C-MACC Sunday Recap
A Successful but Unexpected 6 Months
- We founded C-MACC 6 months ago today – we summarize below what we have produced and some of the highlights since our business formation. We are grateful to the growing global client base that has supported us as we have progressed, particularly during the current distractions and budget constraints.
- The price forecast we issued this week shows a margin peak for ethylene in Asia in June, with steady declines through 2021 and 2022. We are confident about the direction, but we recognize “steady” is not a word often applicable to this industry.
- We remain strongly of the view that the prolonged impact of COVID is underestimated in consensus views on growth, the rate of economic recovery, consumer spending and chemical company earnings, with a few exceptions.
This week we discussed 20 Chemical and related products and 33 Companies
For those who are not full-service clients and focused on specific areas of the chemical market or topics, our research reports can be sorted by keyword or topic and purchased individually on our website. www.c-macc.com
Free to read – See PDF below for all charts
In the Chart of the Week (Exhibit #1) we have chosen to show our 6 months in summary. Over this period, we have attracted global clients in and around the chemical industry, in all major geographies and in many segments of the financial services market. We are grateful for the support, the dialogue and encouragement our growing client base has given us and for the flow of ideas. If the second half of the year mirrors the first, we will have made a good start. Thank-you again for your support and encouragement (financially and otherwise). Please try to refer us where it is relevant and where you think we can help.
Exhibit 1: A simple illustration of the C-MACC product flow intended to show the high cadence, which we expect to maintain. There is never a shortage of issues to discuss and debate both short and longer-term.
Oher 6—Month Highlights
- We have followed the market gyrations of the last 4 months with diligence – explaining what we believe has been happening, while grounded is a consistent view of underlying fundamentals
- Every day we strive not only to identify the news that is relevant but also to explain why it is relevant and to whom. We are told that no-one else provides such a service.
- We began the year with the view that fundamentals were likely to be more challenging in 2020 than in 2019 because of new capacity, with particular concern for polypropylene in 2H 2020. Despite the noise, this view remains unchanged, but is reinforced by the demand slowdowns and the economic damage that has been caused by COVID – our ethylene margin forecast – Exhibit 2, shows significant concern for ethylene profitability for the medium term.
- We have published on Peak Oil and on an expected push into Chemicals by several major oil producers. This was initially work published before the Pandemic, but which has been updated since with broadly the same conclusions and identifying the risk that Peak Oil may be behind us.
- Note that some of the oil and gas infrastructure pipeline decisions in the US over the last week suggest that some participants, especially in the power sector, are pivoting more aggressively towards a faster route to less dependence on hydrocarbons.
- There will be another short (but very interesting) Perspectives piece on this subject this week.
- We have written about both the auto and airline industries and what COVID might mean for them and for the follow-on implications for Chemicals. See the comments in the Friday Daily, linked below.
- We talk to our clients regularly and address their specific interests in those conversations. If you are not talking to us regularly, you are missing a key component of what we offer.
- We are gaining popularity – several quotes in the press and over 600 followers on LinkedIn. We Tweet, but we are not sure why yet!
New Headline Summary
This week, to mark our 6-month progress, we are introducing a new Sunday Recap feature. Avid readers will note that the conclusion of each daily has 10-15 headlines under different subheadings. Each Sunday we will highlight the two or three that we think are most note-worthy and why
- A combination of coronavirus and the new USMCA trade agreement in North America is enticing increasing numbers of US shippers to consider nearshoring their supply chains – see LINK. We note our recent views on re-shoring of downstream, derivative chemical manufacturing to the US – see our note titled “A US Chemicals Health Check – Unwell Before The Virus And Logistically Challenged”
We highlight this comment only because this week we have been asked to help with a project that fits squarely in this category – it would substitute imports – drastically reduce supply chains – and have a significantly lower end to end carbon footprint.
- China launches three chemical options on Dalian Commodity Exchange. The three options comprise PP, PVC and LLDPE being viewed as helping with petrochemical risk-management and supportive for the sound and stable development of the industry.
We highlight this comment only to remind clients that attempts to create meaningful paper markets in basic chemicals and derivatives have generally been disappointing, almost always because of a lack of liquidity. Polymers are more fraught with issues because they are not homogeneous markets, with grade and technology differences limiting the paper market to only a handful of very commoditized materials where there is enough volume – this may work better in China than it has in the US and Europe simply because of the import volumes and some of the more generic end-markets.
- IEA raises 2020 oil demand estimate but warns over threat to strong rebound.
- The IEA said today that will take years for the refining sector to fully recover from the Covid-19 pandemic – see report in LINK that highlights IEA estimates that global refining utilization will post at 72% in 2020, the lowest level in 37 years, before rebounding to 77% in 2021 – this compares to a long-term avg of ~80%. We see this suggesting limited growth in co-production chemical production.
We took two headlines from the Friday Daily as they cover the same issue – more cautionary commentary about the energy outlook as the COVID situation worsens globally. The IEA may be upwardly revising a very weak initial forecast on oil demand, but they are adding more caution to their outlook – at the same time they are pouring cold water on the refining outlook. Air travel plays a big part in this, and one of the headlines that caught our eye this week was Rolls Royce’s commentary that they expect 7 years of depressed earnings from large aircraft engines – Roll Royce is in the worst segment of a bad market, but despite that, 7 years is a very long time.
