Daily Chemical Reaction
Line ‘Em Up– Market Indicators Mixed to Start The Week, Long Term Factors Favor Commodity Support
- We highlight a few notable factors stoking market optimism to start the week, but our analysis concludes that market indicators overall remain more positive for US petrochemical producers relative to Asia and European peers.
- We flag pertinent energy, chemical, and other corporate updates (e.g., bp, WACKER, Olin, Kuraray, Formosa Plastics, OQ Chemicals, Solvay, others).
- We discuss relevant ESG items that range from WACKER initiatives to cut GHG emissions to conclusions from the BP energy outlook.
- We discuss numerous other pertinent chemical sector items in this report.
See PDF below for all charts, tables and diagrams
Exhibit #1: The PPI for both virgin plastic and recycled materials reflect support MoM in February, following notable declines to start the year, and the overall PPI for final demand advances 0.8% in February; goods rise 2.4%, services unchanged. The market has reacted positively to a lower PPI reading than many expected and the recent pullback in crude oil prices is helping promote optimism to start the week. While these issues work in favor of lower costs and limiting consumer demand destruction, we continue to view it as a global concern, with many Ex-US chemical producers facing significant risk in the near term.
Source: Bloomberg, C-MACC Analysis, March 2022
General thoughts. A major YTD trend has been surging global energy values that have worked to steepen the global petrochemical production cost curve in favor of US producers. We noted an uptick in Asia prices to start the week due to production cuts amid unprofitable operations. We find three things of note today with these items in mind. First, we see an increasing level of news to start this week commenting on mounting COVID cases in Asia, such as one noting that Covid cases are rising as omicron’s ‘stealth’ subvariant spreads worldwide. Some are linking it to a drop in crude values, which is working to lessen concerns of consumer demand destruction. We find this quite conveniently timed amid the Russia/Ukraine conflict. We also find it interesting that most appear to be looking past the news of a stealth subvariant as not impacting consumer trends. One can only surmise that the world has become accustomed to COVID spending habits and is not significantly concerned with returning to this setting. We also find a notable uptick in the US PPI, which did not increase as much as some economists thought, but the posting reflects an upward trend since 2020. The other major issue is that freight rates are rising, not falling, which at a minimum suggests global supply chains issues are not behind the global market. We also highlight news of strong online consumer spending that is helping to keep this issue in motion. Overall, lower crude oil values and lower Asia petrochemical prices are negative for US petrochemical producer profit, suggesting lower export prices. But, we remain skeptical of the early-week optimism, as we still find more indicators in favor of commodity chemical trends relative to the start of the year than otherwise. In our view, US traditional petrochemical producers, such as Dow, LyondellBasell, Olin, Nova Chemicals, Westlake, and peers, remain in a good position.. With significant low-cost North American assets, we think many US producers are also in an excellent spot to offset the headwinds they face across their overseas assets until demand growth begins to overtake global supply by mid-decade in most commodity chemical markets. Other items in this report worthy of notice include quarterly results from WACKER that highlight a positive view of 2022 trends in silicones that are also a plus for peer producers Dow, Elkem, and Shin-Etsu. We also comment on the BP energy outlook for 2022 and find several other notable ESG and clean energy strategic announcements worth consideration. Demand concerns, feedstock uncertainty, and a wait-and-see approach to government policy towards ESG and clean energy appear to be keeping growth Capex limited for now.
One of the more well-recognized rules of war is that the best battle plans are generally rendered useless after the first encounter with the enemy. Consequently, traders making big bets on oil price direction based on incremental news around the Russia/Ukraine conflict are taking very major risks in our view. One Russian shell that falls in the wrong place and oil is back at $120 per barrel – a negotiated peace probably takes the price down again. We would bet on only one thing – volatility. As the chart shows, the West is so dependent on Russian oil, gas, and coal, that without some sort of peaceful resolution that thaws relationships with Russia (which seems very unlikely), the West will be looking for alternate supplies of energy and this may keep international prices high. We may reach an interesting dynamic where Russian crude sells at a discount – and moves to a mostly spot market, unless some large consuming countries are willing to commit to Russian supplies. Today such a move would attract very negative international attention but things may look a little different in a year.
