C-MACC Sunday Recap
A Rush To Produce Is Likely A Rush To Lower Margins
- As there are some signs of the virus re-emerging in pockets around the globe, post lockdowns, the OECD last week made its first projections for economic growth this year and next – painting a pretty bleak picture and gives a view of the impact of a second wave.
- The US Fed’s comments last week had two messages: “we are doing all we can and will continue to do so” and “we are doing this because it looks really bad” consistent with what the OECD is predicting.
- While we can see short-term logic for the price strength that we see in some of the chemical and polymer markets, the only longer term logic for strength would come from logistic constraints, as the theoretical capacity to supply in 2020 well exceeds the likely demand – for all products under all reasonable scenarios.
- We see reasons to buy and sell, but no reasons to hold.
This week we discussed 27 Chemical and related products and 41 Companies
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See PDF for all charts referenced
The COVID-19 outbreak has distracted all thinking this year and drawn us and others away from early 2020 views of how the world might look – appropriately so. The OECD forecast of 2020 economic growth released this week – chart below – is something we have never seen.
The macro data is mostly bad, disturbing, and suggests a significant downward step in demand for many goods and services and then several years of recovery even if we can get the virus under control with a vaccine. However, we have watched a very out of step resilience from a large part of the chemical industry that is at odds with historical precedent – for our industry chart of the week we show the stunning recent recovery in Asia ethylene prices, which, despite rising crude oil trends, currently encourage all producers around the world to make ethylene and derivatives and ship them to Asia. We believe that this is mostly a function of limited local supply, because of a significant and unusual number of plant maintenance shutdowns (some companies pulled shutdowns forward because they believed that the virus would cause a dip in demand), while at the same time, polyethylene demand (specifically for food packaging) has remained very strong and has grown above trend in many applications.
We also see strength in propylene in Asia, first chart below, but while the ethylene strength is supported by demand, as well as the plant closures, propylene is likely much more about supply, as refining remains under pressure and the ethylene shutdowns that are impacting the ethylene tightness in Asia are on naphtha crackers and that will impact propylene availability also. Ethylene has a much stronger demand pull than propylene right now in our view. The propylene balance could swing quickly the other way with refinery rates, but so far – second chart below – the improvements we are seeing in the US are incremental and last week were accompanied by a surprising increase in gasoline inventories, suggesting that demand remains very subdued. Once supply reacts to margin opportunities and units come back on line in Asia, we would expect lower margins and probably for a prolonged period (similar to what we saw in 2015/16 or 2008/9) as we were modeling surpluses for a number for products in 2020, because of new capacity, long before the virus started causing greater uncertainty and volatility.
The one product where we seem to be seeing some more conventional logic today is Methanol, where there is clearly significant oversupply and prices are falling to try and find levels that drive more demand. For methanol, the big swing factor is MTO (Methanol to Olefins) and available capacity in China. In the first chart below we show the nominal margins for methanol production in Asia and the US as well as the ratio – the dramatic spike to the right has a lot to do with a collapsing denominator but it is interesting all the same. The second chart is perhaps the more interesting as show that there is a margin in shipping US spot methanol to Asia and making ethylene and propylene on the MTO units there. The positive margin is also a function of the higher ethylene and propylene spot prices in the region discussed above. Over the last week we have talked a lot about a supply response to the high Asia prices and this methanol arbitrage is one of the possible corrective mechanisms, assuming you could lock in prices at both ends to ensure that it made sense to restart units.
Meanwhile, the signals from some of the durable markets look terrible and there is still no support for butadiene pricing and for other materials heavily focused in durables that do not have raw material support.
One of the more interesting reads of the week was Toray suspending composites production at Spartanburg, and reducing capacity at Tacoma prepreg facility. The decision is due to the collapse in air travel and the company sees 3-5 years until a return to pre-pandemic sales volume. In and around the durable markets we are seeing layoffs, with everyone focusing on re-sizing business for the long haul. Last week PPG discussed realigning costs – see webcast highlights in LINK, and LyondellBasell discussed the need to re-think strategies. Johnson Matthey (JM) announced that it was reducing its headcount by one fifth.
The Week of June 8 – the link to each piece is on the day/date line & available by clicking on the title
- US methanol prices fall relative to Asia WoW and margins broadly drop. The methanol market is perhaps a leading indicator for others as production responds to opportunity
- We discuss shifts in global integrated margins, vinyls and styrene WoW.
- US polyethylene (PE) producer nominated contract price uptick for June gains support based on spot and export price trends and higher net costs. We still see margin risk in 2H20 as producers react to positive margins.
- We revisit global methanol following an ~18% drop in US methanol values WoW, a notable rise in implied MTO profit and US export market support.
- Other items of note today range from oil-and-gas commentary, to USGC ethylene exports to Asia, to multiple downstream restructuring reports.
- Asia Butadiene (BD) values reflect a five-year low relative to naphtha and BD derivative values reflect little sign of improvement – Asia ethylene is surging higher and this suggests to us that naphtha cracker operating rate issues beyond planned outages in Asia and Europe have not been resolved.
- We add to our commentary on the US polyethylene (PE) market yesterday and discuss the spike higher in China acetone prices.
- Other items of note today range from oil-and-gas commentary, to rising PET prices in China, to a 2020-22 period targeting self-sufficiency (vs. trade).
- Several factors are emerging in favor of USGC propylene price support near-term and suggest margin pressure for non-integrated derivative producers, many of whom are seeing depressed demand.
- We add to our recent discussions of methanol and polyurethanes markets, and we highlight corporate updates from AkzoNobel and Johnson Matthey.
- Other items of note range from energy commentary, to packaging demand in Europe, to US chemical rail traffic reflecting an uptick in volume WoW.
- Asia ethylene markets tightened further this week and derivative markets are reacting – we expect the elevated prices to spur greater ex-Asia supply.
- We highlight happenings in the North America polyethylene market, note the recent strength in US benzene and further discuss the methanol setting.
- Other items of note range from energy commentary, to VAM Asia outages, to auto production supply chains fighting to restart amid uncertain demand.