Daily Chemical Reaction
- March-quarter industry reports continue to target strong demand, tight supply chains & input sourcing issues. This report discusses a few relevant auto market trends worth considering amid considerable disruption.
- We highlight pertinent chemical sector corporate updates (e.g., Albemarle, Arkema, Evonik, Henkel, Linde, Perstorp, PQ Group, & W.R. Grace)
- US refinery operating rates rise, but US chemical rail traffic falls WoW.
- This report discusses plastic recycling & other ESG industry trends.
See PDF below for all charts, tables and diagrams
Exhibit #1: US auto demand remains robust, and inventory issues are mounting, spurring consumers to move into the used car market. See the surge in the Manheim US used car value index in Exhibit #10, and we highlight an article titled “If you have an extra car to sell, there may never be another time greater than this”. Notice of a tight car market has surged with 1Q21 earnings reports and related business updates, though our research shows that this has been a developing issue since mid-2020. This report flags a few relevant comments from 1Q21 earnings calls and business updates, the consensus expectations that 2Q will market the trough in auto production due to the chip shortage, and the rise in input costs working in favor of keeping new-car prices elevated into 2H21.
Source: Bloomberg, C-MACC Analysis, May 2021
General thoughts today. An item that is easy to see from the freeways in Houston is the depletion of auto dealer on-lot inventory. Our feedback from those recently in the auto market is that it is difficult to find new and used cars given considerable demand strength. With this note, we highlight data from the auto industry today, showing auto sales, the PPI trend as representative of chemical input cost inflation, and the surge in used car values, to put forth the views that high prices are likely here to stay in 2021. When we factor in auto producer disruptions targeted for 2Q21 due to input shortages, notably a result of the lack of chips, we argue that conditions could worsen before they improve for US auto buyers. Interestingly, we find that the producers of chemical inputs into the auto market are enthusiastic about their products and note the hit from lost sales to the auto industry. See Exhibit #7 for an estimated percentage of the market share of the significant polymers targeting the auto market. A relevant question that we find not asked on earnings calls is whether this setting allows auto manufacturers to catch up on inventory of chemicals, though lagging elsewhere, and thus starts a “one chain or piece at a time” walk to normalization of supply chains in this category. Today, we find supply chains notably lean, as shown with commentary ranging from Albemarle to Henkel. All told, inventory replenishment will result in higher than normal demand for chemical products in the near-to-medium term. Still, we find most chains able to satisfy the level of true underlying demand more than. Commodity prices will ultimately trend lower in our view, though 1H22 is likely when we can comfortably call for lower levels. Today’s other takeaways target Albemarle lithium commentary that we view as supportive of views recently put forth by its peer, Livent, and its optimistic view of the bromine market, which is positive for peer producers Lanxess and ICL. See Exhibit #2 for the Albemarle view of each product. The other major item of note, in our opinion, is the surprise drop in chemical rail traffic WoW, which we link to logistical issues and likely producer inventory builds. However, we see volume in 2Q21 reflecting levels on avg. above that of 2Q19 based on our production outlook. We also highlight the plastic recycling diagram in Exhibit #5, and note innovations in this area, such as the BASF investment in watermark technology to help with sorting. Current chemical market conditions are hot, outlooks are positives, and management teams are broadly enthusiastic.
Global Chemical Sector Corporate Items:
The emission targets that have been suggested by the Biden Administration and will likely be ratified at the COP26 meeting later this year, while likely unrealistic, are a significant boost to the EV industry, and once again the issue of battery capacity and availability is grabbing the headlines. As we have suggested in prior research, Lithium is only one of a few raw materials that signal problems for the auto industry as producers try to introduce mass-market EVs, as opposed to what has until now been largely a luxury option. Metal prices are increasing, composite and other polymer prices are increasing and lithium pricing is increasing. Interestingly, Lithium is most likely the one area where we can see corrective supply action, as the lithium suppliers have high valuations and should have little trouble raising capital for new projects. While the current pricing dynamic is good for Albermarle and other producers, and it may last a while, we will inevitably see fresh capital thrown at new lithium opportunities and lithium recycling, which will eventually provide a correcting mechanism. We have always been of the view that the barriers to entry in lithium are much lower than the legacy producers would suggest, and we expect supply-driven price volatility in lithium, even if there is a rising trend for several years. We would be more concerned about other critical metal pricing, where new projects look harder to fund.