Highlights – Week of July 6th
This week we published an update of our olefins price forecast and the underlying ethylene margin assumptions are summarized in Exhibit 2. We have received compliments and encouragement for our willingness to step in to the forecast arena and for the consistent logic that flows through the analysis – we will be expanding the work into polymers this month and hopefully aromatics by the end of August – as always, suggestions are welcome.
Exhibit 2: We see June 2020 as the peak for ethylene margins in Asia, with a major supply response to the higher pricing, possibly damaging Q3 margins more than we have suggested. New capacity and COVID related slower demand growth drive our weaker margin forecast. Note that recent reputable economic forecasts do not have global GDP returning to the pre-COVID expectations prior to 2026.
The other area of our forecast with near term risk is propylene, which has spiked in the US over the last 14 days. We believe this is event driven and not fundamental driven and consequently could reverse more quickly than we are suggesting in the 3Q average shown in Exhibit 3. Dow has taken its PDH unit off-line for scheduled maintenance, but this has happened at the same time that Braskem is in start-up on its new polypropylene plant. Braskem’s new facility should, at capacity, consume around 2.5% of US propylene, assuming that other Braskem units are not cut back to offset this step up in production (Braskem has talked about this facility switching the US from a net importer of polypropylene to a net exporter – which is one of the drivers of our concern for profitability for the polymer). If Braskem is buying to fill new propylene storage at La Porte, or to ensure a pipeline of deliveries, this alone may have caused a spike in the spot price.
Exhibit 3: Our underlying view is that propylene demand is more depressed than ethylene demand because of its more durable exposure, but that this demand hit is more than matched by a lack of refinery propylene availability because of improving but depressed refining run rates. Our declining forecast for propylene assumes that refining rates, Exhibit 4 will continue to improve.
Exhibit 4: US refinery operating rates have crept higher in recent weeks, but with the renewed COVID related lockdowns in many major driving states, we could see the trend stall in the near-term.
The week of July 6th – click on the day or the report title for a link to the full report on our website
- Global spot markets display outsized strength in upstream/basic chemical values in the US and NW Europe relative to Asia, and global downstream price support suggests a demand pull is underway across all regions and that the supply response is as expected.
- Our confidence has increased that significant global spot market volatility is likely for most of 2H20 before supply chains broadly normalize in 1H21. In the same way that supply cutbacks overshot in Q2 we would expect supply increases to overshoot in Q3.
- Asia ethylene prices fall WoW as confidence rises around supply in 3Q20 – this setting suggests disappointments ahead for US derivative prices and profit among integrated and non-integrated exporters, in our view.
- We think greater 2H20/1H21 Asia (and US) production (and lower chemical prices) will put focus on cost curve shifts, and we view the risk for USGC producers reflected in current US Natural gas forward prices is overblown at this point.
- Other items today target oil-and-gas news, commodity price shifts/industry reports of note, and recent news from Linde, Dow and Total.
- The surge in Asia ethylene values amid curtailed global operating rates is now a well-known story, but we find few highlighting the likelihood that the story will reverse as supply returns – we discuss with HDPE chain exhibits.
- USGC polyethylene reflects outsized price strength relative to US ethylene, and this spread holds most of the profit margin for US integrated producers – we discuss the possibility that it will contract within 4-7 months and deliver profit headwinds for US producers, such as LyondellBasell and CP Chem.
- Other items of note today range from Asia naphtha support relative to Brent Crude, to US caustic movements, to more industry restructurings.
- The USGC propylene market has surged higher – we discuss a few major differences between the driving propylene strength relative to USGC ethylene despite both markets seeing similar percentage upticks since early July.
- We take a cautious view of the propylene market in late 2020/early 2021 as production returns to normal and expect PGP-to-PP spreads to remain under pressure – we view this as a headwind for most US PP producers.
- Other items today range from Celanese acetyl chain price hikes, to LPG moving into ethylene cracker feed slates abroad, to reshoring supply chains.
- The global petrochemical cost curve steepening that began in April/early May 2020 has come to a grinding halt – a headwind for further price hikes.
- We discuss China polymer price strength WoW, US LDPE start-ups set for 2H20 and our call for USGC spot ethylene support relative to contract levels.
- Other items of note today target a few producer reports announcing “better-than-expected” 2Q20 results that we equate in some cases to watching someone dunk on an 8 foot (instead of a 10 foot) basketball goal (indeed, we find business conditions far from good/back to normal globally). We also add in commentary on Braskem chlor-alkali issues, varying upstream/feedstock trends, PDH and PP industry items of note, and US rail traffic trends
- The 2Q price strength in Asia appears to have created the inevitable supply response – we expect 3Q to be volatile but with a negative direction to ethylene prices and margins as more capacity becomes available.
- The OECD produced an economic forecast recently that included a “second wave” downside – we have adopted a hybrid of the two given the resurgence in COVID since the forecast was published. 4Q 2020 looks weak on that basis – new capacity and no demand growth.
- With the new ethylene and derivative capacity expected this year and next and with demand for all but polyethylene stalled, we see weaker margins once the volatility is past with 2021 and 2022 similar and not exciting.