C-MACC Sunday Recap
You Can Live In A Car, But Most People Prefer Houses – Building Products Likely To Outperform Autos
- We see mixed signals for both building and autos but expect building and construction to show the more significant recovery – a positive for vinyl-chain (PVC) producers, such as Westlake, Shintech, OxyChem, Formosa (and Olin for EDC).
- The chart of the week focuses on the disconnect between what most industry observers/investors are watching (oil and gas) and what really matters for global ethylene cracker operators (ethane and naphtha). The ethane premium to natural gas has increased and of the strength in naphtha relative to crude – see chart #2. Cheap gas relative to crude is positive for US chlor-alkali and methanol producers.
- Asia ethylene price strength continues; something we still believe will a 1H20/early 2Q20 event, as our findings suggest it is already soliciting a supply response, as evidenced by Enterprise running its US ethylene export terminal at or above current design capacity and a rising level of product flows targeting Asia.
See PDF Below for all charts
This week we discussed 19 Chemical and related products and 44 Companies
The Chart of the Week is a derivative of the US ethane/Singapore naphtha chart that sits below it. In the chart we have taken the ratio of the two ratios to get a better sense for how good a measure the oil/natural gas ratio is to the real feedstock differences and how representative the ratio is if of the ethylene cost curve. Today we are coming back down from an extreme that we last saw in the middle of 2018, but which was dwarfed by the spike in crude oil in 2011/12, which did not see a response immediately in naphtha. Note that this is daily data, and some wild price swings are possible as a result.
The ratio in the chart is derived from the two lines in the Chart #2. For most of the year, naphtha prices in Europe and Asia have sat well below historic relationships to crude, and this is something that we expect to continue longer term and the ideas has featured in much of our thematic work so far this year – see the links below and Perspectives piece highlighted later. The naphtha/crude ratio has normalized over the last couple of weeks, likely because of the refinery cutbacks and the economic attractiveness of running ethylene plants in Asia. However, because of the cutback in oil production in the US, associated ethane production has fallen relative to demand and ethane is at a larger premium to its value as a fuel than we have seen in several years. This is what is now driving the spread in the chart below.
- Petrochemicals – No Longer a Fair Fight
- Some Additional Take-Aways From Our Low Oil Study
- What If We Have Seen Peak Oil Demand?
Chart #2 – Singapore Naphtha prices relative to that of USGC ethane reflects only modest improvement relative to the notable improvement seen in Brent Crude relative to USGC Natural gas. A flatter global ethylene production cost curve YoY remains in play, and we see spread compression from a reset lower in 2H20 Asia values as regional production rises
We expect the spread to remain wide and once the dust clears from the Pandemic, we would expect naphtha to move back to more of a discount to crude as refiners try to revive operating rates to levels that drive profitability, against a backdrop of lower jet fuel demand and possibly lower gasoline demand. Whether US ethane moves back towards fuel value will depend very much on production in the Permian and Eagleford fields. If oil production rises, so will production of condensate, and while ethane pricing could then weaken, naphtha could weaken further because of the increased availability of condensate. It is a very hard dynamic to model, but we would expect the line in the first chart to settle above the historic average.
Meanwhile the strength in Asia ethylene prices continues, making most of the relative cost arguments above redundant near-term, as pretty much every ethylene producer in the world can make money with the kind of spreads suggested in Chart #3, below.
Chart #3: Asia ethylene prices now reflect a ~5% premium to January 2020 levels, while US spot values sit at a ~36% discount to the average seen during this period. Our chart of the day displays the spot spread between the two regions that hit a 2020 high last week of US$0.25/lb, which compares to a ~US$0.14/lb Asia premium to start the year and a US$0.19/lb premium average at this point last year. Indeed, we view this development as positive for USGC ethylene and derivative exporters into 3Q20 on a YoY basis
Our dives into building and autos this week were driven by interesting news reports. For autos, in part by an report out of Germany, suggesting that the unsold inventory at dealers was so high that there was no ability to take on new vehicles, likely causing recently opened auto manufacturers to shut down or slow down.
Chart #4: Polypropylene holds the greater market share of the auto market, but as shown in our report on the auto market last week it is not as large of % of its overall demand/use relative to some other polymer chains.
As Chart #4 shows, there is more polypropylene on a vehicle than any other polymer, but as we noted in our report – linked below, autos are not as important to polypropylene as they are to some other polymers on the list – notably, nylon and polyurethane. The other major sufferers in the auto world are the paint companies and an interim release from Axalta last week showed some very bleak year-on-year comparisons. Worthy of note anecdotally is that TV commercials, at least in Houston, are increasingly focused on new autos and the deals seem to be getting bigger everyday: Discounts now adding to the extended low (or no) credit terms that began a month or so ago. The article focused on Germany suggested that the US was in better shape in terms of new car sales than Europe, but we still expect a negative surprise for the year.
