school chemistry class: benzene, butadiene, ammonia, styrene, naphtha, and numerous petroleum-based byproducts. In industry terminology, they are collectively referred to as “feedstocks,” widely present in all aspects of life, from medical gloves to food packaging. And even though many consumers may not notice it yet, the costs of these chemicals have quietly risen this month.

Stanislav Krykun, CEO of Polish packaging company DST-Pack, has witnessed this trend in the factory workshop. He revealed that the company’s plastic pellet suppliers have recently raised prices by about 15%, citing rising raw material costs and overall market uncertainty.

Krykun’s factory produces packaging for global companies, including those in the United States. He anticipates the reality that consumers will soon face: a general rise in prices.

The key is that the impact of this price increase is not immediate but rather a gradual process—Krykun pointed out that confirmed orders with locked-in prices can still maintain original costs, but “all new orders placed in the past two weeks have seen price increases.”

He added, “Packaging goes through multiple stages of production, transportation, filling, and retail distribution. Therefore, price fluctuations reflect a lag effect on the retail shelves and won’t explode instantly.”

Trillions of dollars’ worth of everyday goods will be affected.

Once the aforementioned lag effect dissipates, its impact will be “ubiquitous.”

Tom Seng, an assistant professor at the Ralph Lowe Energy Institute at Texas Christian University, stated, “The applications of petrochemical products are extremely broad, almost permeating everything we consume. It is difficult to strip away the oil and gas components unless an item is made purely of wood.” He added that the amount of plastic consumed in the automotive manufacturing process is extremely large.

According to statistics, about 79% of the 193 active petrochemical industrial zones in the Middle East are concentrated in Saudi Arabia, Iran, and Qatar, with Saudi Arabia alone accounting for 75% of the production capacity. Seng added that the annual petrochemical output of the Gulf Cooperation Council (GCC) member countries reaches 150 million tons, approximately 12% of the global total.

All of this output relies almost entirely on the Strait of Hormuz for maritime exports.

Jeff Krimmel, founder of the energy consulting firm Krimmel Strategy Group, pointed out, “There are a wide variety of everyday goods that will be affected.” Krimmel predicts that shortages and price increases of petrochemical products will permeate textiles, detergents, and food and beverage sectors. He bluntly stated, “A vast amount of global goods depend on various plastics for packaging and transportation.”

All of these plastic products originate from feedstocks like naphtha, propylene, methanol, ammonia, and styrene. Although other regions also produce them, Middle Eastern oil fields are the primary source of naphtha and hold an irreplaceable position. “Naphtha is crucial,” Krimmel said, “the product chain derived from this highly fluid feedstock will impact the entire economic system like a cascading waterfall.”

Even if the conflict were to immediately cease, normalizing supply and demand relationships would take time. Krimmel warned, the longer the conflict persists, the deeper the accumulated issues will become. Therefore, it will be difficult for consumers to expect relief in the short term.

The pressure on low-income groups will multiply under intensified inflation.

Atsi Sheth, Chief Credit Officer at Moody’s, pointed out that the current situation is just the latest shock that the petrochemical industry has faced in recent years. Previously, the industry has suffered during the pandemic, the Russia-Ukraine conflict, and the Red Sea crisis. However, she also stated that the biggest variable lies in the expansion of production capacity in China, as well as global oil giants increasing production in pursuit of vertical integration.

Sheth noted that Moody’s had been warning about the supply-side shocks—namely, oversupply and weak demand. As a result, Moody’s downgraded the ratings of some producers, primarily because oversupply reduced profits and eroded debt repayment capacity. But she anticipates that once existing inventories are depleted, the situation will sharply reverse, and inflationary pressures will increasingly manifest over time.

“Our conclusion is that the pressure will ultimately be passed on to end consumers. The price increases for food, clothing, and retail goods will heavily impact the lower-income groups in society,” Sheth admitted.

Peter Swartz, co-founder of supply chain analysis company Altana, also pointed out that the market is digesting these uncertainties, and regardless of how the war progresses, the long-term result will inevitably be rising prices. He stated, “The long-term effects are a foregone conclusion. Companies are preparing for an uncertain future and are seeking diversified investments, which will undoubtedly drive up operating costs.”

The volatility in the petrochemical market usually has a multiplier effect—petrochemical products are the foundation for the production of trillions of dollars’ worth of goods, and these goods can be components of another trillions of dollars’ worth of end products. Swartz stated, “There are no simple alternatives that can turn stone into gold for these products.”

According to data from Altana, approximately $733 billion worth of petrochemical raw materials, intermediates, and finished products (such as ethylene, benzene, methanol, etc.) flow through the Gulf region each year, accounting for 22% of global supply. This directly affects downstream products valued at up to $3.8 trillion, ranging from toothpaste to towels.

Currently, Krykun is closely monitoring the fluctuations in plastic packaging orders. He pointed out that consumers may soon find that packaging starts to “shrink,” even though prices have not eased. “Brands will ultimately adopt pragmatic strategies,” he explained, such as skincare brands simplifying packaging box structures, or mobile accessory brands reducing interior components and redesigning to minimize material use.

“Even boxed chocolates are controlling costs by simplifying the internal layout or overall structure,” Krykun noted.

However, time does not favor the manufacturers. Krykun pointed out that streamlining packaging or restructuring designs is not a quick process; it involves development, testing, and approval cycles, which often take weeks or even months. In most cases, brand owners cannot complete packaging restructuring before the next production season. Therefore, they are often forced to accept high-priced bulk orders while simultaneously developing more cost-effective alternatives behind the scenes.

(Source: Financial Associated Press)