- Albemarle reports 1Q21 results. The company highlights little impact from auto production issues due to the chip shortage on the earnings call, with management noting it could be due to its placement in the supply chain. Albemarle inventories are low, and markets are expected to remain tight generally.
- Arkema’s profits, sales grow on higher volumes, cost management; EBITDA beats estimates
- DCM Shriram reports higher fourth-quarter earnings
- Element Solutions acquires UK-based electronic chemicals firm H.K. Wentworth
- Evonik more confident about full year after a strong first quarter
- Henkel’s adhesives business posts higher sales on industrial production recovery. See full release in LINK. Within the earnings report, management notes, “Based on business development in the first three months of 2021 and the assumptions regarding business performance in the remaining three quarters, the Management Board of Henkel AG & Co. KGaA has decided to raise its guidance for fiscal 2021. Following the sharp decline in global economic growth in 2020 resulting from the COVID-19 pandemic, it is assumed based on current estimates that industrial demand will recover significantly in 2021 and that demand for numerous categories of consumer goods will return to normal as the year progresses. At the same time, uncertainty prevails about the further development of infection rates and vaccination progress, and thus of the restrictions imposed to contain the pandemic. Given these circumstances, our guidance is based on the assumption that industrial demand and areas of the consumer goods business of relevance to Henkel – the hair salon business in particular – will recover, in some cases significantly. We expect those categories in our consumer goods businesses that witnessed increased demand in 2020 in the wake of the pandemic to return to normal as the year progresses. We further assume that there will be no widespread closures of retail and industrial businesses or production facilities in our core regions – unlike the second quarter of 2020 in particular – as the year progresses.”
- Linde posts stronger earnings on price gains. See release in LINK.
- Lonza invests €850 million to expand mammalian drug substance capacity
- Myers Industries Reports 2021 First Quarter Results. Within the release, management notes, “As a result of our growing confidence around the strength of the economic recovery and our business momentum, we are raising our sales guidance and expect to be at the higher end of our earnings guidance for 2021. We are mitigating the impact of elevated raw material costs and will be diligent in taking action to protect and ultimately expand our margins, as evidenced by the two price increases announced over the last few months.”
- Perstorp swings to profit on higher prices, strengthening demand
- PQ Group Reports Solid First Quarter 2021 Results from Continuing Operations; Reiterates 2021 Outlook. See earnings call presentation in LINK. Within the release, management notes, “Performance during the first quarter was strong. Absent the storm, our results would have exceeded the first quarter of last year, which was prior to the effects of the pandemic,” said Belgacem Chariag, PQ CEO. “We are benefiting from the economic recovery across multiple end uses and improving demand for our products and services. We remain on plan to deliver our 2021 full-year guidance for double-digit sales and Adjusted EBITDA growth.”
- Sappi swings to net loss on COVID-19 impacts, logistics issues
- R. Grace to be sold by year’s end
- R. Grace reports 1Q21 results that highlight the notable improvement in specialty catalyst and silica sales, and also an improvement in refining catalyst sales YoY. All in, the firm sees improving customer conditions.
Exhibit #2: Albemarle flags improving lithium and bromine trends but sees a weak refining catalyst market in 2021.
Source: Albemarle Earnings Call Presentation – 1Q21, May 2021
The drop in crude and oil products inventories should not be a surprise and neither should be the higher refining operating rates. The US economy is reopening and with it demand for gasoline and jet fuel. We still believe that gasoline will have a sharper snapback than jet fuel, simply because there are few safe international destinations right now and this will not rectify quickly. Gasoline demand will likely surprise to the upside frequently over the next few months and the refining rates shown in Exhibit 3 will rise further. This will likely have negative implications for US propylene prices and also possibly for benzene prices.
