Global PE markets face another tough year in 2020 – this is the consensus view, and we note a couple of areas/happenings that could result in a more supportive US PE price setting than most anticipate.
Other Chemical industry items of note: weak European MDI markets; US refinery market goes on sale; IPEX index displays US chemical price downdraft YoY; Near-term methanol price support.
- Polyethylene (PE) markets faced greater downward pressure in 2019 than many anticipated 12 months ago, and the consensus expectation today is that more capacity will arrive in 2020 and keep a lid on product prices/global producer integrated margins. Per the ICIS report in LINK, nearly 8.3m tonnes/yr (~6% global growth YoY) will come online this, up from 6.9m tonnes coming online in 2019. With a global capacity growth view that is likely to exceed the rate of demand by at least ~200bp, an already depressed US ethane market entering 2020 and a global crude/naphtha market that seems unlikely to keep moving higher [LINK], we find it quite easy to make a compelling case that US integrated PE profit margins will unlikely display improvement in 2020 and to simply look past the potential nominal uptick in January contract PE prices MoM to the likely resumption of a depressed price setting for the remainder of 2020. We flag a PlasticsExchange report in [LINK] from early last week to provide a glimpse into the current US market setting, display Sunsirs China spot market data [LDPE, LLDPE and HDPE] reflecting no early year momentum (we also note low buyer urgency as typical into Chinese New Year), and highlight late 2019 price weakness in Europe as well [LINK] though we do find monomer support in early 2020 [LINK]. So today, we said all of this to flip the script a bit and discuss where and when the bearish consensus 2020 market view for PE could be proven wrong. A few items to keep in mind: 1) most of the global capacity growth (~58% of new PE capacity targeted to crank up in 2020) will arrive in China. In our view, there is notable risk of delay in 2H20 as most are tied to heavy-feed ethylene cracker build-outs. Also, though we anticipate low buyer urgency before Chinese New Year (Jan. 25), we will not be surprised to see an uptick in buyer urgency if production risk becomes a concern in late 1Q20; 2) we foresee a market in 2020 that will reflect tighter US ethylene conditions YoY. Given the current oil-to-gas/NGL spreads, we argue that the risk of ethylene intermediate production downtime (beyond planned outages) on the USGC is low, find non-integrated derivative capacity being added in late 2019 and see the Enterprise ethylene export terminal start-up [LINK] as supportive; and 3) we think an uptick in cracker co-product derivative capacity (notably in polypropylene, such as the 1H20 addition from Braskem that adds ~5% to the US market) will help support US co-product markets in an environment of higher ex-US feedstock costs [LINK]. Though we do think this puts the depressed US LPG market (US propane prices has fallen ~20% on avg. since late Nov. 2019, while Brent is up ~1% during this period) at risk of a demand pull, we think the current profit setting favors heavy fed/flexible US crackers (relative to ex-US counterparts) and suspect this dynamic could last longer than most suspect and lessens the risk of a rush on higher ethylene yielding ethane in 2020. All told, PE markets may face another tough year in 2020, but we suspect US cracker margins will remain healthy (relative to the past ~2 year avg.) and see these FCF engines in gear for producers, such as Lyondellbasell, Dow Chemical, Westlake, ExxonMobil, Ineos, Braskem, Sasol and CP Chem. Keep your eyes peeled for US PE producers with their capital spending/expansions behind them, as we foresee excess FCF targeting the maintenance or uplifting of share buybacks and perhaps increased dividends in 2020 (unless the company has a significant debt burdens) as we view the appetite as low to deploy capital into sizable brownfield or greenfield projects in the current market setting.
- Other Chemical industry items worthy of note today: 1) European polyurethane markets face a winter chill [LINK] – we view weakness in the MDI market as a nagging issue/concern for Dow Chemical, BASF and Huntsman, but also find it important to note that the sharpest price declines have occurred in the crude grades (not purity products) and we continue to broadly predict MDI demand will outpace a low-single-digit global capacity growth setting in 2020; 2) we highlight a Reuters article noting that ~5% of the US refinery market is viewed as up for sale, but there are no buyers – see article in LINK, These refineries are in locatiuons remote from chemical production/consumption and this may be the driver of the buyer cautiuon. While most oil producers and refiners suggest that “peak gasoline” demand in the US may be many years away, most are planning on the basis that it will be sooner than their public position. The easiest fix for a refiner faced with a decline in demand for gasoline is to produce more chemicals – aromatics from reforming and propylene (and possibly ethylene) from FCC units. This switch is far harder for refiners without a ready market for the chemicals and investing to consume the chemicals locally is strategically and financially prohibitive. This would give any potential buyer caution as there are few examples of refineries with declining throughput rates making money – this touches on a subject that will be one of the early thematics published by C-MACC; 3) global petrochemical prices on average reflect price lows last seen in late 2014/early 2015, per the IPEX index – see chart in LINK. We view this as a broad negative for integrated producers of commodity products and see less profit spread risk (on a relative basis) with downstream non-integrated product players/upgraders, such as DuPont, Celanese, Lanxess and Polyone in some of their compound product categories, or with polymer buyers, such as Berry Plastics; and 4) we highlight a Sunsirs report that points to China methanol market strength in the face of stable formaldehyde and acetic acid markets in China, and we note an ICIS report calling for a tighter Asia acetic acid market in 2020 as derivative capacity comes online [LINK]. We see this as a near-term plus for US methanol export values, but we doubt that the improvement will be enough to breath life back into either of the “on-hold” Gulf Coast methanol projects in 2020.