A year ago we wrote the following piece: “A Tricky Tomorrow – Sector Momentum Durability, Energy Transition Complexity & Political Uncertainty Are All Scary“
Looking at our work from a year ago, we were, like most, caught a little off guard by the strength of demand in 2021, but the frequency of our reporting allowed us to catch it early, as is usually the case. We anticipated the rise of ESG and climate change based pressure on companies, but note a significant change of pace and focus over the last three months, with companies looking for solutions rather than talking in terms of more vague goals.
As you look at your unspent research and consulting budgets for 2021 and how you plan to allocate your 2022 spending, we encourage you to consider C-MACC. We are consistently ahead of the pack, we are not afraid to share our opinions, however controversial, and our engagement levels with our clients is very high. Our clients tell us that our content and the breadth of our beachfront set us apart. On any given day 20-25% of those engaged with our work are C-Suite executives.
Below you can find extracts of a couple of reports from the month of October!
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The central themes so far across chemical sector 3Q21 reports target generally strong consumer demand, significant supply chain and logistic issues, and raw material inflation within most product chains.
Production issues with some intermediate and end-market producers, such as in autos, tend to be a significant limiting factor on the demand front regarding product pull. With these items in mind, we find sector profit per unit is offsetting lost volume in many product chains to result in notably positive 3Q results, and most anticipate a strong 4Q21. Another interesting item today targets Dow, as the firm beat profit expectations for 3Q21. On the whole, we found its conference call constructive but its equity down this morning while we find coatings producer PPG, noting a reiteration of inflation headwinds with its pre-release, seeing a rise in its equity.
In our view, the key difference with the view of these producers is that most expect PPG to see raw material relief in 2022, while many see commodity chemical producers, such as Dow, as being a near-term beneficiary of high prices in its commodity products and set to face considerable headwinds from supply chain normalizations in coming months.
Our sector investor conversations targeting the commodity chemical arena reflect low sentiment regarding near-term price and profit trends. Though this has been a similar story throughout 2021 with items simply developing, most unexpectedly to move prices higher or keep them supported, it is tough to argue against a peak price and profit argument if we use Exhibit #1 (below) and #2 (see report) as basic examples among many.
October has been a busy month so far for the decarbonization of the chemical industry, and we see an increasing number of headlines around lower carbon hydrocarbons. But how much is talk, and how much is action at this point?
The Houston CCS hub, which could decarbonize chemicals, refined products, and electric power, is a bold plan but, at this stage, a pitch for higher government incentives. The Dow Canada plan has vague timing – in that project completion is estimated by 2030, providing Dow some wiggle room, which may not be a bad idea given the likely need to explore just how much low carbon polyethylene could be worth.
By contrast, the Air Products CEO was adamant that the Louisiana project passed FID and is as real as it gets. Subsequent feedback from the company confirms this intent, and the operating agreement with the state of Louisiana does have a sequestration site selected. Air Products is pushing ahead to gain some benefit from a first-mover advantage and some government support. It has more certain economics than some other projects – and the economics are key – CCS is expensive.
We talk about inflation several times a week (and it features in many of the headlines in yesterday’s daily report), but the effect that shortages, perceived or otherwise, are having on the US consumer, is significant, as buying remains high, fueled in part by rising consumer credit. COVID reduced consumer credit levels from a record high, just before COVID began, but it is climbing back again, and offers of low credit and new credit cards with new features appear every day. Inflation could have two effects – it could increase the cost of credit-based purchases, so increasing credit card debt, and it could eventually lead to a tightening of credit and higher rates, which might increase the credit default rate and exaggerate the negative economic impact of higher interest rates in general. In our attempts to combat the effects of COVID, overcome a constrained supply chain, and keep economies moving, we may be setting up a credit bubble (not this year and probably not in 2022) that comes back to bite us later.