Daily Chemical Reactions

Single-use plastic debate turns positive; 2Q US profit headwinds much stiffer than 1Q; & Other Items
March 19, 2020
Commodities Mentioned:
Polyethylene, Polypropylene, Polyvinyl Chloride (PVC), Propylene, Propane, Crude, Naphtha, Natural Gas
Companies Mentioned:
Dow, LyondellBasell, Olin, Westlake, PolyOne, Pembina, Indorama, Shell

Daily Chemical Reaction

Single-use plastic debate turns positive; 2Q US profit headwinds much stiffer than 1Q; & Other Items

Key Points:

  • Positives emerge for the single-use plastics industry as a result of the COVID-19 outbreak – we see rhetoric shifting toward the problem of waste.
  • We discuss a few notable commodity chemical trends this week that range from US polyethylene contracts to continued weakness in China caustic soda.
  • Corporate items today target the PolyOne update, Pembina capex cuts and delays at Corpus Christi Polymers. We also flag multiple other relevant items.

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    • Single-use plastics and COVID-19 – we view current trends in favor of better handling, recycling and against the elimination of single-use products. An industry topic/news item that has hit our news screen daily during the past few weeks targets the upward trend in use of single-use plastics amid the COVID-19 outbreak – we flag a discussion in a Mumbai newspaper today LINK as an example among many. On the plus side for the single-use plastics industry, we find Maine halting the plastic bag ban to mitigate the spread of the Coronavirus [LINK], highlight a Washington Examiner report discussing mounting initiatives for more reversals [LINK] and a WSJ article discussing the ban on single-use plastics backfiring [LINK], and note the benefits of single-use plastics in medical devices discussed on page 2 in LINK. Indeed, positive press for single-use plastics has been a long time coming, and we generally argue that this is the result of most environmentalist/anti-single-use initiatives focused on the negative (waste) that comes with the aftermath of single-use product usage and not the benefits. So, as we sit here today, we see the market trending toward two outcomes in the months ahead: a) the surge in the demand of COVID-19 single-use plastics along with a rise in the appreciation of their benefits amid a surge in waste, which only emboldens an environmental wave against the industry – we see this one as already on the whole in motion; or b) the benefits of single-use plastics have now received a positive stamp of approval, and the industry and activist focus pivots toward the collection and increased recycling of product rather than the banning single-use plastics. We see more points of view similar to the one noted in LINK that discusses the perverse panic over plastic as likely to come forth. We are generally in this camp and align with the views of Jim Fitterling, CEO at Dow that points to the needed response on the collection/infrastructure end of the industry and not with the banning of products that provide benefits to consumers – see interview in LINK. 
  • Turning quickly to commodity chemicals, we find a few items worth note midweek:
    • We find both USGC spot polyethylene (PE) and polypropylene (PP) facing downward pressure as low-ball bids/weak export demand appears to be testing the market – see an industry note discussing the issue in LINK. On the whole, we think contract market increases/support for both polymers in late 1Q20 and especially in 2Q20 as unlikely.
    • China caustic soda is walking lower this week – see spot price trend in LINK – and we link it to increased chlor-alkali production and not weakening demand. We flag market reports during the past month noting increased China exports of caustic [see in LINK] and PVC [see in LINK] that we view as negative for USGC chlor-vinyl producers. We see this trend as negative for Olin (EDC, Caustic) and Westlake (PVC, Caustic) into 2Q20. We see Olin as more at risk, as we do not find EDC benefits from outages in the same way as in US PVC [LINK]. This noted, global issues are mounting [LINK].
  • Asia petrochemical markets continue to see weakness – see industry note in LINK – and we see product increasingly targeting premium US and Europe prices. But, as we noted early this week, manufacturer shutdowns suggest demand will be limited. When we throw in a flatter cost curve, we see this pointing to downward pressure on US and Europe prices – see our reports discussing this issues in LINKS 1 and 2. 

