C-MACC Sunday Recap 45
Money For Nothing – Weaker Dollar To Boost US 4Q Profits
- The weaker US dollar has helped US commodity price momentum in 4Q 2020 but will also add a further boost to earnings for those US chemical companies with profitable offshore operations – Dow and LyondellBasell stand out.
- While pricing and demand momentum remains very strong in the US, cracks in Asia in butadiene markets suggest that the strong incentive to run new ethylene units to meet stronger ethylene demand, is beginning to impact co-products. Pricing momentum in ethylene and PVC stand-out as we enter the holidays.
Last week we discussed 21 Chemical and related products and 92 Companies
We published the third edition of our Climate, Renewable, Energy Transition and ESG weekly (the CRETER) last Wednesday – [see Link here and highlights below] – the focus was on hydrogen.
See PDF below for all charts
In this Sunday Recap we are focusing on currency and the weakness of the dollar versus the same time last year. So far, the dollar is 7.5% weaker versus the euro than it was in the equivalent period inn 4Q 2019 (it is equally weak against other currencies). We discuss the impact that the weaker dollar can have on commodity pricing below, but this weakness will be an added profit boost to US domiciled companies with profitable overseas businesses – LyondellBasell, Dow, Air Products and Linde, Albemarle, Huntsman, Orion Engineered Carbons, DuPont, and others.
Exhibit #1: The US Dollar further weakened WoW relative to the Euro (and most other major currencies this week) – see the US/Euro exchange rate trend for 2019 and 2020 relative to its 5yr range. The weakening of the USD since 1Q20 is a notable plus for US commodity prices and for domestic petrochemical production amid rising overseas demand.
The Low-Density Polyethylene US integrated margin chart in Exhibit 2 shows much of the same direction relative direction and it is an illustration of how US commodity pricing can be impacted by the movement of the dollar. With a weaker dollar, international buyers can afford to pay more for US exports and as all US grades of polyethylene as well as ethylene itself are exported, the weaker dollar helps support export and domestic pricing. As Exhibit 1 shows, currency is quite volatile, and the Eurozone is not in any better economic shape than the US. However, as you look at trade movements, US imports are very strong – especially for durable goods, and Europe has had a strong export fourth quarter which has likely helped drive the currency swing.
Exhibit 2: The US average Low-Density Polyethylene (PE) integrated margin based on a USGC ethane feed reflects a five-year high for the current time of year.
As we have discussed for some time, the current boom in commodity chemicals and polymers, while supported by some COVID related consumable increased demand, and also by some production outages, mainly in the US in 3Q, has seen most support from durable demand.
In Exhibit 3 we show US refinery operating rates – a chart we have shown many times this year. The weakness is in part driven by lower demand for jet fuel, but the bigger swing factor has been reduced transport fuel demand. Despite the lower refining rates, US gasoline inventories sit at a five year high right now. We tend to look at this data because of the propylene and benzene production that comes from US refineries, and part of the reason why propylene is in short supply today is because of a lack of refinery supply.
In this report we want to focus on the money! Gasoline demand in 4Q 2020 in the US is down around 60-65 million gallons a day (around 15%). This lack of consumption alone is leaving around $4.7 billion a month with consumers rather than with the gasoline sellers. But in addition, the price of gasoline is roughly 40 cents a gallon lower on what is being purchased, which adds close to another $3.9 billion a month to consumers coffers. This is all part of the broader switch from services to durables that we have discussed previously, but interesting to break-out.
Exhibit 3: US average refinery operating rates decreased WoW, but remain well below 2019 levels – a level that we do not think the industry will see until late 1H21. We also highlight growth in US gasoline stocks WoW to a five-year high level for the time of year – see historical chart and data in LINK.
Otherwise, Last Week
There is some supply chain evidence to suggest that production is catching up with demand and one example is the drop in Asia propylene prices relative to the US – Exhibit 4. Asia prices are still rising slowly but are disconnected from the escalating US market. The US has a near-term shortage because of production issues and strong demand, while Asia has seen significant new ethylene capacity start-up, most with heavier feeds and associated propylene production, which is just about keeping up with new demand for polypropylene production. Butadiene is weakening in Asia, exhibit 5, and we believe this is supply driven because of the new ethylene start-ups. The thirst for ethylene in Asia has been extremely high in 4Q as evidenced by some of the very high spot US ethylene prices, likely the result of incremental purchases to complete cargoes of ethylene heading to Asia – the US terminals have been busy. While this could bode well for Enterprise Products in 4Q, the company will have some offsets as its PDH plant outage is one of the reasons why propylene is in such short supply.
Exhibit 4: NE Asia propylene spot values have decreased notably relative to US values WoW. All of this, during a period of still generally tight derivative markets.
Exhibit 5: Average Asia Butadiene (BD) spot values turned lower WoW following a significant upward run since mid-year. Improved production is the key driver of BD price declines in the region, which is a near-term negative for Asia producers, such as Sinopec, Formosa, and Lotte on a per-unit basis.
