C-MACC Sunday Recap
Corporate Updates Lack Devotion; Commodity Markets Reflect Commotion – We Second Those Emotions
- Last week we began to see companies positioning their stakeholders for the reality of Q2, pointing to depressed demand and lower expectations for EBITDA and earning – however, there were exceptions; a few companies raising what had been overly cautious guidance. Petrochemical pricing continues to strengthen.
- The chart of the week is taken from our “Stagnation” piece and shows “at risk” companies – those with high debt relative to EBITDA and with more of a focus on durable end markets. Companies are already downgrading EBITBA expectations.
- ESG and climate change has been a little lost during the Pandemic but is alive and very well in peoples thoughts – this week L’Oreal has thrown down the gauntlet with the goal of using nothing but recycled plastic by the end of 2020, the most ambitious goal we have seen to date. We discuss.
This week we discussed 24 Chemical and related products and 41 Companies
Separately, for those who are not full-service clients, reports can now be purchased individually on our website.
See PDF below for all charts referenced
The Chart of the Week (Chart #1) reflects our concerns around chemical companies that could be at risk in a multi-year period of economic stagnation. This was covered in detail in a Perspectives Piece last week (linked here and summarized below). The stagnation scenario is driven by the risk that the virus does not come under control for several years – until a trusted vaccine is both available and widely distributed. Since we wrote the highlighted report – virus cases have spiked further in the South of the US, and Harris County (Houston) has reinstated its “stay a home” order. Regardless of rules, our view is that public behavior, corporate behavior and municipality and state-based decisions on how to manage education, could drive depressed sentiment and consumer behavior for a long time (bringing a credit crisis despite stimulus packages). Economies may not decline meaningfully, because of stimulus, but they may not manage any growth. In the chart, we have highlighted companies with either high debt to EBITDA ratios, or high durable exposure, or both.
Otherwise it has been a mixed week for chemicals, with pricing strength in Asia and falling natural gas prices in the US further widening arbitrages for moving many products from the US to Asia, including (but not limited to) ethylene, polyethylene, PVC, EDC and methanol. US natural gas prices hit a low last week that has not been seen since the 1990s and pushed the much-watched oil to gas ratio back above its 12-month average as shown in Chart #2. This does not tell the whole competitive story, however, as ethane in the US remains at a significant premium to its fuel equivalent value and the ratio of ethane to Asia naphtha prices is lagging – Chart #3. The US is recovering some of its competitive edge, but not all of it – Chart #4.
Chart #2: Despite dedicated natural gas cutbacks and associated cutbacks in the shale-based oil fields, slower domestic demand and a severe drop in LNG demand is keeping natural gas in surplus. Inventories last week approached a five year seasonal high – helping to drive prices lower.
Chart #3: The shale based oil cutbacks in the south are, however, impacting ethane supply enough to keep prices high relative to natural gas and this is limiting the US competitive edge over naphtha in Asia. If Permian oil production recovers, which current oil prices now just support, ethane could weaken, but natural gas equally, and if ethane becomes oversupplied, it has a long way to fall.
Chart #4: The ethylene cost curve has moved around dramatically this year as the Pandemic has caused behavioral changes in the chemical and energy markets – today the US has regained some of the competitive edge that it had in 2019 – but ethane probably needs to weaken for it to get back to 2019 levels. This chart will be updated in the Weekly tomorrow.
Not everything is strengthening and last week we discussed the start-up of Braskem’s new polypropylene plant in the US as a trigger for much lower profitability for polypropylene as the US moves from net importer to net exporter (Braskem’s new unit is 5% of US capacity). The capacity jump is more significant as it arrives during a depressed market for polypropylene, because of its significant exposure to durable markets, especially autos. Chart #5 shows the drop in the spread between polypropylene and propylene prices, which is likely here to stay.
Chart #5: Lower refinery operating rates are keeping propylene relatively tight at the moment, and consequently propylene is trading well above its on-purpose PDH costs. Polypropylene spreads are expected to remain limited for some time as we have new capacity in Asia and North America outpacing normal demand growth, before the setback of the Pandemic.
We had promised earlier in the year that we would write something on climate change and ESG and the potential impact on the chemicals industry. We have been distracted by the volatility and uncertainty of the Pandemic and it continues to throw up interesting news and data for our Dailies and themes for our Perspectives pieces. However, ESG and climate change is not far beneath the surface of everything else that is going on, with oil companies like BP and Shell pressing their carbon neutral by 2050 agendas, and more discussion by companies in the chemical sector about initiatives to reduce carbon production and/or capture the carbon. Money is being spent on recycling initiatives, low carbon pyrolysis replacement technologies (BASF looking at a carbon dioxide free route to hydrogen and Shell, Dow and BASF looking at electric furnace ideas, are examples).
This week L’Oreal announced that by the end of the year all of its products would be packaged in recycled polymer. The company seems to be focused on RPET (recycled PET) and we have always believed that any consumer products company looking to increase recycling would have to standardize it polymer use. RPET is more plentiful than any other recycled plastic and globally around 40-45% of PET bottles are recycled today (the number is lower in the US, <30%), mostly because of ease of separation and dedicated recycling points at places like supermarkets – similar to aluminum. High density polyethylene (when used in bottles) is a close second to PET, in terms of percentage recycled, but the overall volumes are smaller. Recycle rates for other polymers is much lower because of the problems with identification.