- API shows a sharp drop in crude, product inventories – sources
- Australian LPG exports hit record high in March
- BHP Group reports first oil production at Ruby project in Trinidad and Tobago
- Biden’s drilling halt on federal land will benefit Middle East, says Wyoming governor
- Chevron pitches $100 million in New Mexico properties as oil M&A heats up
- Continental Pivoting to Oil-Weighted Bakken, SCOOP as Market Rebalances
- Crude oil futures tad lower as Brent fails to cross the $70/b mark
- Crude oil futures rangebound on mixed EIA data
- Devon CEO Urges Lower 48 E&Ps to Focus on Generating Cash, Limiting Oil, Gas Production
- Diamondback Sees No ‘Clear Signal’ to Boost Permian Output
- Energy prices push OECD inflation up to 2.4% in March 2021
- Energy production in the United States fell by more than 5% in 2020
- Equitrans Now Delaying MVP Startup to 2022; NC Regulators Reiterate Southgate Denial
- Fund oil buying resumes as global manufacturing surges
- Goodbye OPEC, Hello OMEC. A Shift From Petroleum Power To Minerals Power
- Haynesville producer looks to take advantage of pipeline extension project
- Higher LNG to Britain likely in May and June on NBP premium
- HollyFrontier looks west with refinery deal
- India’s COVID-19 crisis to inflict a wound on oil demand, but not a deep one: FIPI chief
- June Natural Gas Futures, Cash Prices Lose Momentum Ahead of Storage Report
- LNG Suppliers Woodside, Santos See Revenue Lift on Higher Commodity Prices
- Malaysia’s Petronas eyes 4Q Pengerang refinery restart
- MENA oil investments to slow in next 5 years as gas ‘seems to be plateauing’: APICORP
- Mexico’s fuel law to take effect amid complaints
- MPL CEO Sees ‘More Urgency’ in LNG Market as Customer Interest in Mexico Project Ramps Up
- Pemex: Dos Bocas refinery costs to rise by 40%
- Port Arthur LNG final investment decision likely to be delayed to 2022: Sempra
- Saudi Aramco cuts June OSPs for crude bound for Asia, Europe, raises US
- Shell to cut Singapore Bukom refinery capacity in July
- Some 5.11 mil barrels of Murban to be delivered in June to settle IFAD futures
- Suncor Says Global Vaccine Deployments Herald Growth for Oil, Refined Products
- Tatneft crude production down 0.9% in April 2021
- The US crude inventories fall in latest week: EIA
- US base oil output reaches record low in February; refiners vulnerable ahead of hurricane season
- US crude stocks see largest draw since January amid rising demand, export surge
Exhibit #3: US average refinery operating rates increase WoW to surpass 2020 average utilization for the time of year but remain below 2019. Refineries produce ~45% of US propylene and ~60% of US benzene. Total US gasoline stocks rose WoW to stay comfortably in the five-year range for the time of year – see EIA chart in LINK. This report highlights several global energy and chemical trends impacted by US refinery production that is worth consideration.
Source: EIA, Bloomberg, C-MACC Analysis, May 2021
- US Crude Stocks Plummet as Imports Drop, Exports Jump and Production Holds Steady, EIA Says
- US crude oil imports from OPEC are down, but imports from Canada remain high
- US crude stockpiles slump after a surge in exports -EIA
- US Gulf refiners balance high margins, RVO
- Wood Mackenzie Report Projects Interesting Times For Oil And Gas Industry
Supply Chain & Commodity Chemicals:
The fall in rail car shipments is surprising but is possibly a consequence of customers wanting more inventory and holding on to rail cars for longer – this will be fine if the US demand growth for chemicals and polymers is strong enough to keep US units running at high rates, but a desire to move more polymers to export facilities would be severely hampered by a reduction in rail car availability. There is not much of an option to switch to trucking as larger polymer consumers are equipped to take rails cars, plus there is the well-documented shortage of drivers.
- April contract prices of ethylene in the US rose by USD6 per ton (US$0.25/lb)
- April contract price of terephthalic acid (TPA) in Europe dropped by EUR5 per tonne
- Axalta completes waterborne coatings plant expansion in China
- Braskem America plans to raise PP prices in Swahili America in June
- We highlight our weekly commodity price update from Monday in LINK for commodity price trends – more to come on relevant movements in a few markets to close the week will come forth in our research tomorrow.