Each weekend we sift through the headlines that we gathered during the week prior and look for some themes that stand-out. This week, we focus again on market momentum, with a very long list of headlines and we discuss the transformation of Trinseo.
Momentum – Driving Flat Out (on An Unfinished Overpass Perhaps)?
The market strength headlines have picked up this week, but we highlight a few news items at the end of the list that might be a cause for concern and note the lower propylene and butadiene prices in Asia discussed above. The first couple of headlines are more macro in nature, but the list includes positive profit guidance and several price initiatives. Some might suggest that pricing initiatives are being driven by higher base chemical pricing, but we would note that it is almost impossible to get pricing when a customer’s demand is declining, so the price initiatives suggest that demand remains strong.
This is a broad manufacturing rebound, with headlines suggesting strong demand for steel and aluminum and strength within US manufacturing as well as Asia. Europe is looking better but some of the manufacturing pull in Europe appears to be for higher exports not domestic consumption.
The three highlights in RED are signs of weakness and may be some of the red flags that we are expecting and have discussed in work focused on how consumer spending patterns may change once inoculations for COVID become more widespread – covered last week in our Sunday recap.
We keep our focus on PVC as we estimate that most of the strength in PVC demand – which has driven 5-year high pricing – see exhibit 6 – is coming from housing and infrastructure spending growth, something that is not only likely to continue into 2021, but to accelerate. Beneficiaries are Westlake, Orbia, Shin-Etsu, Formosa, OxyChem, and Ineos among others.
- Global GDP rebounded from recession in Q3, but COVID-19 threats remain
- US imports from China surge in 2020 despite tariffs, pandemic
- Avient boosts its 4Q20 EPS outlook by 20% to US$0.48 and bases the increase primarily on improved demand conditions across all business segments and regions – see release in LINK.
- Umicore upgrades guidance as fourth-quarter performance exceeds expectations.
- Lanxess raises prices for engineering plastics in EMEA
- France’s October chemicals output up 7.3%, nears pre-pandemic level
- US ethylene exports to China soar despite Covid-19, trade war
- US ethylene prices reach new 2020 highs
- US propylene prices continue to surge
- China’s industrial output grows by 7pc in November
- FedEx, UPS Manage Surge in Packages With Strict Limits on Shippers
- Recovery faster than expected; economic indicators encouraging – PM Modi at FICCI event
- Bounce in eurozone business activity overshadowed by fresh lockdowns
- China’s factory recovery steps up as export, consumer demand grows
- AOC hikes resins prices in EMEA on rising raw material, logistics costs
- BASF to increase caprolactam, nylon-6 prices
- Dow increases TDI and polyol prices in North America.
- Port of Los Angeles posts strong November liftings as trans-Pacific trade remains untempered
- Textile industry bounces back stronger
- Lanxess increases prices for engineering plastics
- MEGlobal raises ACP for January 2021 by USD10 per tonne
- US LNG exports set a record in November
- ‘Artificial raw material scarcity’ soars plastic prices, sends market into frenzy
- China xylene prices rise on upbeat market sentiment
- China’s petrochemical industry expected to see more robust growth in 2021
- China’s largest mills raise steel output to new record to help fill global supply gap
- China sees record Aluminum (Al) production in November
- United States Steel Corporation Provides Fourth Quarter 2020 Guidance. Within the release, management notes that “Flat-rolled customer demand in the US and Europe has improved throughout the fourth quarter, fueled by consumer-driven end-markets such as automotive, appliance, and packaging”.
Exhibit 6: Avg. Asia polyvinyl chloride prices hit a five-year high last week…
- Germany’s petrochemicals end the year on brighter note than polymers, inorganics
- Dow Chemical raises January US polyethylene prices by US$0.05/lb: company letter notes that this uptick is in addition to the December US$0.05/lb nominated MoM increase.
- Spot US Low-Density Polyethylene (LDPE) climbs to highest pricing in 28 months
- China spot LDPE values weaken from late November highs
- Polypropylene (PP) futures fell 3.2% in China amid expectations of lower demand
- Singapore Nov petrochemical exports down 18.5%, NODX slips 4.9%
- Polyethylene demand boom should not obscure focus on major changes in industry fundamentals
- See PlasticsExchange commentary on the ethylene market WoW that suggests upward momentum has slowed following the recent surge
- For US Economy This Winter, a Freeze and Then a Thaw
- Infrastructure-Investment Binge Will Continue—Even Without Washington
- OQ to increase oxo intermediate prices on strong demand, rising raw material costs
Some thoughts on Trinseo’s Transformation
Trinseo, is likely faced with the same dilemma as many of the big oil companies. It is focused in a suite of products that may be less popular longer-term – this is especially true of styrene polymers, which are harder to recycle and easy to substitute. A bit like BP, Shell and Total, Trinseo has likely concluded that it is time to rethink the portfolio, even if change might be expensive and unpopular. Change is likely less value destructive that curling up in a corner and hoping. The Arkema transaction is a step in the right direction in our view – a good step, but only a step. The company will need to get out of businesses that are in secular decline (or find a way to ringfence them and just take the cash flows – if there is no buyer). Huntsman has reinvented itself several times over the last 35 years, also divesting a styrene business at one point. These changes are possible, and can add value – but the path is often volatile. The Huntsman stock chart in Exhibit 7 shows some of the ups and downs, but several of the major moves – into styrenics/out of styrenics etc. – happened before the company was taken public.
