The Petrochemicals Shock That's Already Rippling Through Plastics

23:25force majeures 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 se a full shutdown. Or force majeures, 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.

24:01We 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.

24:13Tracy Alloway:By the way, I genuinely wasn't sure about this. There is polyethylene futures that trade on the Dalian Commodity Exchange. We have quotes on this. You can see they're traded in lots of five metric tons. So in USD, in the beginning of the year, it looks like they were trading at around$925 for five 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 open liquid markets versus long term contracts, et cetera, 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, et cetera, versus more clearing house model.

25:10Tracy Alloway: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. And in terms of the spot market, they're relatively small, but the spot market is - That's what I figured.

25:41But 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 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 or some of my theoretical underpinnings are slightly off. So I'm curious about that for the next couple of days slash weeks.

26:12Tracy 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. A hundred percent. 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 U.S. is also low, but the U.S. also only pays a fraction of the production costs because U.S.

26:46is ethane or gas-based. Asia and Europe are largely NAFTA-based. The reason, by the way, this is an important asterisk, almost going into a side tangent 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 feedstock. 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.

27:24Tracy Alloway:By the way, I'm looking at the European NAFTA swap. This trades in the NYMEX. That is at$842 per metric ton right now. But that was around$496 at the beginning of the year. So all of these different chemicals and polymers that you're talking about, massive spikes, obviously, and the big spike, obviously, since the start of the war. What does it mean when force majeure is declared? What does that actually entail? You tell me. No, it depends a lot. But usually, again, we like to talk a lot in certain terms. I think a force majeure colloquially is implied to mean, oh, production is fully cut. It kind of depends.

28:08So to give you one concrete example, Wanhua 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 majeure for their supplies to the Middle East. So I looked at this and I was like, well, what does this mean? So you dig further, try to find something specific. The only thing I could find publicly announced is they're declaring force majeure on their suppliers 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.

28:41So the bottom line here being that when you read force majeure, 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 percent 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.

29:06Tracy Alloway: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? Yeah, that's a great question.

29:40If I'm not mistaken, the spread has increased a lot over the past three weeks, both in Europe and in Asia, but especially NAFTA price in Asia have surged. 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 percent 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-ish by the packaging sector.

30:21Now, in reality, it's more complicated, and maybe we can cut it to one-third or so. It's a huge chunk either way. And to me, again, that sector seems pretty non-fungible. It's very hard to really destroy a lot of demand within an industry. If we talk about jet fuel, diesel, and gasoline, on the 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. Yeah, or cancel flights just period. Exactly. Yeah, yeah, yeah. So to me, it seems that diesel, gasoline, and jet fuel have more wiggle room for demand destruction than NAFTA.

30:53That's my current hypothesis. And again, 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. Yeah. 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 week's potentially months. For NAFTA, a big question here also that I'm just throwing into the room is how viable is it for refiners to actually shift more toward NAFTA production, both from an economical and just engineering perspective, right?

31:27Because 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.

31:50Tracy Alloway:I want to go back to you mentioned China for a second. And I remember seeing headlines about China's petrochemical boom and worries about a glut in the market. And I think some of those headlines were like two months ago. Yeah. Can China pick up some of this production? I assume it's getting some naphtha from, I would guess, Russia or Iran at this point. What's going on there? Yeah, big question. Short term, no. Short term minus if you would have a lot of production within refinery 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.

32:29But other than that, I don't see any possible way where you could compensate for that. 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 need 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 tons-ish. So China and them together is about 100 million tons.

33:11China, 60 million. Those others are about 40 million together. Out of those 40 million, depending on, again, what happens, but probably around 30 million you could potentially discard. Don't quote me on that exact number, but just to give a ballpark, right? 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 U.S. especially. But if you assume, for example, that the U.S. was running at about 85 % before, and they would go all the way up to 9 ,500 % now, so 10 to 15 % difference, that's about 4 to 6 million tons added.

33:49So that's basically one-tenth of what more, one-eighth of what would be lost in the most extreme scenario. And when it comes to China, thing is that those crackers are large projects. They take time. And the world at large had an incredibly large pipeline for 2026, which is ironic, and which is why I emphasize polyethylene so much, because the amount of projects, like world-scale projects that are very well covered, 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 don't see any way in the short term to compensate for such an extreme shortfall if that were really to manifest to the utmost extent.

34:30Tracy Alloway:That's a really good example of how these short term disruptions can linger for years and years and years. OK, one other question on trying to fill the gap in supply. What about recycling existing plastics? I mean, we've been told for years and years and years the world is awash in plastics. Like, OK, let's do something with that. 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.

35:03You also need production facilities for this, which also, again, needs time to be built. I'm utterly unaware of the utilization rates of existing recycling facilities.

