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How Deep Is The Pit and How Far Does It Stretch? C-MACC Sunday Recap
April 5, 2020
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Sunday Chemical Recap

How Deep Is The Pit and How Far Does It Stretch?

Important dates for your calendar.

Conference Call with Raj GuptaApril 10th 11.00am ECT

Publication of a Perspectives piece on Bargain Hunting – Mid-Week

Please contact us for details – you can register for the conference calls directly by following the links above or visiting our events/conference page.

There has been no good news this week – perhaps the curves are flattening out in parts of Europe, but we are likely a couple of weeks away from that in the US and other parts of the world are behind the US.  Schools and Colleges are closed in many places or the rest of the academic year.  The lock downs continue.  Our exceptionally informative call with Andrew Liveris clarified what we have been discussing for a couple of weeks – there is no precedent – this is at best a U shaped downturn, but we don’t see the bottom yet and we don’t know either the length of the U or the rate of recovery – nor can we really estimate. 

Key Points from the last week

  • We repeat the same first bullet as last week intentionally – Oil price volatility suggests that few are doing the basic math – demand is likely to be down by far more in the second quarter than anyone can cut production by – either as a group (OPEC-Russia) or as a country such as the US individually. We expect oil prices in the US to be below $20 during April – even with the best attempts to get production agreements.
    • If US exports of crude dry up, and production does not get cut back, the storage capacity being offered in the US Strategic Reserve will be full in 10 days and that is without any cutbacks in refining operating rates – which are inevitable.
    • Crude oil shipping costs have risen to levels that make it highly uneconomic to export and highly uneconomic to lease ships to store crude.
  • There is much more evidence that Chinese manufacturers who are returning to higher operating rates cannot find homes for the products.
  • As costs and demand collapse, chemical and polymer pricing is falling fast, with many products seeing the fastest month on month decline in pricing in history – benzene in Europe probably holds the record so far – down more than 50%.
  • We fully agree with Dow’s decision to push its Q1 report to the very end of April. The company now has more time to think about an appropriate production response and will have visibility into demand for May before it has to make a public statement.  We would expect others to follow suit. While it creates more uncertainty near-term for investors – we remind readers of the very different messages being sent by those who reported Q4 earnings early and those who reported later.
  • We published our fifth read-through report this week – the focus was on the oil and gas markets. We also published our low crude oil price study last Monday and a follow up piece on light hydrocarbon oversupply

If you are a C-MACC client and have not logged on to our website and/or have lost the instructions – let us know and we will fix it – you should be able to fix any log in problems directly on the website as your name and email are already in the system.  Alternatively, email us with any PDF requests.

Late last week we concluded that we could add more value to our Daily reports, given that we have now been publishing for almost 3 months and given the number of medium-term pieces we have produced.  Consequently, each time we write about a company in a daily report will be (consistently) adding a final comment with our opinion – either from an investment perspective or from a corporate strategy perspective.  These opinions are not backed by comprehensive financial models and will not include target prices but given our long history with the industry and most of the companies, we expect them to be value added – clients can, and do, of course, call for more detailed discussions.

Separately, one of the pieces listed below is free to read on our website and listed as such.  We continue to look for more clients and the following text was included in an Email yesterday which some of you may have received already.

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Dear Friend,

Yesterday, we published a piece with our views on energy. And we sent this report out beyond our growing client base.

Thanks to our analytics, you are receiving this e-mail because: 1.) you read the report; and 2.) you are not yet a C-MACC client.

Here is what you’ve been missing, just in the last week…

  • Eight additional publications spanning (listed and linked below):
    • Daily update on everything that is relevant in and around chemicals globally;
    • Weekly review of profitability across all major chains;
    • Detailed, timely, and actionable study of the possible impacts of low oil and weak demand on the chemical industry.
    • Follow-up focused on one unexpected finding of that study — the likelihood that the world is awash with light naphtha permanently; and
    • Short brief of the risks and benefits of pre-releasing earnings this quarter.
  • A fantastic conference call with Andrew Liveris, former chairman and CEO of Dow Chemical and a board member of Saudi Aramco. Andrew drew on his experiences with the companies and countries that he is working with now. Everyone should listen to the replay.  
  • The opportunity to talk to us about much more than what we publish.

And, here’s what we already have planned for this week…

  • The same high quality daily and weekly work.
  • A perspectives piece on “bargain hunting” in a downturn, applicable whether you are an investor or a chemical company. This will be a dramatic downturn and many bargains will appear…eventually. 
  • A call with Raj Gupta, former CEO of Rohm and Haas and board member of Arconic and DuPont. Raj and I will discuss a number of subjects, but M&A will be a hot topic.  

…Also note that, since we wrote our oil commentary on Friday, there is already division between Russia and Saudi Arabia on how to move forward…likely for the reasons we discussed.  