Exhibit #4: US Chemical rail volume fell WoW, falling below the level seen in 2019 but well above the YoY level. We think shipments will stay at or above 2019 average levels in 2Q21. See the exhibit below & AAR charts in LINK.
Source: AAR, Bloomberg, C-MACC Analysis, May 2021
Sustainability, Clean Energy, Recycling & ESG:
Since we began our more dedicated ESG and Climate work we have challenged one of the fundamental beliefs of the “green” energy advocates, which is the ready availability of abundant cheap clean power quickly. Our concern has been that at a global level the demand for renewable power is likely to grow so quickly that the industry cannot keep up, and while the expected learning curve shape might continue at a process, delivery, and assembly level, capacity constraints would overwhelm these gains. We began talking about raw material limitations earlier in the year and have focused on it intensely in recent reports – including our Daily from yesterday and the ESG and Climate piece also from yesterday. The inflationary fears around metals (and around shipping constraints) are now mainstream, with good coverage in the FT today and on CNBC yesterday. The Albermarle call, discussed above, confirms the inflation and expected continued inflation in Lithium prices.
Separately, the article highlighted below talking about cost increases for the European Chemical Industry because of the carbon price increase is broadly correct but will impact some companies more than others, and some companies not at all. The Cap and Trade mechanism in Europe will result in companies increasingly having to buy credits (raising the price) if they cannot meet the carbon-cap limits which are getting increasingly tighter. However, not everyone is included in the system – the original plan included power plants and “large” industrial sources – which included the larger chemical complexes but not many of the smaller ones. One of the reasons why the carbon price is rising is because most of the low-hanging emission reduction opportunities have been taken by now, leaving the harder and more expensive ones left. Even at €50 per ton, few large CO2 emitters can afford the cost of carbon removal and are therefore better off buying the credit – which will impact earnings as the article suggests.
The dynamic in Europe could be very interesting and very different from what we are seeing in Canada for example. In Canada, the impacted industries know that by 2030 they will be paying a C$100 per ton carbon tax. They are investing now to avoid or minimize that tax – lots of carbon capture and some green hydrogen projects. In Europe, the price is there today but is still not high enough to spur investment beyond the large publicly assisted projects that we see in the UK and Scandinavia. The article below may be missing a critical point, which is that the European carbon price could get much higher than it is today because investments to remove carbon need it to. But investments take time, and in the meantime, carbon emitters in Europe could see rapidly escalating costs of compliance. In its planning assumptions a year ago, bp assumed a carbon price in Europe of $100 per ton. This is likely a critical factor in its decision to build a blue hydrogen facility in the UK. A lower carbon price assumption might not have helped justify the facility. The real risk to those impacted in the European chemical space, which would include BASF, Dow, LyondellBasell, Total, Ineos, Borealis, Shell, and others, is not the impact of the €50 per ton carbon price today but the risk that it could quickly move much higher and stay there, while investments to lower carbon emissions catch-up. The 45Q carbon credit in the US provides a future target for investors – $50 by 2026 – designed to encourage investment now, but it is not high enough on its own to make the impact that the emission goals in the US call for. This would be a relatively easy move for the Biden administration to make – increase the credit, and possibly make it last longer than the current 15 years, acknowledging that CCS is needed for 25-30 years.