35:15Tracy Alloway:Which probably tells you something about the importance of recycling in a petrochemical analyst career. Exactly, right? It's very much on the fringes. I'm very peripherally aware of it. 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 ,000 tons per year of production capacity, which compares to a world-scale cracker that's usually one to two 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.

35:56And again, it's not my forte per se. It's a reasonable amount. And I could definitely see, especially within the timeframe 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 fell short very significantly from really fixing the problem.

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38:45Tracy Alloway:Terms apply. 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 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? 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. Can that in the medium term be, just derive our plastics from coal? Medium term, sure, but I don't think medium term is the problem here. Yeah. If we define medium term as let's say - Sure, yeah, I guess right, right.

39:24Tracy Alloway:That's not going to help us. Right. 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. Could coal at some point in the short to medium term be part of the solution for the origin of our plastics? Beautiful question. I think the bigger question here is, well, twofold. Firstly, if this continues, will it reshape how the global chemical industry works? 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 Hormuz has changed.

40:08And 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, we talk about South Korea has 13 million tons, Japan, 6 million tons, Singapore and Taiwan, both 3 to 4 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 percent of this could disappear.

40:36Tracy Alloway:Wait, wait, sorry, why? Very long story short, because the overcapacity that was in the pipeline, especially for polyethylene, was so severe that the case was very hard to make for some units. stay in business, right? My hypothesis here is that what's happening currently, the increased perception of risk through the Strait of Hormuz 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. I would be very surprised if that does not happen. Then the question becomes, well, two questions here.

41:12Firstly, what happens afterward if things and they 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 feedstocks coming from the Middle East. What happens to that? 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 slash methanol. Side note here also that because how it works is that coal is converted to methanol, which is then converted to ethylene or propylene, methanol is also imported from the Middle East.

41:59So 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 three to four 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 fourfold 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.

42:34But it would be a big push. 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 U.S. there are also a couple of asterisks in terms of the political environment, whether that is not considered to be too volatile. Well, that out of the way, though, if you talk about chemicals and the potential there, there was a significant slowdown because of this overcapacity.

43:08But U.S. 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 Hormuz really shifts a lot of production potentially to the U.S. So I'd be surprised if we would not see a lot of renewed interest in U.S. ethane and U.S. chemicals.

43:28Tracy Alloway: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. I'm cheating like on an exam. I'm like, you can't see it. I'm in the studio. I'm leaning over and looking at Tracy's laptop. It's like, I need to get a look at this. So it actually, it has - It's a JP Morgan chart. 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.

44:04Tracy Alloway:It also says that Naphtha is pretty sensitive. And one of the reasons Naphtha apparently is sensitive is because if prices for Naphtha go up, then petrochemical plants can substitute ethane, which it seems we're starting to see. I'm also reading a Bloomberg story. 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 saying that U.S. producers of polyethylene are buying more ethylene to make plastics. What's the substitutability of ethane versus naphtha? Because you touched on this earlier, but I really want to drill down on this point.

44:41Not very high.

44:43Tracy Alloway:Okay. So two things here. I realize I like making a lot of lists without completing them, but maybe you 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 propylene, you get butadiene, you get benzene.

45:16The byproducts you mentioned earlier. Exactly, right? And they need to be separated. And there is a whole post this cracking section for that that just vastly differs for NAFTA cracker versus ethane. I think one common point of confusion is so you have three major oil or gas feedstock streams. You have NAFTA, 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 colloquially 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.

45:52And also, if you just look at the practicality of it, they're comparatively outside of the US and the Middle East. There are 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 the LPG share depending on the price movements.

46:21Tracy Alloway: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 or whatever. But just to help me conceptualize what some of these things are, I remember from Liberation Day, the trade fights in 2025, one of the few things that the U.S. exports to China in mass, 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? Why does China need to get it from a lot of us and what does it go into? It all depends on what we mean by a lot. That's a very relative term.

47:01Tracy Alloway:I just know that about half of all U.S. exports of ethane, which is extracted from U.S. shale gas, which probably explains why we have a lot, head to China. So what's the deal with that? Yeah. So firstly, that mainly comes because the U.S. is a very large producer of shale gas, which yields a lot of ethane LPG. And because the U.S. has basically exceeded in its LPG ethane production what it domestically needs, it has started to export a lot. And 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.

47:37But 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 5 or 6 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-ish? I see what you're saying.

48:01Tracy Alloway:There's kind of a lot relative to U.S. industry, but it's not really a lot in the grand scheme of how much China is using and producing. And even for the U.S., this is probably, if we convert this into barrels per day, it's probably around 200 ,000 to 300 ,000 barrels per day. Even this article I'm saying says about half of all U.S. exports of ethan go to China, which means this is just a fraction of total ethan production in the U.S. 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 the articles, it seems like there's a huge wave of new ethane crackers in Europe and in Asia, etc.