The collapse in Singapore’s naphtha prices, implied in Exhibit 3, will be a combination of a reaction to the pullback in oil prices, but also a pullback in demand as several ethylene producers in the region have cut back operating rates or shut down because of escalating costs. Refineries can reconfigure to make less naphtha, but generally not overnight, and in the meantime, prices are falling as sellers seek out demand. Prices may fall far enough to justify restarting ethylene units, but ethylene producers will want some clarity on both costs and prices before restarting as these units are not designed to be run on a campaign basis. It is also worth noting that most incidents on ethylene units happen when facilities are not at a steady state – so during shutdown, start-up, or maintenance. Swinging operating rates in Asia increase the risk of a major facility incident.
- Asian refiners confident of finding Russia crude alternatives but seek OPEC+ supply boost: panel
- Australian gas producer Senex agrees takeover by Posco
- Backed by Government, Argentina E&Ps Upping Natural Gas Production
- Can the EU reach its ambitious new targets to cut reliance on Russian gas while maintaining energy security?
- China Q2 refining margins outlook bearish amid COVID-19 outbreaks, crude uptrends
- Canada lacks energy export infrastructure to help Europe
- China ‘last impediment’ to oil demand recovery
- Energy markets at risk from ‘undersupply’: ADNOC CEO
- Expensive LNG bunkers yet to force gas-fired dry bulk ships to switch fuels: sources
- EU adds Russia sanctions to ban imports of key iron/steel products
- Feb bunker sales fall for fourth straight month to 3.50 mil mt
- FERC allows New York entities to recover costs if transmission project abandoned
- Fuel for Thought: US oil, gas industry not keen on playing ‘swing producer’ role, despite government pleas
- Japan eyes LNG investments to cut dependence on Russian energy: minister
- Natural Gas Futures Retreat Early Amid Weather-Driven Demand Weakness
- Oil drops again, now more than 25% below recent high
- Peabody Energy: soaring commodity prices make headaches of hedges for producers
Exhibit #2: Europe is a key destination for Russia’s energy exports
Source: EIA – Today In Energy, March 2022 Our analysis of BP’s energy outlook. We provide a link to the document in LINK.
Exhibit #3: We highlight a sharp decline in Singapore naphtha values relative to USGC ethane, which we in part link to naphtha falling with crude values but also find demand cuts in the region working to offset any supply issues.
Source: Bloomberg, C-MACC Analysis, March 2022
- REFINERY NEWS: Plants in Europe seek alternative crude supplies
- Shandong independent refiners’ product output falls 17.3% on month in Feb
- The oil market and the four horsemen
- The Soviet pipeline that keeps Europe hooked on Moscow’s oil
- US gas-fired generation gains as Russia-Ukraine war hikes coal prices globally
- US shale oil production growth revised downward, natural gas outlook rises: EIA
- Williams expands Haynesville gas ambitions with Trace Midstream acquisition
- Russia ready for ‘harsh confrontation’ with EU in energy sector: official
- Russia-Ukraine war driving up feedstock costs triggers petrochemical crisis in Asia
Supply Chain, Commodity Chemicals, & Chemical Sector News:
First, today, we want to focus on the Olin news that the company is shutting epoxy capacity in Germany. While the company is likely telling an accurate story around demand weakness and Ukraine-related uncertainty, we note the impact that the Olin has had on the US chlor-alkali business with its select plant closures in the US. The effect has been a tighter market and higher margins for all, including Olin. Olin’s share price is up dramatically since the company took its different tack to chlor-alkali. The stock has reacted negatively to today’s closure news, but perhaps the market is reading this announcement incorrectly. The Olin epoxy business is not that strong in general and the epoxy markets overall, while attractive in pockets, have been relatively weak and plagued by cheap exports from Asia for many years. If Olin is attempting in epoxies what it has achieved in chlor-alkali then the news should be read positively, not just for Olin but for other epoxy makers, most important being Huntsman and Westlake. If the Ukraine crisis gives companies excuses to shut older and less efficient capacity across many product chains, the net effect could be a better supply/demand balance in a recovery and higher margins. We would be buyers of Olin rather than sellers on this news.