L’Oreal may still be challenged by availability, as many of the brand-named carbonated beverage bottle users also have aggressive RPET targets – using a layered approach, with a layer of RPET between two layers of virgin PET. The bottle makers are the lion’s share of the PET market and their demand for RPET could rise quickly. There has also been significant movement of RPET into the clothing industry as polyester fiber. This is likely be the balancing mechanism as demand for RPET in bottles and personal care products rises – less with flow to fiber.
L’Oreal has an aggressive target, but others in the same industry and in other consumer products industries have aggressive goals in the 2022/3 time frame and the impact of the Pandemic is unlikely to change any of these targets. To meet their customers needs, the polymers industry will need to accelerate initiatives in the following in our view:
- Help drive polymer standardization in single use areas such as food packaging, other protective merchandise packaging and household and personal care packaging.
- We see this favoring polyethylene and PET at the severe expense of polystyrene and (at the margin) PVC, which has limited and very specialized packaging involvement these days.
- I received two large packages this week (electronics and furniture) with more expandable polystyrene packaging than I have seen in years (it must be cheap and in surplus in China today). If the packaging had been foamed polyethylene (equally protective), the entire package could have been containerboard and polyethylene – easy to separate an easy to recycle. As it stands the EPS will likely end up in landfill.
- Standardization – will require US importers setting packaging expectations for their suppliers.
- Increase the volume of polymers made from renewable resources – including the chemical recycling of polymers.
- Work with municipalities to improve both the collection of recyclables.
We will focus more on all the opportunities and challenges presented by ESG in future work. As the ESG investment funds continue to outperform their non-ESG peers (something we believe will continue) no publicly traded company can trivialize this trend.
The week of June 22nd – click on the day or the report title for a link to the full report on our website
Monday – Weekly Margin and Pricing Analysis
Global Chemical Update – Pushing The Dragon
· Spot prices moved favorably for US ethylene derivative sellers WoW, and we frame the HDPE market shifts facing producers, such as LyondellBasell.
· Unlike the strength witnessed in most US commodity chemical spot prices WoW (that came despite lower raw materials), we find US methanol declined – we discuss the market setting facing producers, such as Methanex.
Cost Curve Views, Growth Capex Blues & The Coiled Consolidation Spring
- We think industry restructuring and consolidation will be primary sector themes during the next few year – we provide a basis for our view from recent cost curve developments, upcoming production additions (notably Asia) and relative to basic chemical (notably ethylene) price trends.
- We discuss business updates from Huntsman and Sherwin Williams that support our case for strength in Building & Construction markets.
- Other items today range from oil-and-gas commentary, to global methanol production additions and a discussion of ACC specialty chemical data trends.
Ocean view – New Braskem, TX Polypropylene Facility Will Swing US to Net Exports
- Braskem announces construction of its La Porte, TX polypropylene (PP) plant is complete – a significant supply addition in a weak demand period – we take a broadly cautious global view of the PP market in 2H20 and 2021.
- We discuss a business update from Solvay that notes relative strength in construction relative to autos and aerospace – these trends align with our view, and recent commentary from Huntsman and Sherwin Williams.
- Other items today range from naphtha markets seeing strength, the likely US June polyethylene contract uptick, and global chemical demand in limbo.
Upstream Market & Forward Curve Views; Corporate Updates
- We frame recent shifts in upstream crude, natural gas and NGL values, and discuss the forward curves and why they may be (and likely are) wrong.
- We find chemical spot price support in China (polyethylene, both caustic soda & PVC, etc.) and view it as a near-term plus for US producers.
- Other items of note include an Ingevity business update, the US chemical freight carload uptick WoW and Sasol divestment commentary.
Something for Everyone – Pockets Of Strength, Weakness & Elements of Freakiness
- We find US petrochemical feedstock costs in reverse relative to strength abroad, and varying degrees of end market strength. Further enticement for US producers to operate at capacity
- Three commodity market items to think about today: a) US natural gas weakness; b) global ethylene spot market support; c) US propylene strength
- Other items of note today range from oil-and-gas commentary, to Braskem polypropylene export views, to an array of downstream reports.
Aramco, Sasol and? – Structural Change In Basic Chemicals
- While expected, the completion of the SABIC acquisition by Aramco last week could drive meaningful and not necessarily helpful change for much of the chemical industry – given Aramco’s global expansion ambitions in Chemicals.
- Separately, as bids emerging for a share in the Sasol facility in Lake Charles, a different scale of transaction and driven by very different motivations, we discuss motivations and what might make sense for a buyer.
- Early signs of what is coming as companies likely emerge from this downturn with different perspectives, growth estimates and different stakeholder priorities.
Stagnation – The Worst Scenario?
- The spread and re-emergence of COVID suggests that the “one (and done) wave” thesis was hopeful. We now likely must live with COVID and protect against it until a vaccine is effective, available and widely used. Until then we live differently
- This raises the possibility of economic stagnation for a few years, with government stimulus perhaps preventing a deep recession/depression, but not driving growth. Continued high unemployment globally, credit issues and a subdued/depressed consumer all bode poorly for chemicals.
- With the possibility of prolonged risks to margins and volumes we would avoid companies with a lot of debt and/or a durable focus. HB Fuller, Trinseo, Olin, ASIX and Axalta would be on our watch-list.