Daily Chemical Reactions

The Locomotion – Global Chemical Supply Chains Far From Normal, Product Availability Improves
November 26, 2021
Commodities Mentioned:
Plastics (PVC, PP, PE, PU, PC, PET, etc.), Recycled Resin, Propylene, Ethylene, Benzene, Lithium, Carbon Black, Carbon Dioxide, Hydrogen, Methanol, Natural Gas/NGLs, Crude/Naphtha
Companies Mentioned:
Borouge, ExxonMobil, Chevron, JERA, Lukoil, Petrobras, Linde, KazMunayGas, Cumberland Plastics, Lanxess, LyondellBasell, Braskem, Pinnacle Polymers, Methanex, Southern Chemical, Celanese, Mitsui, Greiner, BP, BASF, Petrobras, Ineos, Asahi Kasei, PTT Group, Tessenderlo, Wartsila, Tokyo Gas, Cosan, Natgasoline

Daily Chemical Reaction

The Locomotion – Global Chemical Supply Chains Far From Normal, Product Availability Improves

Key Points:

  • Global chemical production indicators suggest rising product availability. Though most supply chains remain imbalanced, we comment on why lower US commodity chemical prices are likely in 2022 and other relevant trends.  
  • We discuss pertinent chemical sector updates (e.g., Methanex, Braskem, Linde, Petrobras, Tessenderlo, PTT Group, Ineos, Lukoil, & others).
  • We note relevant ESG items worth notice, ranging from EU carbon values to CCUS development trends. We also highlight our latest ESG thematic research Carbon Prices – Inequitable and Uncertain – Not What We Need.
  • We discuss numerous other pertinent chemical sector items in this report.

See PDF below for all charts, tables and diagrams

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Exhibit #1: US Chemical rail volume grew modestly WoW but remain at the high-end of the five-year range for the time of year. The multi-week volume trend remains positive. We expect continued trend support in 4Q21 and model US (& North American) shipments in the December quarter of 2021 at or above 2019 levels. This report discusses US (& North American) rail volume developments and other relevant chemical sector trends.

Source: AAR, Bloomberg, C-MACC Analysis, November 2021

General thoughts. At the close of the week, a trend standing out to us is the evidence of improved chemical product flows in the US. This trend is significant because the US is a premium-priced commodity chemical market relative to Asia, where product availability is less of an issue. Improving US supply will put downward pressure on domestic prices. We find evidence of downward pressure in polymer chains already occurring, such as in polypropylene (PP). We highlight methanol as also set to see a downward move in contract prices MoM in December and flag monomer price support that is being driven near-term more by elevated demand and higher polymer production rates relative to feedstock price movements. With greater production in motion, the next logical question is whether the product can arrive at customers. We find significant issues at US ports but find most of this is based on problems with importing products. Based on this, higher domestic production rates and product flow in the US, a country that exports a significant share of its polymer production, will put downward pressure on US commodity prices from within. We do not anticipate a substantial price decline until the lower-priced imported product becomes available. Indeed, a shock to demand caused by a shift away from durable products or as a result of another COVID variant shock could further shift global supply chains, but we think more indicators suggest healing than provide evidence of further imbalances currently. Other items of note in this report include the EU carbon price hitting a record this week. We highlight our weekly ESG report on this market titled Carbon Prices – Inequitable and Uncertain – Not What We Need. This report also comments on the IEA work on CCUS developments, and we highlight numerous industry demand items worth consideration in 4Q21. All in, we anticipate strong 4Q21 chemical sector results YoY but our views remain cautious for 2022.

Energy/Upstream:

As we go to press today we are looking at a collapse in the stock market and a collapse in crude oil prices, both fueled by a renewed COVID concern. The new variant that has emerged in South Africa is causing countries to impose travel restrictions and there are talks of further lockdowns. Crude oil is falling more on this news than on the news that several countries will release reserves as there is an expectation that economic growth will be hit by the new wave. Airline stocks are down more than 10% today as travel is again expected to face restrictions. The sharp contrast with natural gas prices which are higher today in the US is because natural gas is much more of a stay-at-home fuel than crude oil, and the weekly inventory numbers showed a drawdown, albeit not large.

Separately, it is interesting to see ethane weakening relative to natural gas – Exhibit 3. We have two ethylene plants in start-up right now, which should add to ethane demand, as well as additional demand for export to Mexico. The US has added fractionation capacity in anticipation of the new demand and neither BayStar nor ExxonMobil/SABIC is likely operating near capacity yet.

Exhibit #2: Brent Crude values fell relative to US Natural gas this week, while Ex-US naphtha values showed relative support compared to USGC ethane on average. The global petrochemical cost curve remains flatter at the feedstock level – a negative for US producers relative to Asia – when compared to its steepest levels in 2021.

Source: Bloomberg, C-MACC Analysis, November 2021

Exhibit #3: USGC ethane values on an MMBtu basis have trended lower relative to US natural gas since October, despite both at lower levels relative QTD. We model US ethane price support near term amid rising demand.

Source: Bloomberg, C-MACC Analysis, November 2021

Supply Chain, Commodity Chemicals, & Chemical Sector News:

There is not much to discuss today, especially as the movements in energy today and the emerging risk of further travel restrictions and lockdowns could drive swings in commodity chemical prices, and the stability of this week could be old news quite quickly. The refining rates could swing back down for example if there are further international travel restrictions and jet fuel demand slips again. This would be negative for propylene and benzene supply.

