Daily Chemical Reaction
C-MACC Events; Industry Themes Emerging Mid-Week; More PVC Thoughts; & Other Items
Key Points:
- We will host a call with energy consultant En*Vantage today and Braskem tomorrow (Friday, 3/27) – click the link above to register – or call.
- We highlight a few industry themes emerging mid-week that range from China import issues to rising risks of abrupt US/EU commodity price drops.
- We add to our PVC commentary yesterday, and we highlight a few Corp. items today targeting Repsol and Saudi Chemical; we also flag multiple other discussions, ranging from US propane/propylene inventory to LNG.
- Registration for all C-MACC events can be completed on our website [https://c-macc.com/events/]. Today, we will host an NGL/chemical feedstock webcast/event with energy consultant En*Vantage [see our views ahead of the event in LINK], and tomorrow, we will host a webcast/event with Braskem. Let us know if you have issues with registering.
- The relevance of the call today is highlighted in the chart below. Ethane pricing in the US is at its lowest level in more than 40 years (maybe ever as we do not have data before 1980), and yet it is currently the least attractive feedstock for a US producer with feedstock flexibility. This is an unstable situation, and ethylene co-product prices should adjust to reflect this, but with no good alternate homes for propane, butane and naphtha today, will it just be a competitive race to the bottom as these streams try to buy their way into ethylene plants?
See Chart in PDF
- A few notable themes have emerged this week that we think are worth note:
- The EU, like North America, is in the midst of COVID-19 shutdowns and demand is in reverse for many items not listed as essential (packaging, medical supplies, etc.). When we dig a bit deeper, we find some firms noting that production has not been impacted as a result of being included in essential operations by respective governments – see US list in LINK and we highlight Kraton as a quick example based on from feedback yesterday. We suspect many will seek to fit under this umbrella and we do see positives if COVID-19 issues are short-lived, but the concern that we have is that this can also turn to a notable issue if derivative product demand channels abruptly fall apart, inventory spikes and related commodity price collapse – we find the benzene market declines in the EU this week [see in LINK] and the decline in the US as notable;
- We find China now trumpeting that the import of some key products, ranging from electric machinery to chemicals, has been affected by the global spread of COVID-19 – see LINK noting Ministry official encouragement of local gov’t to roll out measures to support the sales of cars and new energy vehicles. Feedback from our meetings with Sinopec in early 2020 highlighted the Chinese desire to eventually move toward self-sufficiency in chemical production (currently it sits at ~65% per our model), and if the COVID-19 issues persist and cause supply chain disruptions, we would not be surprised to see greater government support for China to spur self-sufficiency initiatives – at the expense of imports from the Middle East and the US.
- Record low petrochemical prices in Asia [LINK] and India [LINK] suggest declines in US and EU markets. Beyond the argument of a flatter cost curve, we our concern with ample upstream product trying to find a home and the potential for an abrupt downtick in demand (as noted above with benzene) is a concern. Also, we suspect buyers will more likely de-stock/run hand-to-mouth in the midst of the COVID-19 issues than build inventory in the midst of uncertainty surrounding its duration and demand.
- The worst in the US and Europe is not behind us. We appreciate that investors seek to build equity positions as they look through the currently dicey, COVID-19 and low oil (relative to gas) landscape, to consider better demand conditions ahead in 2H20 and the sizable pullback in equity values since the start of March. But, we also think 2Q20 results across the chemicals sector are trending to be much worse (notably in April) than many consensus views estimated when they were set with mid-1Q20 updates. All in, we see duration and the ability to withstand shocks as key points to consider, as we do not see an abrupt rebound for the chemicals sector in 2H20 given the current flatter cost curve setting and ample product availability.
