Key Points:
- We discuss the rise in US hydrocarbon exports and downward pressure on the price of commodity chemicals – we take a tepid view of international 2020 profit trends.
- Other Chemical Industry items of note: US polyethylene contract watch; caustic soda thoughts; C&EN Chemical 2020 outlook; the final four
- The recent four-year low in US natural gas prices has hit at a time when US LNG exports are high and rising, and the current international LNG price suggests that the US surplus is being felt globally. According to the Financial Times in an article on Tuesday [ LINK], spot LNG prices in the Japan/Korea market has fallen to ~$5 per million BTUs. This reflects the US price plus the variable cost of liquefaction and transportation and very little more [LINK]. Low-cost LNG is a major benefit for buyers in Asia and Europe, but it is a sign of just how oversupplied the market has become. Supply in the US is rising, despite lower drilling activity in the natural gas focused shale plays, because the oil-focused shale plays, which continue to see plenty of drilling activity have abundant associated gas, all of it looking for a market. Much of the Permian associated gas is flowing to the new LNG facilities on the Gulf Coast. Capacity to export has increased already this year, but as international demand has not kept pace, prices are being set by what it takes to find a home for the next cargo. Depressed natural gas prices appear here to stay and with the demand pull strong from US export terminals, ethane will be abundant and cheap on the US Gulf, and likely abundant and even cheaper in the US Marcellus region. US shale, the Permian more than the Marcellus, has effectively turned the US into a hydrocarbon exporting machine – oil, LNG, ethane, LPG (especially propane), ethylene and ethylene derivatives (polyethylene, etc.) are pouring into international markets with export volumes of all likely to rise in 2020. The fix is notable growth, economic growth and consumer spending growth. Without growth, and as long as crude oil stays US$50+ per barrel, the US can place product nearly anywhere it wants (tariffs aside) at prices lower than local production costs. Cheap LNG may be a benefit to the Japanese and Korean economies, but what is causing that low price is not good news for their chemical industries. As we progress through earnings season, poor 2020 commodity chemical profit views from US producers will imply poorer outlooks for counterparts in Europe and Asia.
- Other Chemical Industry items of note:
- Following our discussion of the nominated US January polyethylene (PE) contract price lift of US$0.04/lb MoM yesterday, ExxonMobil notified buyers that it will implement a further US$0.04/lb price increase on Feb. 1 in addition to the January increase. The only exception is LDPE, where it plans to now seek a US$0.05/lb MoM price hike on Feb. 1 in addition to the US$0.04/lb in January – we suspect that the recent LDPE disruption at Sasol [LINK] is a key reason for the greater push in LDPE contract prices. Against this backdrop, it appears Pemex cut its PE list prices last week by 3-5% in Mexico amid seemingly good run rates at Braskem Idesa at the start of 2020 [see LINK]. Though we see a mixed setting for the January PE contract price push among producers, our reading does point to decent product demand since the start of the year [see LINK] and we suspect that the push by ExxonMobil is intended to likely spur buyer urgency to keep US spot prices supported in late January/early February. Despite the near-term momentum, we see greater production of PE ahead in a period low domestic feedstock costs and little upward risk in cost pushing higher pricing abroad. Thus, we see downward pressure on PE prices in late 1Q/early 2Q and view early 1Q20 strength as temporary at this time. We view the early year strength as a plus for US PE producers, such as Dow Chemical, LyondellBasell, Sasol, Westlake, CP Chem, Formosa and ExxonMobil, but we think downward pressure on PE values in 2020 will benefit global buyers, such as packager Berry Plastics, and some non-integrated compounders with above-average pricing power downstream.
- We highlight a Platts caustic soda podcast – available in LINK. It highlights the sizable global collapse in caustic soda values since the peaks reached in 2016/17, and we do agree that demand for caustic soda has weakened more than many anticipate. But we do not agree that caustic soda fundamentals reflect the global economic uncertainty as the podcast title suggests. Our argument goes back to the basics: for every 1 unit of chlorine in an ECU there is 1.1 unit of caustic soda created with it as a co-product, and chlorine (not caustic soda) tends to dictate/determine chlor-alkali operating rates as chlorine is difficult to store and ship. When we add to this a low-cost setting for chlor-alkali production (cheap natural gas to power co-gen units), cheap ethylene production costs and better chlorine derivative demand (vinyls, MDI, etc.) relative to caustic soda, it paints a setting for a weak caustic soda prices. We have been negative on caustic soda for some time as a result of this dynamic, as we tied 2016-17 strength in part to heavy outages and have been in a believer in higher chlor-alkali run rates that would push more caustic into the market despite limited new greenfield plant additions. We pushed back on a 2018 IHS presentation that pointed to price support based on good demand and limited supply growth [see LINK], and we tended to view this as an argument for tightness in the chlorine end of the chain (not the caustic soda piece) until run-rates were consistently at elevated rates on a global basis and caustic supply was fully absorbed into the market. This in mind, we do agree with the Platts view that caustic soda values will likely reflect little upward momentum in 2020 as we see a low-cost backdrop for chlor-alkali production, and we do not see a surge in global caustic soda end markets (paper/packaging, alumina, etc.) near-term. Major US chlor-alkali players are Olin, Westlake, OxyChem, Shintech and Formosa. All are exposed to the weaker merchant caustic soda market, with Olin least well placed to make up for the weakness with integrated chlorine through PVC benefits.
- We highlight the Chemical & Engineering News (C&EN) Chemical 2020 outlook in LINK. We agree that sustainability, recycling and other environmental issues with remain a hot topic in 2020, and we see the US commodity chemical build-out coming to a bit of a halt in 2020 as the capacity build-out turns to Asia (most notably China) – also see LINK that points to a profitability downcycle in China as a result of the new capacity additions. In a depressed commodity markets as a result of ample supply, we argue that non-integrated product players toward the specialty end of the spectrum should see better relative profits – we view non-integrated MDI players, such as Huntsman, or chemical compounders, such as Lanxess, PolyOne, the transportation business at DuPont or Eng. Materials at Celanese as examples of beneficiaries in this market.
- The final four:
- Natpet (Saudi Arabia) plans to restart 400,000 t/yr. of polypropylene (PP) production in February after an unplanned outage in late 2018 that included an onsite PDH plant [LINK]. We maintain a close eye on the overseas market for PP, as we have a cautious global PP profit view for 2020/21.
- The Chemical Activity Barometer (CAB), a leading economic indicator created by the American Chemistry Council (ACC), jumped 0.6% in January on a three-month moving average (3MMA) basis following a 0.1% gain in December. On a YoY basis, the barometer rose 1.4% – see LINK.
- We flag two reports discussing Asia and European demand: 1) comments to Asia chemical markets facing tight supply in a few products (notably Butadiene) in a setting of broadly weak demand after Lunar New Year – see LINK; and 2) we flag a report commenting to a setting of improvement at the start of the year in Europe – see LINK. Indeed, we find the global economic landscape mixed.
- McDermott Int. has agreed to sell its Lummus chemical technologies unit for $2.7bn to a partnership between The Chatterjee Group and Rhone Group – see LINKS 1 and 2. Note that this is a first step in a Chapter 11 re-org and there remains opportunity for others to bid for Lummus, which will ultimately be sold by auction to fund restructuring and DIP (debtor in possesion) loans at McDermott.