Exhibit #4: US average refinery operating rates rose WoW, the fifth consecutive uptick but usage rates remain below 2019 levels for the time of year. US refineries, per our view, produce ~45% of US propylene and ~60% of US benzene. US regular gas price remain near 2021 highs and inventory levels sit near the low end of the five-year range – both favor upped refinery runs near-term, suggesting increased refinery chemical production into year-end 2021 (see LINK).

Source: EIA, Bloomberg, C-MACC Analysis, November 2021

Exhibit #5: US spot polymer-grade propylene (PGP), US spot benzene and US spot ethylene values show support WoW amid still strong derivative production. We anticipate US production rates to remain elevated into 2022.

Source: Bloomberg, C-MACC Analysis, November 2021

Exhibit #6: We highlight contract North American Methanol price trends relative to US spot levels to show that the December posting reflects an upward trend on a relative basis to spot values when compared to mid-year 2021 levels.

Source: Methanex, SCC, Bloomberg, C-MACC Analysis, November 2021

Sustainability, Clean Energy, Recycling & ESG:

We note the IEA work on CCUS in several charts below and this is good timing relative to our ESG and climate report this week – which focused on carbon pricing, something we believe is necessary to promote more real activity in CCUS. In Exhibit 7, it is important to note how many projects are in “development” rather than operational or under construction. It is also worth noting that the number of projects under construction has not grown since 2019. One of the reasons for this is that increased activity at the planning stage is then followed by a delay associated with permitting, which depending on the region can take 2 plus years. The other constraint is uncertainty, with many of the projects under consideration waiting for something to change, either local values of CO2 or mandates or direct government support. For example, the large project planned for Houston and championed by several oil, power, and chemical companies is unlikely to move forward without a higher tax credit for CO2 sequestration or without some other incentive. The mid-West projects targeting the ethanol industry will also need permits, not just for the wells but also for the many hundreds of miles of proposed pipelines.

The other important factor – which is partly shown in Exhibit 9 – is that much of the CCS we are seeing announced is around greenfield investment. This is partly because in some regions it is likely going to be challenging to get any carbon-intense growth project approved without a carbon plan, but it is also a function of how much less expensive it is to capture carbon if the facility is designed for it rather than a refit. While these investments may be important for growth and have some eventual linkage to overall carbon reduction – for example, blue hydrogen to blue ammonia to Japan to offset coal usage – they generally do nothing to lower the carbon footprint of existing facilities. The Dow Canada project is an interesting test case as the overall investment will eventually lower the carbon footprint of existing facilities. However, it should be noted that the carbon incentive in Canada is higher than in many regions.

Separately, the jump in the European carbon value over the last few days likely reflects a better understanding in Europe of how much heavier feed power capacity is going to be needed through the winter. As we have pointed out in recent research, faced with paying more for a carbon credit of buying LNG at $30+ per MMBTU, any utility with flexibility will choose to burn coal and buy the credit. The positive outcome will be to elevate carbon prices to levels that justify abatement investment without additional subsidies – see our ESG and Climate weekly – linked above.

Exhibit #7: Global pipeline of commercial CCUS facilities operating and in development, 2010-2021Source: Carbon capture in 2021: Off and running or another false start? – Analysis – IEA, November 2021

Exhibit #8: Global CCUS projects in development by region or country, 2021

Source: Carbon capture in 2021: Off and running or another false start? – Analysis – IEA, November 2021

Exhibit #9: Global CCUS projects in development by application, 2021

Source: Carbon capture in 2021: Off and running or another false start? – Analysis – IEA, November 2021

Exhibit #10: EU carbon dioxide (CO2) values took another step higher WoW to hit a record level, closing the week 19% higher since the start of 4Q and 118% higher YTD. Energy cost inflation in 2021, as illustrated by our discussion of global natural gas prices in our recent research, and also a movement to more coal-based power has been a major driver of higher EU CO2 values. We discuss this development and other industry trends in this report.

Source: Bloomberg, C-MACC Analysis, November 2021

Other Chemical Industry, Demand & Downstream News:

The headline on China Direct Foreign Investment is timely as investing in China is the core theme of our upcoming Sunday piece this week. We are seeing many western chemical companies up their investment in China this year, all chasing a return to domestic demand growth that has been negatively impacted by COVID, as well as some logistic constraints in the export market. A fresh COVID wave will quickly extinguish some of the more enthusiastic headlines below and may give those investing in China some sleepless nights through 2022 as the money gets spent, but we would expect the underlying domestic demand growth in China to pick back up again eventually. The risk for all investors in China is exactly what we have seen this year, which is that too many people chase the same growth expectation and the country ends up in surplus and forced into the export market but without any underlying feedstock advantage. In the Sunday piece, we will also discuss geopolitical risk.

Exhibit #11: Total US rail traffic rose modestly WoW and, posted below 2019 levels. We also highlight Chemical rail traffic (Ex. #1) and North American rail traffic trends by-product (Ex. #12).

Source: AAR, Bloomberg, C-MACC Analysis, November 2021

Exhibit #12: North American rail volume decreased WoW, but we highlight above-average strength in chemicals and still notable weakness in Motor Vehicle & Parts traffic. See the full November AAR update in LINK.

Source: AAR November 24 update, November 2021

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