- 80% Of U.S. Coal Plants Are Uneconomic As Renewables Costs Drop
- Averting the PPE waste pandemic – Medical Plastics News
- Bee’ah, PepsiCo partner on UAE plastics recycling
- BHS-Sonthofen offers control solutions for complete recycling plants
- Biopolymer Compounding on a Twin-Screw Extruder: Four Things You Need to Know
- Blanket Bans On All Plastics Is Unsustainable, Says Malaysian Plastics Industry
- Boomerang Water Aims to Wash Away Single-Use Plastics
- Brand owner launches bottle recovery initiative
- CarbonLite facility to be auctioned in bankruptcy case
- China’s Emissions Now Exceed All the Developed World’s Combined
- Cummins Inc. Signs MoU With KBR to Collaborate on Integrated Green Ammonia
- Dettol, Dubai-based startup Zeloop partner for recycling
- Doosan Heavy jumps into race to produce hydrogen with waste plastic
- EPA leader connects recycling and environmental justice
- EU carbon prices of over Eur50/mt spur CCS interest
- EU eyes 26%renewable transport by 2030
- EU to lift 2030 renewable energy share target to 38-40% from 32%: leaked document
- European chemicals industry faces €1.5bn carbon bill
- Faster German renewable expansion to reduce 2030 power prices by 10%
- Florida passes bill to limit private hauler ‘displacement,’ reassess plastic bag policy
- Gasunie, Energinet outline Denmark’s hydrogen export potential
- German packaging waste stranded in Turkey raises legal questions
- Global R-PET feedstock post-consumer bottle supply snug to very tight
- How America’s biggest coal producer will tackle the energy transition
- How technology is weaning the world from plastics
- Infinitely Recyclable Plastic on the Horizon with Next-Gen Polymers
- Japan’s KHI develops marine hydrogen tank system
- Lenzing marches towards group-wide climate neutrality with EUR 200 million investment in Asia
- LyondellBasell starts commercial production of polymers using raw material derived from plastic waste
- Michelin wants to make tires out of recycled plastic bottles
- Michigan recycling effort the ‘largest push in state history’
- Nanofibre filtration for automotive applications
- PLMJ, Abreu advise on the acquisition of a controlling stake in Sirplast by SCG Chemicals
- Recycling of plastic waste from Gundam models gets under way
- Reliability Factor: Why Renewables Won’t Easily Replace Coal Usage
- Research identifies barrier tech which ‘improves paper packaging recyclability’
- Researchers tout benefits of a US bottle bill
- Spain increases 2030 target for H2 vehicles
- State legislatures busy with plastics policy on shampoo bottles, chemical recycling, and preemption
- The Recycling Partnership, Systemiq develop tool to track packaging waste reduction goals
- Tool Enables U.S. Companies to Set Strategies to Reduce Plastic Waste
- Trash to treasure: Plastics lab a new way to recycle
- UK government Environmental Audit Committee to examine battery supply chain.
- Unilever, Croda, Afton Chemical among companies joining task force to tackle polymer waste stream issue
- Ultra-Poly at ‘semi-commercialization’ of turning shops’ bumper fascias into plastic stock
- Vitol Acquires Stake in Green Hydrogen Producer Gen2 Energy
- We still need plastics despite Trudeau’s vow to get rid of them
- You Can Make It If You Try – A Review Of Hydrogen Production Pathways
- BASF Joins Digital Watermark Initiative HolyGrail 2.0 to improve plastic sorting for recycling
- Our top stories from April 2021 – Plastics Recycling Update
- Recycling Isn’t as Clear-Cut as You Might Think
- The Future Looks Bright for Infinitely Recyclable Plastic
- Your recycling is not always being recycled—here’s why | PBS NewsHour Weekend
Exhibit #5: We highlight an exhibit today from a report from The Conference Board framing the plastic recycling and management market and offers an outlook for the future of plastic solid waste management. See report in LINK.
Source: The Conference Board, Bloomberg, May 2021
Other Industry & Downstream:
The auto industry dynamic is fascinating not least because US consumers are sucking up new and used vehicles as fast they can – driving the price inflation that we see in Exhibit 6 – but because this is happening at a time when many Americans are looking at lower vehicle utilization going forward as at least some of the working population will embrace the work from home opportunities that have been introduced because of the Pandemic. It is an interesting exercise to do in any part of the country, but we suspect that if you walk around any US neighborhood today you will find vehicles parked on streets and in driveways that look like they have not been touched, or have been barely driven in months. The argument that the vehicle is a sunk cost holds water in many cases, but the annual cost of insurance and maintenance makes no sense for a vehicle that travels less than a thousand miles a year, especially with low-cost alternatives like Uber and Lyft.
