Risk of historic El Niño event rises, driving expectations of price hikes for chemical products led by oils, energy and metals

An extremely rare super El Niño event is gradually taking shape. Against the backdrop of tightening global bulk commodities, the chemical industry chain will face a new round of cost and supply shocks from raw material and energy ends.

On August 30th, Craig Rye, a sustainable investment research analyst, released a report warning that the tropical Pacific El Niño index is expected to approach a peak of 3.2°C by the end of 2026 and the beginning of 2027, with its intensity about 15% higher than that of the 2015-2016 super El Niño event. In addition to impacting agricultural products, extreme climate will also indirectly transmit along the energy and industrial metal chains, significantly disrupting global chemical raw material supply and production costs.

From the perspective of upstream bio-based chemical raw materials, the report predicts that the prices of palm oil and coconut oil will rise by 30-40% in the next 18 months. These two types of oils are core raw materials for oleochemicals, directly affecting the production costs of products such as fatty acids, surfactants and plasticizers; the price of rubber is also estimated to rise by 30-40%, which will increase the pressure on the industrial chains of synthetic rubber, rubber additives, tires and rubber and plastic products.

The impact further spreads to the energy and industrial metal dimensions. Droughts caused by El Niño will weaken hydropower output and push up overall electricity prices. The price of thermal coal is estimated to rise by 20-40%, which will directly increase the cost of electricity and coal for high-energy-consuming chemical plants. The maximum price increase of copper and aluminum is expected to reach 20%. The rise in aluminum prices will affect supporting chemical electrolysis and pipe equipment; the increase in copper prices will lift the capital expenditure and replacement costs of chemical equipment, pipelines and other facilities. Extreme weather will also disrupt mines and port logistics, causing periodic disturbances in raw material transportation and plant operation and maintenance.

Signs of overall tightening in the current bulk commodity market have emerged. The Quantix Commodities Total Return Index has risen by more than 22.5% since the end of June, hitting a record high, covering multiple categories such as energy, agriculture and industrial metals. Jeff Currie, former head of commodities strategy at Goldman Sachs, said that the scarcity of physical commodities is returning.

According to multiple model forecasts from the International Research Institute for Climate and Society, this El Niño event is likely to become the strongest on record. El Niño is often accompanied by large-scale droughts and floods, and Southeast Asia, as the main producing area of palm oil and natural rubber, will bear the brunt. Abnormal precipitation will impact the output of agricultural and forestry chemical raw materials on the one hand; on the other hand, the decline in hydropower will force an increase in thermal power load, rising coal and electricity prices will squeeze the costs of BDO, methanol and electrolytic chemical products. Real cases of weather disturbances have already appeared overseas: floods in Chile have caused mine shutdowns, droughts in Papua New Guinea have hindered inland water transportation, and metal raw material shipments have been restricted, leading to LME copper prices rising for nine consecutive weeks.

It should be noted that the current increase in upstream chemical costs is not solely driven by climate events, but is the resonance of multiple factors including extreme weather, long-term underinvestment in the industry, and持续 declining raw material inventories across the whole society. Market views align with UBS's judgment, and the institution reminds the market to prepare for the upward cycle of bulk commodities. The simultaneous strength of multiple index varieties also indicates that this is a full-chain supply contraction. The chemical industry needs to continuously track the linkage changes of agricultural and forestry raw materials, coal and electricity, and industrial metals, and evaluate the cost transmission space of mid-stream and downstream chemical products.