Thankfully, C-MACC is having more success than expected given the impact of the novel coronavirus pandemic. In fact, we passed an important milestone this week: our number of institutional clients now matches our number of corporate clients.    

In these unsettling times, we would be honored to partner with you and your organization as a C-MACC client. Please feel free to contact Cooley or me at any time. And don’t forget to stay up to date with us via our website, www.c-macc.com.

With gratitude,

 Graham and Cooley

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The Week Of March 30th – the link to each piece is on the day/date line

Monday – Weekly Margin and Pricing Analysis

Global Chemical Update

  • The global petrochemical cost curve further flattened WoW, and we note the lagged drop in derivative product prices as negative for 2Q sector profit.
  • We discuss propylene, ethylene and methanol – three commodity chemicals facing downward pressure (among others) in late 1Q20 (see fig. 43 and 44).

Tuesday

Our 2Q20 Concerns Remain Elevated; US Caustic Nominations Discussed; & Numerous Other Items

  • Our findings from around the globe early this week support our case that US chemical industry profit declines are likely in 2Q20 – clients take notice.
  • US caustic soda contract nominations for March point to increases – in our view, lower global chlor-alkali operating rates are needed to support a hike.
  • We highlight corporate updates from AdvanSix, LyondellBasell, Braskem, Sinopec and Kraton; we also flag multiple other items focused on gas market fundamentals, industry capacity additions and general sector health. 

Wednesday

Forecasts For A Return To Normal Continue To Be Pushed Out; Europe Contract Updates; Other Items

  • We discuss delays in US auto production restarts and views from Dow CEO Jim Fitterling targeting sector conditions – clients take notice.
  • Europe ethylene, propylene and benzene contract prices fall for April – not a surprise but the trend rings negative for US price negotiations.
  • We highlight several other items, ranging from SBR trends in Asia to the extension of NEV purchase incentives in China for two more years.

Thursday

Words From The Wise – Takeaways From Our Event With Andrew Liveris; Other Chemical Sector Items

  • We provide thoughts following our event with Andrew Liveris today and flag many near- and long-term items worth consideration – clients take note.
  • Corporate items in the news today target the restructuring of Arkema, production cuts and delays at Methanex, and a Reliance capital raise.
  • Other items include commodity shifts worthy of note ranging from PE to Acetic Acid, and we also highlight a few relative items discussing demand. 

Friday

Crude Humor & Other Chemical Items

  • The uptick in the oil-to-gas ratio this week spurred sector interest – we do not see feedstock benefits pulling chemical sector profit higher anytime soon, and we do not think the current ratio can last.
  • Corporate items in the news today target Lotte Chemical M&A ambitions, the Wanhua 4Q19 report and Nova Chemical expansions being put on hold.
  • Other items of note today range from the significant pain being felt by US crude exporters to activist pressure at GCP Applied Technologies. 

March 31st Perspectives 7 – Additional Take-Aways From Our Oil Study

Some Additional Take-Aways From Our Low Oil Study

  • On March 30th we published our $20 crude and its impact on chemicals analysis.  As we sent it to each client and subscriber, we added a short, tailored set of thoughts as they applied to each company, whether they were a chemical producer or investor. 
  • During the process of writing these summaries it triggered some additional thoughts around today’s environment and how it differs from what we have seen before, and especially how it differs from the early 80s, when we saw Brent oil prices fall from $26 per barrel to $11 per barrel in then current dollars, roughly the equivalent of a fall from $57 per barrel to $25 per barrel in current dollars (very close to what we have seen for Brent so far this year). 

April 1st Perspectives – Pre-Released Earnings

Pre-Release Season is here; do we see less than usual?

  • At the end of every quarter there are always a handful of companies who feel the need to pre-release an estimate of earnings; either because consensus is so far away from actual or because they have other news and need to get something out there so that they can talk during what would normally be a quiet period. We can make an argument for an unprecedented number of pre-releases over the next 14 days, but we can also make an argument for relative silence. See the end of this document for a list of companies worth noting that have either pre-released 1Q20 with statements highlighting their strong liquidity positions and/or withdrawn 2020 guidance altogether citing a lack of fundamental visibility in months ahead.  

April 3rd – Second DerivativeThis report is free to read on our website

The 5th Second Derivative – Focus On Energy

  • We still believe that the historic proxies being used to attempt to frame current events are all giving the wrong signals.  But, some of the old models are being thrown out and the word “unprecedented” is appearing more frequently – and appropriately so.
  • This week we are focusing on Energy – it seems appropriate given the noise and volatility of the week and given the reception that we have had to the oil at $20 cost study we published Monday.  We are not energy analysts; we are amateur economists and expert mathematicians (and Graham has worked for two of the majors – albeit 35 years ago).  Plus, we know a thing or two about the chemical industry which is closely connected with the energy sector.  So, with that, these are the highlights:

 

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