The very high price of used cars will eventually encourage people to sell the third or fourth car they own if it is getting no use, and we believe that the chip shortage, the increased demand for delivery services, and other supply chain disruptions in the auto space are creating a significant bubble.
Whether these bursts and dissipates slowly or quickly in part depends on the Administration and whether or not they propose moves to make EVs more attractive and ICE vehicles less attractive. Note that to hit the Biden emission goals in the automotive space, the US needs to take 130 million ICE powered autos off the road by 2030 – see our ESG and Climate report No 22. The suggestion of a gasoline tax would take the wind out of the auto market overnight.
- £1bn UK-India trade deals will create 6,000 UK jobs, says PM
- ASM considers South Korean metals plant
- Celebrating Small Businesses—The R&D Of The US Economy
- China suspends economic dialogue with Australia
- China’s Economic Miracle Is Ending
- China’s growth prospects, further opening-up in favor of attracting FDI inflows: OECD expert
- China’s population peak hastens fiscal reckoning
- China’s push to cut carbon emissions boosts risks for part of the country
- China’s SMEs see stable recovery
- Chip Shortage 2021: Semiconductors Are Hard to Make and That’s Part of the Problem
- Companies Warn of U.S. Labor Shortages Economists Call Temporary
- EU reviews Covid-19 entry restrictions
- Europe’s first quarter earnings growth expectations surge further
- Eurozone business growth accelerated in April as services expanded -PMI
- Eurozone producer prices accelerated in March to stoke inflation
- Fed’s Evans says policy likely on hold for some time
- Fed’s Mester: More progress needed in the job market before forward guidance conditions met
- G7 needs China to unlock the global economy
- German business optimistic, but supply chain troubles weigh
- India’s oxygen shortage slowing down industrial production
- India’s services growth slowed further in April, input costs soared
- Indonesia economic recovery to remain moderate on slow vaccine rollout
- Is it over yet? Still, no recession end date as the US economy hums along
- Mom-and-pop stores at centre of India’s $850bn retail evolution
- More robust rates lift Baltic index to near 11-year peak
- Nintendo: record year presses play on high sales targets
- Nintendo warns global chip shortage to hit Switch production
- Port of New York sets new monthly record for container volume in March
- Singles economy spurs new consumption in China
- Spending is China’s way out of this epidemic
- The US, China to assess Phase 1 deal soon, Biden trade chief says
- Turkey scrap importers’ purchasing rate rises in April
- UAZ will launch car production in Ethiopia
- UK new car sales rise in April as lockdown eases
- US automakers expect Q2 to be production trough amid chip shortage
- US Mortgage Rates Slip to Lowest Level in Almost Three Months
- US Services Sector Activity Grew Solidly in April — ISM
- US Treasury Evaluating Various Scenarios for Debt Limit Reinstatement
- Who Would Pay Biden’s Corporate Tax Increase Is Key Question in Policy Debate
- Why steel stocks have quadrupled in the last year
- Why Mega-Companies May Damage the Global Economy
- With eye on China, EU drafts rules to curb state-backed foreign buyers
- Yellen says she sees no inflation problem after rate hike comments roil Wall Street
- Used-car prices soar and the sticker shock may get worse
- Car Companies’ Profits Have Outrun the Chip Shortage—but Not for Long – WSJ
- Here’s why car prices are at record highs – and rising – CNN
- Rental car prices are so high in Hawaii, tourists are renting U-Haul trucks
- Rental Agencies Uncharacteristically Buying Used Cars
- Rental car agencies rush to build back fleets — by buying used cars?
- Rental Companies Buy Up Used Cars as Chip Crisis Get Worse
Exhibit #6: US used car values reflect notable strength, amid strong demand for autos amid new car supply issues
Source: Manheim Index, Bloomberg, C-MACC Analysis, May 2021
Exhibit #7: We provide an estimate of the % of each polymer consumer in automotive applications. Polyurethane and Nylon products reflect the greatest relative exposure to autos as a % of their total end-market consumption.
Source: Corporate Reports, Bloomberg, ICIS, C-MACC Analysis, May 2021