Monthly Thematic Piece

Volatility Suggests There are Many Views Of The Future
May 17, 2020
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Sunday Chemical Recap

 

Volatility Suggests There are Many Views Of The Future

  1. The week has been dominated by odd price and margin movements in select products around the globe, suggesting over or under reaction on the part of producers with respect to operating rates, and/or some very hairy speculation.
  2. US ethane prices have been surprisingly strong relative to natural gas and it will be interesting to see just how un-competitive US ethylene production was last week, when we publish the weekly report tomorrow. Ethane strength suggests very high operating rates for ethylene as we have not seen a meaningful reduction in Permian based output yet and the forward ethane curve does not suggest any incentive for rising inventories.
  3. Consumer spending data for April confirms our fears around the durable side of demand and VW’s decision to close some production soon after restart confirms our fears that auto demand will drive all sorts of issues this year. If we were invested at all in the sector if would be with a focus on consumables not durables.

For our chart of the week (see PDF below) we have chosen the US refinery grade to polymer grade spread, as it is the best example of extreme volatility to date.  Refinery grade propylene was bid up quickly as FCC units shut down and availability for splitters fell.  The increase in price may have caused some FCCs to restart, but the bigger impact would have been a fall in propylene demand, such that the splitter capacity is not needed.  Propylene is by far the hardest commodity to predict today because of its multiple sources and because we are not sure where the low will be from a demand perspective.

Volatility has been evident all around the world this week and in many products, as we discussed in our piece about spot pricing.  At this point we are not looking for a “new normal”, we are simply looking for the bottom – what level of demand will represent the lows for each of the products and how long it will last – it may only be weeks or it may be months and it will be different for each product and in each regions.  This makes production planning almost impossible and companies are forced to be reactive rather than proactive, causing temporary shortages in markets that are all theoretically oversupplied.  Tyvek for PPE may be in short supply but Tyvek in general is not.  Polyethylene for food packaging may be in short supply, but polyethylene is aggregate is not. 

For the most part companies are taking the right approach as they face their stakeholders, addressing what they can, costs and the well-being of their stakeholders, most important being employees in the current environment.  In terms of predicting the future, most are staying quite but promising regular updates, which seems the most prudent approach.  Despite the attempts to reopen economies in Europe and the US, the social distancing requirements are likely to lead to incremental change in behavior rather than a step change and the process could be reversed quickly if the rate of infection rises again, which without a vaccine seems almost inevitable.

There is significant increased demand for materials that will aid in maintaining social distancing – ranging from thick sheet like Plexiglas to thick polymer film, which could be another boost to polyethylene beyond packaging.  Many polymers can be used to for protective barriers and we would expect to see experiments with multiple products as new ideas are tried.   Polymer or other separating mechanisms are a possible alternative to greater separation in tightly packed offices, but we still do not expect many companies to take the risk of packing trading floor like offices to pre-Pandemic levels any time soon, even with some degree of physical partition.

With the exception of propylene, which has its own unique dynamic, we have seen other co-products of packaging driven production become very cheap because of oversupply. We highlight two in the charts in the PDF below; benzene in the US, co-produced from ethylene to a limited extent, but likely unwanted in refineries and facing limited chemical demand.  The second is European butadiene, which is close to free – an unwanted co-product of ethylene given limited demand for synthetic rubber and some polymer and latex applications.

Note that benzene pricing is closely tracking gasoline pricing in the US, which should be expected.  While benzene is not a popular gasoline component from an environmental perspective, it does have a high octane value and will remain in refinery blending systems to the limits allowed.  Benzene demand in chemicals is focused in Styrene and Cumene both of which largely have an end use bias towards consumer durables since polystyrene has lost ground as a single use packaging product, partly because of bans and partly because of it is a more complicated polymer to recycle than polyethylene, polypropylene or PET. 

One final thought: the volatility looks like fertile ground for trading and as we said in the “spot market” piece highlighted below, it should be a relatively safe bet right now to sell anything where an unusual price and margin peak is appearing or buy something where clearly the implied margin in the price is negative.  However, unlike the propylene example above, we probably will not see anomalies corrected quite as quickly, and the constraint to trading may be finding somewhere to store the product while you wait. It is clear that logistics and storage issues in Europe are preventing anyone from taking advantage of what appears to be a major arbitrage between local butadiene prices and those in other parts of the world.

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The Week of May 11 – the link to each piece is on the day/date line & available by clicking on the title

Monday – Weekly Margin and Pricing Analysis

Global Chemical Update – Cost Curve Remains A Headwind For An Asia-led Chemical Price Recovery 

  • We approach USGC chlor-vinyl price improvement WoW with caution. The chart of the day suggests limited profitable export opportunities
  • Butadiene, ethylene, propylene and cracker feedstock trends discussed. Volatility in refinery propylene in the US reflects weak demand for propylene

Tuesday

US PE Producers Fight for Price Support in May; Numerous Global Corporate Reports

  • We discuss US polyethylene producer price hike nominations for June and recent trends in the ethylene market – we see any strength as short-lived.
  • We provide our takeaways following three corporate earnings releases (Amcor, Ashi Kasei, Energy Transfer, Hanwha Solutions, Indorama, IFF, Univar, Aramco, Lotte Chemical, Mitsubishi Gas Chemical, Tokai & Tosoh).
  • Other items of note range from oil-and-gas commentary, to India markets starting to show initial signs of life, to global aviation activity.

 Wednesday

Odd Price and Margin Moves Everywhere, But the Cost Curve Frames The Fundamental Path

  • We highlight interesting commodity movements mid-week that range from Asia ethylene strength to widening China acetic-to-methanol spreads. We see this as noise, with consumer spending and the cost curve the real signal.
  • We provide our takeaways from several corporate releases (Ube Industries, ICL, Kansai Paint, Brenntag, Equate and Ferro).
  • Other items of note range from oil-and-gas commentary, to European integrated PE margin compression, to rising Europe EV market share.

Thursday

Buckle Up For A White Knuckle Commodity Chemical Ride 

  • We find commodity chemical market indicators rising suggesting notable volatility ahead – we flag our views and comment on a few commodity trends ranging from NA methanol to China chemicals searching for a home.
  • We provide our takeaways from following multiple corporate releases (Hexion, IPL Plastics, Kuraray, Clariant and Sibur).
  • Other items of note range from energy commentary, to India production itching to return, to a French plastic car parts player declaring bankruptcy.

Friday

Chemical Movers & Shakers; Global Corporate Releases Of Note

  • Our commodity comments to close the week target more price volatility in global benzene, methanol, polyethylene and chlor-vinyl markets.
  • We discuss an array of recent sector news releases (Showa Denko, Solvay, Tokuyama, Nissan Chemicals, Air Products, Oxea and Sumitomo).
  • Other items of note range from oil-and-gas commentary, to more China polypropylene ahead, to shop-screen plastic shortages.

 May 14 Perspectives

What Happens To The Spot Markets?

  • A slow recovery for Chemicals will likely cause mismatches in production versus demand, creating price volatility and at times spot markets could reflect very incremental thinking, resulting in “acceptable” losses rather than plant closures.
  • Recently, we have seen significant price and margin volatility all over the world as supply imbalances create short-term anomalies; we expect these to continue until the markets find a balance – in our view these are all trading opportunities.
  • We will continue to highlight markets with pockets of volatility developing in our research – let us know your questions or areas of specific interest.

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