Key Points:
We highlight the DuPont Water Solutions business – it’s worthy of notice.
Other Chemical Industry items of note: China single-use plastic initiatives; USGC ethylene-to-alkylate project; Styrene supply length; US/China trade
- DuPont is similar to a 50-year-old home, if you are looking for something wrong or something you don’t like, you will find it, and equally you will find things that are right or that you do like. The real value in an old home is spotting things that have potential. At DuPont, we view water treatment as something with potential and think recent acquisitions will further strengthen this old Dow business ,which moved to DuPont on the split. In particular, DuPont has a very strong position in the RO filter business, focused on the large (industrial) end of the market rather than the (commodity) in-house filter end. The addition of Desalitech, as well as three smaller businesses in recent weeks [LINK], will now place DuPont firmly in the broader and increasingly important “water technology” business of which RO membranes are only a part. We recognize that these additions may not move the needle much today, but clean water and cleaning up water is likely to be one of the major growth industries of the next several decades, based on predictions of both water shortages and stricter rules around the disposal of and possible reuse of contaminated water. If DuPont can secure a stable seat at the (water) table and lead with innovation to lower costs and improve product quality, this has the potential to be a major business within five years and become a significant driver of growth. It is worth watching but near-term, it is likely to get lost in the noise despite a number of ongoing strategic reviews at DuPont, such as the one targeting potentially exiting the Electronics segment announced last week [LINK]. Ultimately exiting Eectronics would improve the relative prominence of the water solutions business. Per our estimate, the DuPont water solutions business generated 20-25% of the Safety and Protection (S&P) segment EBITDA in 2018 [LINK], per our view of this unit, and S&P generated ~28% of total DuPont (ex-Nutrition & Health) EBITDA that year.
Other Chemical industry items worthy of note:
- This weekend, China announced further and more aggressive efforts to curb the use of single-use plastic products. We find these efforts include the ban on all plastic bags by year-end 2020 in its major cities and in all of China by 2022. Markets selling fresh produce will be exempt until 2025, and other items such as plastics utensils from takeaway food outlets and plastic courier packages will also be phased out. One of the goals, per news reports, is to cut single-use plastic items by 30% across the restaurant industry by 2025. We view the mounting news around single-use plastics and sustainability measures as relevant, because it implies downward pressure on global demand growth rates for many virgin resins (notably PET, PS, PE and PP among others) in a period where more global capacity will hit the market in Asia most notably for PE and PP. We see fewer concerns for more specialty resin products/converters focused on durable markets, such as Eastman Tritan among an array of other examples. Reports in LINKS 1, 2 and 3. We highlight a UN report that comments to global initiatives put in motion and discusses the plastic product categories impacted most by the measures [LINK].
- A USGC ethylene-to-alkyate project, known as Project Traveler, received FID approval in 4Q19 and will consist of a 28-Mb/d ethylene-to-alkylate plant in Pasadena, TX – see a report on this Next Wave Energy Partners’ (NWEP) project folloing FID approval in late 2019 in LINKS 1 and 2. The project is targeted for start-up in mid-2022 and has the capacity to consume 1.2bn lbs of ethylene per year. We highlight it today, as this project adds to our views given last week that targeted a likely move upwards in USGC ethylene values (and the feedstock to monomer portion of the profit spread for an integrated player, and at the expense of many monomer-to-derivative spreads) as greater derivative production and new outlets arrive to the market. We see this as a plus for ethylene merchant sellers and helping low-cost integrated ethylene derivative producers with margin support, which comprise CP Chem, Nova, Lyondellbasell and Dow Chemical, while we view this trend as a potential negative for merchant buyers with spot market exposure, such as at slivers of Celanese and Westlake per our estimates.
- We highlight the recent decline in China styrene spot values [LINK] during a period where we are also seeing input cost increases/support on a net basis for non-integrated producers – we note China spot benzene price support in LINK and ethylene support in LINK. We view the styrene price weakness as largely tied to greater supply in the region and think it suggests profit headwinds for producers, such as Trinseo and Lyondellbasell. This general framework in mind, we note a flag a few other items that we found during the past few days that are relevant to the styrene market:
- We find increased production being highlighted from Iran at the Pars Petrochemical facility and find that the growth rate of exported product, including styrene, is notable – see article in LINK. We view greater Iranian export supply targeting the global market as a negative for US petrochemical producers/exporters.
- We note that derivative capacity beyond polystyrene (comprised 57% of the styrene derivative demand in 2017, per IHS – LINK) appears set to increasingly arrive in Asia during the next 3-5 years – see the recent news from Ineos that it plans to construct an ABS unit in China that’s plan for completion in 2023 [LINK].
- Lyondellbasell and Sinopec have signed a MOU to construct a PO/SM (propylene oxide styrene monomer) unit in China – see LINK. We will meet Sinopec for lunch in Houston, TX tomorrow and welcome questions for the company from clients.
- We highlight two Argus reports discussing the styrene market:
- Petrochemical industry will likely see little impact from Phase-1 US/China trade deal, per ACC commentary noted by Platts in [LINK]. For the most part, we agree, as we see little change for US commodity chemical exporters. We think the major potential positive is if the Phase-1 deal that included a cut of US import tariffs on China spurs demand for finished products which could benefit some downstream chemical industry sectors [LINK]. But currently, we view our optimism as a stretch for the overall chemical industry. We lastly flag the ACC trade website LINK.