48:43But if you really double down on which facilities they are in Europe, it's one. That's project one.

48:47Tracy Alloway:We're busting the ethane hype on Onwatch. It's like all these people going around. This ends now. Yeah, the ethane hype ends now. By the way, guys, to actually finish one of my lists. because I was mentioning how there are two points on US and ethane and how much flexibility there is there. I think another thing is just production volumes. That goes up, but it goes up steadily. 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, there are limited suppliers for now that can go up, but also that takes time.

49:23Tracy Alloway: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 petrochemicals analyst, 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? I'm bold to assume I go out and speak to people. 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.

50:00During the first two years, and maybe that was also more the zeitgeist back then, 2022, 2023, a lot of the conversations were about the morality of working as an oil analyst. Oh, yeah. Now, a lot of that has dissipated. Or maybe I just don't talk to those people anymore. I'm not 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 times, I struggle.

50:38I 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 the 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.

50:58Tracy Alloway:Well, I have one last question, which is just tell us about the next several weeks. And what are you looking out for? And how bad could it get? And what is the timeframe for that? Give us your sort of outlook at telling clients. They ask, how bad is it? What's going on? And let's suppose we, none of us know when 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 are we looking at? Still one asterisk there, whether the war continues or not, which we talk about in binary terms, it does not mean that the strait of Hormuz will become accessible again.

51:33You're right. Just an important caveat. You're right. 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 next weeks or months, the assumption that the straight of Hormuz will become passable again, to me is very hard to make. So that's my first really major takeaway. At least when I look at my own forecast outlooks, which partially have become completely obsolete, 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.

52:04But that's my first really major thing that I just find the argument that the Strait of Hormuz, that things return to normal in terms of shipping, incredibly hard to make. So point number one. Now, when it comes to chemicals, firstly, spread between NAFTA and crude oil, especially in Asia. I expect a surge, especially the 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 carve 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.

52:42I 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. Well, that's probably not going to work out in 2026, 2027. any projects 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.

53:19Because, 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, where are we 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, where we see a researched interest in investments and Western Hemisphere, Latin America, Bolivia, Peru, Venezuela, which had a lot of interest in the chemical industries in the past, but it was dropped again.

54:00Will we see a renewed interest there and potentially in Argentina with a lot of shale 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 produce in 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.

54:33Tracy Alloway:Philip Gertz, thank you so much for coming on Odd Thoughts. Really enjoyed the conversation. That was a lot of fun. Thank you too, guys.

54:52Tracy Alloway:Joe, that was a lot of fun. I always appreciate analysts who come with the numbers just memorized and just rattle off like, well, there's a difference between production versus capacity, all of that. Right. Or there's like, OK, South Korea, Malaysia, Japan, Indonesia, Singapore, they could see the 44 million. Yeah. Now, people who can do that, those are the people that always know their stuff and details matter. 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.

55:27Tracy Alloway:But like when we're talking about the closure of the Strait of Hormuz. We're basically talking about like the choke point of all choke points in the global economy. 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, 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.

56:09Tracy Alloway:Even there, like you could see a revival as a result of this. Even, you know, three weeks worth of disruption. Yeah, 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 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 Strait 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 it's like, oh, we don't need to do anything. But like we're in a state we know now that like it is closable.

56:49Tracy Alloway:We know it's close. Not only do we know that it's closeable, we know that it's closeable without a particularly large 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. Exactly. That's sort of what Taleb talks about when he that is sort of the significance of a black swan. 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.

57:36Tracy Alloway:And so it is a black swan in the sense that if the Strait 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, et cetera, 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 the milkshake of economic activity pouring into China relative to everywhere else.

58:15Tracy Alloway:So lots of things going on at once. Well, also the non-substitutability of polyethylene. Yeah. Especially packaging. Yeah, yeah. Like the idea that we're not all suddenly going to switch to burlap bags and bring our own like wooden crates to pick up like beams from the crates. Yeah, I could see that being an aesthetic choice. But that's not a scalable solution. But not scalable. No. All right, shall we leave it there? Let's leave it there. This has been another episode of the Odd Lots podcast. I'm Tracy Allaway. You can follow me at Tracy Allaway. And I'm Jill Weisenthal. You can follow me at The Stalwart.

58:47Tracy Alloway:Follow our producers, Carmen Rodriguez at CarmenArmond, Dashiell Bennett at Dashbot, and Kale Brooks at Kale Brooks. And for more Odd Lots content, go to Bloomberg.com slash Odd Lots for the daily newsletter and all of our episodes. and you can chat about all these topics 24-7 in our Discord, discord.gg slash oddlots. And if you enjoy Oddlots, if you like it when we talk about nurdles and other polymers, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there.

59:23Tracy Alloway:Thanks for listening.

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