- US polyvinyl chloride (PVC) was our topic of discussion yesterday following news of the India lockdown, and based on the inflow of interest, we dive into a bit more detail to support our negative case for PVC prices in 2Q20/early 3Q20 – we would not be surprised to see a 15-20% drop in US values by early 3Q20 if demand channels do not open up. To set the stage, US PVC contracts increased on a MoM basis in January (US$0.03/lb) and February (US$0.02/lb), and we found seasonal strength in March alongside some uncertainty with product availability (Formosa and Shintech outages, export uncertainty, etc.) as initially looking to support domestic spot prices. But now, the tide as shifted, and we see greater risk to US PVC prices in 2Q20 than the simple reversal of the 1Q20 ~US$100/mt (~US$0.05/lb, ~10%) contract price uptick. So, what changed to spur more confidence in a negative price view? A few items to keep in mind:
- The US PVC export market started the year strong but now reflects weakness. Though it seems like long ago, we started the year with a strong US PVC export market – we flag the note in LINK that discusses tightness in India as a positive for US producers. As we noted yesterday, India is now on lockdown [see LINK.and China prices have declined ~16% during the past three months – see chart in LINK. In our view, export prices are likely to stay depressed into 2Q20.
- US outages/planned turnarounds created supply uncertainty among domestic producers that were seeing generally good order books – see industry report in LINK noting the uptick in US production/supply in late 1Q20 and early-to-mid 2Q20 that we now view as the consensus forecast. It also comes at a time when Asia supply is also looking for a home – see LINK.
- The PVC production cost curve (cheaper global ethylene, etc.) is flatter and regional spreads have shifted against the US market. For reference, the avg. Asia value is now roughly in line with the US spot level – if we return to the start of the year, the avg. Asia value was at a US$169/mt net premium to US level and this compares to a ~US$145/mt Asia PVC premium price point relative to US levels in both 2018 and 2019 that worked in favor of US exports. All in, our concern is that a US$150-170/mt drop in US PVC values may be in the cards even if we assume spot Asia values hold their current level – at this point, given the pushback of volume from India, we think Asia values face downward pressure – a negative for USGC markets.
- NA PVC producers include Westlake, Shintech, OxyChem, Formosa and Orbia.
Key corporate updates/events worthy of note today:
- Repsol cuts planned capex by more than €1bn on oil price drop and COVID-19 concerns, and it delays the presentation of a 5-yr. (2020-2025) strategic plan until macroeconomic outlook becomes clearer – see LINK.
- Sinopec Shanghai Petrochemical announces 2019 results – see LINK.
- Saudi Chemical, a portfolio company with businesses ranging from pharmaceuticals to explosives, reports its 2019 results – see detail in LINK.
- We flag an uptick in gross profit YoY in 2019, but a downtick in operating profit as a result of the stopping the capitalization of the costs on two production lines as a result of commencing commercial production. Also, the firm saw higher selling & marketing costs YoY.
Relevant articles/items worth a look:
- Energy/Upstream News
- China to resume US LPG imports as Beijing waives tariff – see LINK.
- When propane and exports collide – price crash could upend Western Canada’s propane export outlook – see article in LINK.
- Weekly US propane/propylene inventories fall 3% WoW but sit at historic highs for this time of year – see data in LINK.
- India’s Coronavirus lockdown hits LNG demand and port activity – see LINK. Also, see LINK.
- Supply Chain & Other Chemical Industry News:
- Coronavirus blackens outlook for German exporters – see LINK that highlights an Ifo institute survey putting German export sentiment at its lowest level since the global financial crisis.
- Future dims for Middle East refiners amid worsening 2Q20 outlook – see LINK. Also, see report noting the sever hit to global refining margins as a result of weak gasoline demand in LINK.
- ICIS discussion of caustic soda benefits from the coronavirus pandemic in LINK – though we see a bright spot in this area, we do not think it is large enough to move the needle – see the downward trend in the China caustic soda price chart in LINK.
- Coronavirus restrictions gum up polymer logistics – see LINK.
- India lockdown abruptly halts US container trade – see LINK.
- China cuts international flights on global virus spread – see LINK. Quite interesting timing of this announcement, now that the country is trying to stop a rebound in cases.
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