Key corporate updates/events worthy of note today:

  • We see 2Q20 profit trends holding more risk/uncertainty relative to 1Q20. PolyOne will hold an update call on Friday, March 20 at 9AM EST – see detail in LINK and notes in the press release that it reaffirms its 1Q20 EPS guidance at US$0.48, which sits relative to the Street view at US$0.44, and bases the strength on a strong performance from its North American businesses that is helping to offset 1Q20 impacts of the COVID-19 virus disruptions in China. We did not view the trend noted within this announcement with surprise, as we see a number of companies likely providing updates similar to this view. The key question for PolyOne is that state of order books into 2Q20 and whether they are seeing cancellations among North American customers – we see this being a major risk for compounders/specialty products producers; especially, in an environment where raw material/petrochemical costs in North America and Europe are poised to follow the Asia market lower and result in less buyer urgency to hold inventory. And, we also note that manufacturer shutdowns in North America are just starting in many key areas – see LINK – and flag that North America weekly chemical rail volume increased 5% relative to 2019 on a trailing four week basis this week – see LINK. The US cannot shutdown its auto industry without direct consequences for the chemical and polymer industry.
  • Pembina postpones PDH/PP project in Alberta as part of announced capital spending cuts that are in response to the decline in global energy prices – see LINK. The project was targeted for start-up at the end of 2023 – we flag a bit of background on the project in LINK. Though we see more energy players entering the chemicals market on a global scale during the next few years in search of growth markets for their hydrocarbons, we also see a mounting risk that cuts in capex could be broad as a result in declining cashflow. We view the PDH/PP postponement at Pembina as a medium-term plus for US PP producers LyondellBasell and Braskem.
  • Corpus Christi Polymers (CCP), a joint venture set up two years ago between Alpek, Far Eastern Group and Indorama Ventures to acquire the PTA/PET production assets from M&G USA, has announced that it will extend the period of pre-construction until the end of 2020 due to increases in labor costs – see LINK to article that requires a translator to English. We flag a report from roughly a month ago that highlights that M&G would resume work in May – see in LINK – in our view, this delay appears more linked to market uncertainty, in our view, on a relative basis to aggressive ramps in labor costs, though we do think COVID-19 issues likely make it prudent to push the estimated timeline a few months. We also flag three industry reports: a) one discusses the Europe uptick in PTA/PET product demand [LINK] – we link part of this to the rush on single-use plastics/PET noted above; b) China paraxylene values face downward pressure and appear to be searching for export market home [LINK]; and c) Asia PET appears to be searching for a home, putting downward pressure on Latin America values [LINK], and we note PET product quality differences impacting prices in Europe [LINK]. All in, prices appear to be following raw materials/upstream costs lower – not a surprise to us.

Relevant articles/items worth a look:

  • Energy/Upstream News
    • Asian appetite for petroleum storage, reserves will not save global oil prices – see report in LINK.
    • Oil price meltdown puts Asia’s upstream projects in jeopardy – see LINK.
    • Crude market vaporizes; contango and storage plays take center stage – see LINK.
    • Industry report discusses the Coronavirus impact on energy markets – see LINK.
    • US propane, butane hit 21-year lows this week – see discussion in LINK. 
  • Supply Chain/Price News
    • Sipchem targeted the restart of the Al Waha Petrochemical PDH unit for this week – see LINK.
    • Shell puts Pennsylvania cracker construction on hold because of a COVID-19 outbreak – see local news coverage from yesterday in LINK.
    • US Benzene falls 22% amid pandemic; styrene and polystyrene losses muted – see LINK. 
  • Other Chemical Industry Items of note
    • European tire makers shut down as coronavirus hits automotive sector – see LINK.
    • Colorado bill proposes to ban single use plastics – see LINK.
    • Plastics Industry Association rallies to support medical need during COVID-19 outbreak – see LINK.

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