Daily Chemical Reaction
India Lockdown Negative for USGC PVC Values; Two Upcoming Events This Week; & Other Items
- We discuss the 21-day India lockdown to combat COVID-19 and the likely negative impact to the global PVC market that translates to lower US prices.
- Following our call with energy consultant Peter Fusillo tomorrow, we will host Braskem for a conference call on Friday – contact us for details. You can register directly for these calls from our website
- Corporate items today target Eastman Chemical, Kraton and Rayonier. And, we also flag multiple other relevant items, ranging from the sizable drop in EU benzene spot values this week to positives for single-use plastics.
- India is at the start of a 21 day ‘total’ lockdown – we frame the general landscape and narrow our focus to paint a view that is net negative for USGC polyvinyl chloride (PVC) producers. A significant item that notably stands out to us since our daily report yesterday is the ‘complete’ coronavirus lockdown in India – see LINKS 1 and 2 for detail, and we highlight an industry report discussing the lockdown in LINK that points to petrochemical plants declaring force majeure/shutting down [see LINKS 1 and 2] and its ports are doing the same amid a 14-day quarantine has been issued for vessels coming from many Asia import regions. We highlight a general overview of the India petrochemical sector in LINK, and while we note that India is a sizable importer of a number of chemicals (synthetic rubber, isopropanol, LAB, etc.), the major chemical (in terms of volume/size and impact to the USGC market) that we choose to focus on today is PVC – in 2019, PVC imports comprised more than 50% of the domestic demand in India [see commentary on page 3 in LINK],and we highlight two presentations from 2018 to frame the India PVC industry [see LINK 1, and notably slide 18, and also LINK 2]. The import requirement is nearly ~2 MMT, which is ~4% of global demand, per our view. Our concern with India fits well with our recent reports discussing the re-start of China production capacity with limited COVID-19-driven demand outside its borders for product [LINKS 1 and 2] – the India COVID-19 lockdowns add to our concern of supply-chain disruption inflating chemical/resin product inventory and further presses product prices in China [see the downward trend in PVC spot in LINK and caustic soda in LINK] amid recent cost curve benefits and that this notably impacts USGC producer/exporter profit. Per our model last week, USGC spot PVC now reflects roughly an in-line value with the avg. Asia price in the mid-$800s/mt, which compares to a ~US$169/mt relative discount for US PVC at the start of 2020 and a ~US$145/mt discount avg. for 2019. Indeed, given US outages have helped support US PVC prices [LINK], Asia production is now seeking a home [LINK], the net lower raw material setting and a weak global demand landscape, we see US PVC prices set for at least 10-15% drop by mid-year and take an increasingly cautious near-term view. Key USGC producers include Westlake, OxyChem, Shintech, Formosa and Orbia.
- Two events ahead of us this week – the chemical feedstock call with energy consultant En*Vantage tomorrow (Thursday, March 26) [see our views ahead of the event in LINK] and our conference call with Braskem on Friday, March 27. We look forward to discussing everything from the Braskem polypropylene (PP) expansion on the USGC [LINK] to its general growth prospects in a setting that reflects a flatter global petrochemical production cost curve – in our view, consolidation is needed in global petrochemical commodities. Given only recently halted negotiations between Braskem and commodity peer LyondellBasell [LINK], we think the company can offer a unique perspective on this trend that we see developing over the next 3-4 years.
- Single-use plastics and COVID-19 – as we noted last week, we view current trends in favor of better handling, recycling and against the elimination of single-use products – see our report in LINK. Today, we note that single-use plastic producers are included in the US Dept. of Homeland Security essential critical infrastructure – see last section in chemical tab in LINK. Indeed, we view this as a positive for the single-use plastic industry, and we think it will help push the argument for better waste management/collection/recycling relative to the elimination of single-use plastics all together. Our views generally 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.
Key corporate updates/events worthy of note today:
- Eastman Chemical provided a guidance update this morning – see LINK. A few things of note:
- sees 1Q20 EPS above 1Q19 (the Street currently estimates a ~9% decline), and mgmt. notes a focus on cash generation in the near-term based on cuts in capex and also working capital benefits on a YoY basis if raw materials stay at current levels. See press release link above for detail.
- As we have noted in our reports, 1Q20 profit and FCF is not the issue for US producers, and in our view, the announcement from Eastman is not a significant surprise. The items worthy of focus are its actions taken into 2Q (capex cuts, noted liquidity sources, etc.) and the notable level of uncertainty that is implied by its actions, and the potential build-up of inventory as demand dries up into April. All in, we warn investors to not get too optimistic on forward profit trends too quickly.
- Kraton equity reflected wild swings yesterday, with the stock being down almost 10% at one point and in the face of a rising market. We reached out to the company this morning following our finding that management was hosted for a conference call yesterday – see LINK – and our inability to find a transcript. Oddly, it appears that nothing “new” was said to investors and, thus, we highlight the points provided to us below:
- As an “essential” provider under the Homeland Security designation [also see LINK], the US plants at Kraton are operating, the firm is able to source raw materials and customer orders appear to be being met – though inventory issues could be a concern, which we have noted on a broad scale for all of the sector, we did not view this as a “new” item.
- Liquidity is not an issue for Kraton, as it has a US$250m ABL facility, nothing outstanding and the borrowing base is meaningful. The firm also has other receivables which we could pledge to upsize if it wanted to (but doesn’t see the need to). In addition, the company has retained a portion of the Cariflex sales proceeds to preserve flexibility, paid off a U.S. Term Loan and US$75m Euro tranche, and its net debt on a consolidated basis sits below US$900m. Again, not a “new” item per our view.
- Overall, the points we were given highlight little that is new but also ring in support of operations and no liquidity issues – we find nothing that justified the mid-day sell off in the equity yesterday.
- Kraton sits in that difficult zone where equity is now a small portion of enterprise value and where small changes in sentiment drive small changes in enterprise value which reflect as large changes in equity value.
- Rayonier curtails production, cellulose facilities to remain operational – see LINK. At this time, we do not see this as an issue for the sourcing of raw materials for acetate tow production, such as at Eastman Chemical, though as noted in [LINK] some of the contracts were set to be renegotiated late last year.
Relevant articles/items worth a look:
- Energy/Upstream News
- Amid oil price crash, natural gas is also under attack – see LINK.
- US Gulf of Mexico crude oil producers braced for price/coronavirus storm – see LINK.
- Equinor halts US shale activity, cuts spending in response to oil price slump – see LINK.
- India lockdown articles: a) domestic oil demand hit, cheaper crude offers opportunity to store – see LINK; and b) Asia spot LNG prices under pressure amid lockdown – see LINK.
- Supply Chain & Other Chemical Industry News:
- India state refiners cut run-rates on weak demand – see LINK. And, we note an article commenting to lost India demand inflicting notable pain on North Asian gasoline suppliers – see LINK.
- Coronavirus affecting EMEA petrochemical markets – see LINK. Europe benzene March spot prices crack over 50% in the past 24 hours per an ICIS report yesterday – see LINK.
- Europe’s polypropylene (PP) demand outlook mixed on cheap feedstock, coronavirus – see LINK.
- Europe construction industry pleads for force majeure status on coronavirus – see LINK.
- Brazil ports operate normally amid coronavirus issues – see LINK.
- China cement prices rise helped by recovery in coal demand – see LINK.
- Malaysia extends coronavirus lockdown to mid-April – see LINK and also the Reuters article noting virus fight issues as the world’s medical glove capital struggles with lockdown – see LINK.
- Australia’s Pilbara secures new lithium chain offtake to Chinese upgrader – see LINK.