Key Points:
We find multiple VAM disruptions in the news that suggest a considerable portion of US production could be impacted – we see prices moving higher.
Other Chemical items: PFAS lawsuit and the DuPont strategic review of electronics; Asia propylene; single-use plastics & recycling; the final deuce
- Dow Chemical issues order control letter for vinyl acetate monomer (VAM), per Platts report in LINK, and we note the force majeure declaration from Lyondellbasell on acetyls and VAM production from its La Porte, TX plant that was issued last Thursday (1/9) [see in LINK]. Per our estimate, this suggests more than 35% of US VAM production is impacted. We argue that this is a likely plus for VAM profit in early 1Q at Kuraray and Celanese, as it should help their ability to raise price on VAM in an environment of higher methanol, henry hub natural gas (though it remains ~10% lower MoM) and ethylene prices since the start of the year. Also, Celanese added the first VAM to the US market this century in late 2018/early 19 [see LINKS 1 and 2], so price support after these price additions YoY is a plus and will add to its recent call for price hikes. We also view it as a plus for the non-integrated Kuraray VAM assets as well, as it will help them offset recent acetic acid strength since the start of the year [see upward trend YTD in China spot values in LINK] that appears in part linked to a tighter methanol market to start 2020 [China spot trend in LINK, and we also flag already tight methanol conditions due to outages on the USGC in LINK]. As a last postive, if the production upsets are long in nature, it could push up values for PVOH that is an ingredient in PVB film – a bit of price support in this area would benefit Kuraray and the PVB unit at Eastman Chemical. Now, turning to the negative side, we see direct profit headwinds at both Dow Chemical and Lyondellbasell as likely, but we think it could also impact some input costs for those buying VAM as an input in the production of co-monomer, such as at Westlake for some of its polyethylene products [LINK], as a co-polymer, which is a noted Arkema products [LINK] and used by other latex producers, and as an ingredient into a number of coatings, which Sherwin Williams, PPG and other coatings players produce.
Other Chemical industry items worthy of note today:
- Michigan files a PFAS lawsuit against 17 defendents earlier this week – see LINK for the list of companies that includes DuPont, 3M, Corteva, Arkema and Solvay among others. A lawsuit against 3M by Minnesota brought many the PFAS or commonly referred as “forever chemicals” to light – this suit was settled in 2018 for US$850m per LINK. We simply find the PFAS issues not going away, and we do not expect the negative investor sentiment surrounding a few of these firms to lessen anytime soon. As mentioned in a prior daily, a broad (multi-state or global) settlement is needed here to get investors to look past it. We found that, per news yesterday mid-day, DuPont is exploring strategic options, including a sale, of its electronics unit – see LINK – and note that these follow multiple other corproate actions recently taken at the company, with the major one being the merger of its Health & Nutrition business with IFF [LINK]. Despite the announcement mid-day, DD equity was only up !1%, roughly in-line with the market – in our view, many are concerned with near term results and 2020 profit guidance, and likely further PFAS news. Most anticipate strategic reviews as being an ongoing part of the current DuPont management strategy, so not a surprise. We think DuPont will likely look for a tax effieint exit for its electronics platform as it did with Health & Nutrition, unless Private Equity steps in with a big multiple. More to follow on this next week.
- Propylene values are moving higher in parts of Asia as a result of tight supply – see in LINK – and we highlight a Platts podcast [LINK] that points to tight naphtha markets in the region. Also, see an ICIS report discussing tepid plasticizer demand in Asia ahead of Chinese New Year (Jan. 25) and the cost pressures from higher propylene in LINK. We view a tight naphtha setting as a plus for US producers, and we see it as a general plus for US producers with feedstock flexibility upstream, such as at Dow Chemical and Lyondellbasell, and we it also as a plus for US propylene derivative export values. We see it as a potential headwind for non-integrated propylene derivative players if the global propylene prices take a step up – these range from coatings producers, such as PPG, to propylene oxide players, such as Indorama [LINK], to potentially Braskem in polypropylene.
- Four items hit our screens on the topic of single-use plastic and recycling:
- Nestle is investing ~US$2bn to create a market for recycled plastics and will launch a venture fund support packaging innovation – see LINKS 1, 2 and 3. Indeed, we see these efforts, along with mounting efforts globally to reduce plastic waste, as a threat to demand growth for some major virgin resin categories (notably PET, but also many grades of PE and PP). We also highlight a FT article on this topic that hit overnight also noting recycled packaging efforts at Univar and Mars [LINK].
- we add Chicago to the city list [see LINKS 1 and 2] that wants to cut single-use plastics use. And, we provide a LINK to a McKinsey report that discusses plastic recovery efforts in the US and see exhibit 1 that highlights the key plastics in packaging and food-service packaging.
- We find news in India of both banning single-use plastics but also pushing to boost the thickness of polyethylene bags [LINK]. Increasing bag thickness, increases the cost and processors are upset.
- Potential e-plastics export disruption is on the horizon if Beijing inacts import requirements on the consistent quality of plastic pellets – see article in LINK. This could potentially boost virgin resin demand for a short period of time, if capex lags the China import requirement final decision.
- Nestle is investing ~US$2bn to create a market for recycled plastics and will launch a venture fund support packaging innovation – see LINKS 1, 2 and 3. Indeed, we see these efforts, along with mounting efforts globally to reduce plastic waste, as a threat to demand growth for some major virgin resin categories (notably PET, but also many grades of PE and PP). We also highlight a FT article on this topic that hit overnight also noting recycled packaging efforts at Univar and Mars [LINK].
- We conclude our daily this week with two final commodity items of note:
- BASF, Covestro and Dow Chemical production units were not impacted by the IQOXE ethylene oxide (EO) plant explosion in Spain – see write-up in LINK. It impacts roughly 4% of the European EO market, per our rough estimate. We add in this morning a podcast from ICIS that comments to a potential tightening of European EO markets [LINK]. Per our view, the key EO producing companies in Europe comprise BASF, Dow Chemical, Ineos, Clariant and Shell. The buyer/consumer list is quite fragmented, and we tend to see the most non-integrated risk in ethanolamines and polyol producers.
- Formosa formally announced the initial start-up of its new ethylene cracker mid-week – see in LINK. Two items of note after this: 1) the end of the first US cracker capacity wave post 2012 has now been completed with this unit, in our view, as the Sasol ethylene facility running, despite its recent issue with an LDPE unit. We see the second wave not kicking into production until 2021/22. More to come on this; and 2) our readings point to two items that have helped support USGC ethylene values despite the new start-ups (though they are not fully online at a net basis at this time):
- BASF, Covestro and Dow Chemical production units were not impacted by the IQOXE ethylene oxide (EO) plant explosion in Spain – see write-up in LINK. It impacts roughly 4% of the European EO market, per our rough estimate. We add in this morning a podcast from ICIS that comments to a potential tightening of European EO markets [LINK]. Per our view, the key EO producing companies in Europe comprise BASF, Dow Chemical, Ineos, Clariant and Shell. The buyer/consumer list is quite fragmented, and we tend to see the most non-integrated risk in ethanolamines and polyol producers.
- four major planned ethylene cracker shutdowns at the start of 2020 (Westlake/Lotte, Formosa Olefins III, Shintech and Indorama). We estimate ~6% of US capacity is offline on this front;
- a few unplanned issues (CP Chem, ExxonMobil) that has resulted reduced run rates. We link roughly 2% of capacity offline on this front.
- export supplies flowing from the Enterprise terminal on the USGC that allows for another outlet for merchant ethylene.