Daily Chemical Reactions

The Risk of Flatter For Longer & Other Items
March 24, 2020
Commodities Mentioned:
Ethane, Propane, Butane, Naphtha, Crude, Natural Gas, Ethylene, Polyethylene, Polypropylene, Polyester
Companies Mentioned:
LyondellBasell, Huntsman, Kingboard Laminates, Orion Engineered Carbons, Valvoline, Sipchem, Shell, Total, Chevron, Cooper, Michelin

Daily Chemical Reaction

The Risk of Flatter For Longer & Other Items

Key Points:

  • We will host Peter Fasullo, a principal of energy consulting firm En*Vantage, for a call on Thursday, March 26 to discuss global chemical feedstocks and related cost curve drivers for 2H20 and 2021.
  • Four corporate items today, including an update from Kingboard Laminates in China and further news of China production returning.
  • Other items include notes discussing capex cuts at Shell, Total and Chevron (among others) and generally depressed global chemical prices.
    • The petrochemical cost curve has flattened relative to 2019, limiting any benefits from a post COVID-19 demand recovery for USGC producers. A key topic on our mind is the duration of the current global petrochemical cost curve setting, which now reflects one of its flattest displays in more than a decade and points to profit headwinds for US petrochemical producers and related export markets. See the discussion in our recent reports in LINKS 1 and 2 that followed the drop in global energy prices in early March and points to greater petrochemical production ahead. As we look upstream from the chemical sector to energy, we also highlight aggressive E&P industry capex cuts that could suggest an eventual slowdown in oil, gas and NGL production – we note two RBN energy reports discussing trends in this area in LINKS 1 and 2. In 2019, the high level consensus view when looking at 2020 was the NGL production would increase to USGC producers, and the uptick in supply (notably of ethane) would overshoot demand needs from new cracker start-ups (Sasol, Formosa, etc.) in 1H20. And then, a wide oil-to-gas spread would work in support of US profit spreads as new production turned from the 2018-2020 US wave of capacity to the overseas (notably Asia/China) market additions in 2020-2023 that were mostly based off of oil/Naphtha – see slide 42 in LINK. Thus, the argument for most industry players was notably supported by the protection of the cost curve. This is now, at least for the moment, turned on its head – as of our report yesterday, ethane ranked third most favorable among USGC feedstocks with naphtha now most advantaged, and though we realize this is a spot ratio that does not give adequate credit for the ~US$0.15/lb premium in the Asia ethylene price relative to the US that supports a wider US ethylene-to-derivative export spread (notably in polyethylene), we also think that it is important to note that the current oil-to-gas setting not only fails to support a snap-back in USGC chemical sector profit back to 2019 levels but also now creates some very interesting dynamics that could incrementally pinch USGC producers at the expense of overseas peers – we view the possible slowdown in NGL production and related price increases as we go into 2021 (sooner if oil falls into the teens) in the US as a mounting risk. On our call with Peter Fasullo on Thursday, March 26, we will not only focus on what happened to get us to where we are but also drivers of the fundamental trajectory for 2H20/1H21 – our current view is that conditions have not only shifted for the worst and that supply chain issues along with a flatter petrochemical production cost curve relative to early 2020 will limit the benefits of a post COVID-19 demand revival. While we find some clinging to the hope that Saudi/Russia oil issues will be resolved and spur prices higher, we do not view this as a strategy. At present, we see a prolonged recovery for USGC commodity producers, such as LyondellBasell, relative to 2019 views but foresee a setting of ample inputs for non-integrated upgraders/derivative producers, such as Huntsman in its advanced materials/epoxies and MDI-systems, or Sherwin Williams in coatings.
  • We highlight two chemical commodity sector items worth note heading into mid-week that we plan to discuss in greater detail during the next two weeks:
    • Contract volume tends to be negotiated a month in advance. This is an item that we find often overlooked in a downturn, and currently we are hearing increased chatter surrounding the US March volume agreed to in February that points to inactivity in 2H March leaving inventory with consumers of polymers and chemicals, either as raw materials or as finished goods. Negotiations for April and into May are going on now, and this is the period where we will see the hard evidence of reduced demand that will push prices lower – we anticipate broad-based price declines across most petrochemical contract indexes during this period. While a lot of polymer contracts have limits on how much the price can move up or down each month – i.e. by no more than 4-5 cents, maybe less – we see a lot of these clauses set for potential renegotiation in April/May. For a high-level view of the contract relative to the spot market, we highlight the report in LINK for a quick overview.  
  • US March polymer contract nominations calling for an uptick face significant downward pressure – we highlight this as notably the case in polyethylene (PE), where producers were calling for an uptick in March of ~US$0.05/lb that follows the US$0.04/lb uptick in January. This in mind, we have also heard that there are at least a couple already delaying the net implementation of polyethylene price hikes – see LINK and also a brief discussion of this development in LINK. Given the recent declines in both ethane and ethylene, declines in the US spot market and overseas PE prices [we flag a note discussing Asia polymer (PE and polypropylene) price weakness since January in LINK], and the uncertain but generally weak demand environment, we see a flat settlement for March as a “win” for producers ahead of likely declines in April/May. We see polypropylene (PP) trending lower with PGP in March, and though some were pushing for a ~US$0.03/lb margin uptick earlier this month, we see this as also increasingly unlikely. Though we recognize some of the US strength has held due to outages, we find the Asia (notably China) market facing pressure – see LINK.