- Trinseo to acquire Arkema’s PMMA/MMA business for $1.4 billion. Also, see the Arkema release in LINK and article titled: Trinseo sees Arkema PMMA deal as the first step in transformation.
- US Trinseo cuts dividend, mulls synthetic-rubber sale
Exhibit 7: Huntsman stock chart. Lots of volatility, partly because of transaction activity, but a reasonable argument could be made that the stock would be lower than it is today have the portfolio transformation (which is on-going) not taken place
We highlight Trinseo above not because we have a strong view either way of the company or the announced transaction, but because we believe that we are going to see more of this – more significant portfolio shifts as companies decide what they want to keep and what they are better off without, especially in a post-COVID more intense ESG world – we will cover this in more detail in the CRETER Weekly on Wednesday.
The week of December 14th – click on the day or the report title for a link to the full report on our website
- We find Asia strength leading the charge in support of global commodity chemical prices into year-end – we frame our view, discuss a special situation, and highlight a few integrated beneficiaries that should benefit into 1H21.
- Other items highlighted in this report: Asia spot PVC prices hit another five-year high; US spot methanol hits a five-year high for this time of year; Concerns mount around non-integrated derivative producer profit trends
- Chemical producer 4Q profit guidance updates continue to emerge, citing better-than-expected demand. This report discusses these business updates and commodity spot price trends suggesting per-unit profit shifts in 1Q21.
- We highlight multiple corporate items (e.g., Avient & Umicore 4Q20 profit guidance upticks; Air Liquide, Chart Industries, Trinseo, Arkema, Phillips 66, Pembina & LG Chem strategic moves; Lanxess & OQ price hikes)
- This report highlights numerous other relevant items – these range from the recent decline in Asia butadiene prices; to the demand-pull on naphtha from Asia ethylene cracker start-ups; to the use of clean-energy SPACs.
- The commodity chemical market currently reflects significant strength into year-end 2020 and we foresee price support in early 1Q21. In this report, we discuss recent findings in MDI, methanol and PVC that are worth notice.
- We highlight multiple corporate items (e.g., BASF MDI news & price hikes; SABIC, Posco, Mitsui Chemicals & BP strategic moves; Methanex & OQ price hikes; Odebrecht shopping its Braskem ownership stake)
- This report highlights numerous other relevant items – these range from the North Sea as a storage reservoir for CO2, to recent capacity utilization shifts at US manufacturers & chemical producers; to Joro introducing an app that will estimate your carbon footprint from retail purchases as you spend
- We find continued strength in building products and packaging demand supporting price increases in related commodity chemical products. We flag a few relevant products and beneficiaries of per-unit margin improvement.
- We highlight multiple corporate items (e.g., BASF, MEGlobal, AOC, Dow & Lanxess price hikes; Braskem & Ineos strategic moves; Potential Lanxess interest in Emerald Kalama Chemical; Sipchem facility shutdown).
- This report highlights numerous other relevant items. These range from the downtick in US refinery utilization rates WoW, to our view of US LDPE spot values relative to Asia and the latest US contracts, to US Chemical rail traffic moving lower but posting a five-year high for the current time of year.
- US spot ethylene values increased during the past few weeks relative to Asia values. We discuss this tightening relationship, global sector profit trends, and our positive view of the US commodity chemical sector near-term.
- We highlight multiple corporate items (e.g., BASF, Orion Engineered Carbons, West Coast Olefins, Braskem & BASF strategic moves; Sipchem & US Steel commentary; Enterprise LPG-Powered VLGC loading).
- This report highlights numerous other relevant items. These range from the notable weakness in the US dollar relative to the Euro since 1Q20 (Ex. #6), to a view of carbon prices & tax initiatives (Ex. #5), to the difference between US and Asia ethylene cracker cash costs relative to the oil-to-gas price ratio.
- The “learning curve” expectations for those pushing the quick adoption of Green Hydrogen are likely far too hopeful; not because the technology to produce green hydrogen cannot improve, but because the expectations around the affordability and quantum of low-cost electricity is likely to fall well short of potential demand.
- The science and the low carbon promise of green hydrogen is compelling, but a long blue hydrogen runway is likely the least economically painful way to achieve lower CO2 in the near-term, while building a hydrogen infrastructure that can work for the long-term. Blue hydrogen investment will not occur without some return assurances
- Otherwise, this week, the “I want to be green” headlines continue – with the Canada CO2 tax hike the most striking – see below.