The chart of the day for Friday (Chart #5 here) is related as it looked at the ever weakening butadiene market – which is partly a function of the very weak synthetic rubber market, which comes back to autos – not just new sales, but also miles driven on the existing fleet. As mentioned above, ethylene units are encouraged to run, given ethylene pricing, especially in Asia, and this adds more butadiene to a market that does not need it and struggles to deal with rising inventory
Chart #5: NE Asia Butadiene held a five-year low at a ~US$38/mt discount to avg. Asia naphtha WoW but reached a new five-year low point relative to NE Asia avg, spot ethylene values WoW (see chart) – we find Asia butadiene derivative prices remain under pressure amid weak derivative demand and see its placement (also noted in late April as an issue by Dow CEO Jim Fitterling – see LINK) as a limitation for some heavy-fed (notably naphtha) cracker operating rates currently. See our note from last week discussing this trend titled “Higher crude, Asia outages & Rubber Limits – The Three Amigos Taunting US Production” and from May titled “Price Hikes Amid Limitations – The Butadiene Handcuffs; Vinyls, PE & Other Items”.
Our building and construction analysis was driven in part by what appears to be the start of and an anticipation of a migration from some major cities (to more suburban areas), prompting an uptick in home-builder confidence, as well as hints of infrastructure bills, aimed at driving economic recovery. On the real-estate side we can see a scenario in which building continues to create new suburban homes and more socially distant eating and shopping experiences – this could result in a significant under use of some existing urban real-estate, but the demand for building products would be a beneficiary. Building and construction is a major end-use for PVC (Chart #6), and if we see a focus on the environment and health, PVC use in water pipe could benefit more meaningfully.
Housing is a significant demand driver for polyurethane for insulation, but polyurethane also shows up as major raw material for autos in Chart #4, and this may overwhelm what gains may be seen in housing. We see the Housing/Auto dynamic favoring PVC over polyurethane and (particularly) polypropylene, with polypropylene additionally impacted by significant new capacity in 2020.
Chart #6: Polyvinyl Chloride (PVC) holds the greatest market share of the Building & Construction (B&C) market and as shown in our report last week it comprises more than 50% of PVC end-market demand/use
The Week of June 8 – the link to each piece is on the day/date line & available by clicking on the title
- Asia ethylene prices rise while US values fall – we frame global reactions and highlight the arbitrage available to US exporters and the incentive to run export-oriented capacity at high rates.
- We discuss PVC strength WoW, HDPE movements and methanol trends.
- We discuss recent US polyvinyl chloride (PVC) market price support that we view as a plus for USGC producer integrated profit support into 3Q20.
- We highlight Celanese vinyl acetate monomer (VAM) price hike news – the trend in Asia feedstocks and supply issues supports the uptick in our view.
- Other items of note today range from our perspectives report targeting the need to re-shore US manufacturing to US spot benzene market support.
- We discuss global polymer chains with significant exposure to the auto sector following the PolyOne and Axalta business updates yesterday.
- We flag multiple reports highlighting strength in Asia C2 markets – we use this opportunity to further our discussion of China MTO margin strength (a plus for US methanol exporters) and US polyethylene contract price support.
- Other items of note range from the drop in natural gas relative to crude (see our chart of the day), to a modest recovery in synthetic rubber prices in China, to shippers eyeing a floating storage drawdown in 2H20.
- Asia ethylene price support relative to USGC spot levels remains on our mind – we discuss why the spread will face downward pressure in 2H20 and the lure for USGC ethylene and derivative exporters to ramp production.
- We highlight several corporate items worthy of note – these range from a few takeaways from the BASF virtual shareholder meeting, to a Sasol update, to Huntsman CEO views, to an array of initiatives on the ESG front at Dow.
- A few other items noted today include the modest rise WoW in US refining run rates, Europe PE converter issues and US chlor-alkali outages, and the drop in WoW US chemical rail loadings that questions a V-shaped recovery.
- We discuss plastics targeting the Building & Construction market – we view current trends as most beneficial for PVC producers, such as Westlake, and flag PU products targeting this market from Huntsman, BASF and Dow.
- Our chart of the day highlights the five-year low reached this week in Asia Butadiene (BD) prices relative to avg. Asia ethylene – we continue to find stiff demand headwinds facing BD/rubber applications (most notably tires).
- Other items of note range from oil-and-gas commentary, to the PQ 2Q20 business update that rings positive for a refining services demand pick-up, to Tosoh expanding bromine production in China despite recent spot weakness.
- The more we do to understand volume trends year to date in 2020 and predict possible rates of recovery, the more we note how poor domestic US chemical growth has been for the last 10 years, despite the strong economic backdrop.
- Experience curve behavior at customers is a major contributor to the poor growth (we discuss the Industrial Gas example), innovation at chemical and polymer producers has also contributed, and there has been a continuous, albeit small these days, trickle of offshoring.
- Helping to reverse the offshoring trend is really the only pro-active move that US chemical producers can make, as the other factors are likely to continue to eat away at volume growth relative to economic growth and consumer spending. But reshoring must address significant logistics challenges in the US