Sunday Chemical Recap
Oil Price May Just be a Distraction, Demand is Key
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This week we appear to have seen Europe, in aggregate, turn a corner with the virus, and there are signs that New York may be flattening also, but the US as a whole remains a problem and the virus continues to spread through other parts of the world. Despite its more encouraging news, the situation is so bad in New York that the Mayor called for schools to be closed through the end of the academic year. This counters the better news with the more concerning economic reality, which is that things are not going to return to normal any time soon. This week the focus has been on oil and while the OPEC+ agreement is something, it all looks fragile and the cuts do not come close to matching the fall in demand. We are still very much in the forest.
Key Points from the last week
- We remain very concerned about the state of the energy market and its impact on chemicals and will publish another Perspectives piece on the subject tomorrow morning. The knee-jerk reaction trades are happening in the stock market – oil rises, buy US basic chemical companies – but we now think this is too simplistic and that changes in the specific feedstock markets may be more important than oil itself.
- There is more evidence of demand destruction on the consumer discretionary side of the market every day, and the longer some of the shutdowns or slowdowns continue, Autos and Aircraft manufacture being the most well covered, the less likely these markets are to recover quickly. Their shutdown is linked to the level of virus-related demand destruction and to lockdowns, and the longer it persists the less money there will be for discretionary spending on the way out.
- As enough demand vanishes, chemical and polymer pricing is starting to fall very fast, with many products seeing the fastest month on month decline in pricing in history. The April shock could be followed by a more aggressive May shock as buyers of chemicals and polymers assess not only their likely levels of demand, but also just how much chain inventory there is, as well as the likely rate of recovery. Days of sales of inventory and raw materials are rising from both sides of the equation.
- We do expect to see companies announcing production cutbacks, and perhaps as early as this week. Material production cuts are disclosable for a public company and while many may hope that they can wait until their scheduled quarterly calls they will need to balance, economics with the need to contain inventories, and the need to inform stakeholders
- We did not publish a read read-through report this week – we have focused on the major issues in recent editions and there was not enough incremental news to change any our views.
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The Week of April 6th– the link to each piece is on the day/date line
Global Chemical Update; The Flattest Cost Curve Ever! Very Bad News In A Weak Demand Scenario
- The global petrochemical cost curve further flattened WoW, and with demand falling it is not obvious where the necessary production cutbacks will come. Possible that all margins fall close to zero everywhere in 2Q20.
- We discuss propylene and ethylene market trends – two chemicals that look likely to face further pressure despite historic low USGC price points.
Global Durable Goods Demand Collapse; Benzene Snapshots; & Other Relevant Sector Items
- Global durable goods markets face very tough conditions – we highlight a few recent releases showcasing significant uncertainty and pain which will flow back to polymers.
- We comment to declines in US benzene WoW despite the recent modest upward moves in Europe and Asia – we do not foresee a V-shaped rebound.
- Other items of note today range from ExxonMobil capex cuts outside of chemicals, Braskem thoughts before its earnings call tomorrow, and news that LyondellBasell may re-start its Houston refinery FCC units next week.
Sector Cost Cuts Ahead; Chlor-Alkali, Propylene & Methanol Snapshots; & Other Relevant Sector Items
- Downturns create a sharp turn in the chemical sector racetrack that enables prepared drivers to take the lead – we discuss how the wave of cost cuts/efficiency measures likely discussed with 1H20 results will fit in.
- We see the whole chlor-alkali complex facing downward price pressure, discuss our negative view of global cracker co-product values and comment to US methanol pressure, China polymer inventory trends and India lockdowns.
- Other items of note today range from further cuts at Sasol that add to other Western World production reductions, to the EV battery market share position at LG Chem and EV policy trends favoring in-country producers.
Flat Cost Curve Bad; Enterprise Zones A Possible Solution; Thoughts on Producer Updates; & Other Items
- We follow our research and talk with former Dow CEO Andrew Liveris about US enterprise zones with a push by The Association of Equipment Manufacturers (AEM) to create a chief manufacturing officer position to report directly to President Trump – we hope this is a positive step.
- We find evidence of increased naphtha cargo bookings from the USGC to Asia – it implies low fuel demand but also US chemical intake is maxed out, as we estimate naphtha is the most advantaged USGC cracker feed currently.
- Other items of note today range from our thoughts on updates at Solvay, Calumet, RMP and Trinseo, to an assortment of other news items.
Eggs Turned Sunny-Side Down for USGC Polymer Producers in 2Q, & Other Items
- We take a bearish stance on US polymer prices for 2Q20 and do not see a pronounced global rebound from the lows in 2H20 – there are simply too many polymer eggs in play on this hunt, and not enough hunters.
- Other items of note today range a discussion targeting US Natural gas price support to an article discussing CFOs being under increasing levels of pressure to maintain liquidity as COVID-19 issues inflict damage.
Bargain Hunting – Big Game and Niche Targets
- It’s too early to find bargains yet and fundamentals weakness, oversupply and a flat global cost curve could create margin and earnings declines for basic chemicals in 2020 not evident in any current models surprising both companies and investors.
- Significant restructuring likely, some under bankruptcy protection, creating opportunities for public market investors, smart consolidators and private equity