Four corporate updates/events worthy of note today:

  • Kingboard Laminates, a vertically integrated China electronics manufacturing company, reports 2019 results – see LINK. A few key takeaways:
    • As noted in the prospects portion of the release (page 15), mgmt. notes ahead of its electronics market comments that “Stepping into 2020, the Group’s laminates orders carry the momentum from the latter part of 2019. The Group’s upstream plants were able to maintain uninterrupted production during the Spring Festival. As the coronavirus epidemic comes under control in mainland China, all factories have resumed work and have gradually restored to full production capacity.”
    • We also note that China commodity output is recovering amid end of Wuhan lockdown – see LINK.
  • Orion Engineered Carbons, a producer of commodity carbon black and derivative products, withdraws its 2020 profit guidance noting the uncertainty surrounding the duration, magnitude and geographic reach of COVID-19. And, the company partially drew down its revolveer to boost its cash position to ~US$100m and also withdrew its dividend to better manage the current setting. See LINK.
  • Valvoline, a global supplier of premium lubricants and automotive services, withdraws its fiscal 2020 profit guidance, which did not contemplate the impacts of COVID-19, and notes that it will provide a business update with the 2Q20 report. The firm also notes delays in capex and credit line availability – see LINK.

Relevant articles/items worth a look:

  • Energy/Upstream News
    • COVID-19 and oil price war could derail two-thirds of the World’s oil & gas project sanctioning – see discussion in LINK.
    • Shell, Total slash capex on COVID-19, drop in price of oil – see LINK. We highlight this article that came ahead of the Chevron news this morning – see LINK.
    • Asia (ex-China) braces for more energy demand destruction as nations locks down cities – see LINK.
    • IMO compliant fuels more available in ports around the globe – see LINK. 
  • Supply Chain & Other Chemical Industry Items of Note
    • The oil collapse and COVID-19: a two pronged impact on the global chemical market – podcast discussion from Platts in LINK.
    • Sipchem starts propane dehydrogenation (PDH) maintenance ahead of schedule – see LINK.
    • Refineries in Europe move from speading up maintenance to pushing it off and cutting operating rates – see LINK discussing this development.
    • Cooper, Michelin suspend some North American tire production on COVID-19 – see LINK.
    • Asian polyester chain product prices tumble to record lows amid COVID-19 – see LINK.
    • Single-use plastic bans delayed on coronavirus concerns – see LINK.