Separately, the very strong Wacker results and bullish outlook make sense for a company very exposed to the solar industry. The solar companies themselves may be struggling to make money, but their demand is very high and their thirst for raw materials equally high. In bp’s annual review of world energy, the company is forecasting a three-fold increase in the rate of annual renewable power investment and all of this will require more materials – setting up polysilicon suppliers like Wacker very well. The negative for Wacker, of course, is the high European footprint and the current increase in energy costs in Europe. Given the strong demand for polysilicon, Wacker should be able to raise prices – adding to the woes of the solar panel makers.
- American commodities trend bullish on Ukraine conflict
- Asia styrene and styrenics balance to hinge on Chinese exports, demand
- Brenntag expands distribution agreement with Elementis in APAC
- China petrochemical markets bearish; new COVID-19 wave hit hubs
- Covestro doubles PC compounding capacity at India facility
- Ecolab to buy back $500 million in shares in 2022
- Europe and Asia production costs and margin erosion, concerns for April loom
- Exide Industries and Svolt collaborate to build Li-ion cell plant in India
- Fertilizer markets in turmoil as Russia moves to suspend exports
- Flooding delays Australia’s grain exports
- Formosa Plastics begins restart of Point Comfort, Texas cracker: sources
- Global stainless steel production up 10.6% on year in 2021: ISSF
- Japan’s Mitsui Chemicals to shut its sole PTA plant in Aug 2023
- Kuraray to stop PVA gel production
- Lubrizol appoints new Berkshire Hathaway executive as interim CEO
- Mercedes-Benz and Primobius to build battery-recycling plant in Germany
- India fertilizer, edible oil shortages worsen amid Ukraine war
- Mideast TDI demand steady amid tight supply, high feedstock costs
- Mitsui Chemicals to terminate production of PTA in Japan
- More urea price increases due for a market already at historic highs
Exhibit #4: US spot ethylene, propylene and benzene values have trended lower to start the week. In part, we link it to increased USGC production, given greater confidence in derivative market support as a result of a recent upturn in exprot price trends. We flag ethylene production costs by major feedstock and region in our weekly report in LINK.
Source: Bloomberg, C-MACC Analysis, March 2022
Exhibit #5: Asia ethylene values remain at a significant premium to US ethylene values, we find that Asia derivative prices are also higher as noted in our weekly report. This trend is a plus for US merchant ethylene sellers, such as Nova Chemicals, and is also a benefit from non-integrated US ethylene buyers, such as Celanese, relative to peers abroad.
Source: Bloomberg, C-MACC Analysis, March 2022
- Nouryon posts increase in revenue on higher volumes, pricing actions
- Olin to curtail epoxy production in Germany
- OQ Chemicals raises carboxylic acid prices on higher energy, raw material costs
- Petronas and Eneos join hands on hydrogen-to-methylcyclohexane project
- PhosAgro CEO quits after EU announces sanctions
- Polyester products whole line in loss, why PET bottle chip still lucrative?
- Russia to limit grains exports to license holders: report
- Russian govt directs metal companies to cut profits, keep domestic prices low
- Sadara earnings, sales soar on higher selling prices, gain from debt restructure
- Sibur chairman hit by EU sanctions
- Sipchem affiliates complete maintenance turnarounds at Jubail
- SK On partners with Ford and Koç Holding to build EV battery plant in Turkey
- Solvay increases guar capacity in France
- Supreme Petrochem to expand EPS capacity in India
- Trinseo raises March PC prices in Europe
- Uncertainty on the rise despite strong M&A market
- War in Ukraine dominates commodity markets
- We highlight our global chemical weekly that highlights global commodity chemical prices in LINK.
- Wacker’s net profits more than double on higher volumes, prices, cost management; EBITDA beats estimates. See today’s press release in LINK.
Exhibit #6: WACKER highlights an expectation for strong consumer demand and higher prices across its four business segments, following a year of considerable profit growth in its polymers, silicon and polysilicon units.
Source: Wacker Earnings Release Presentation, March 2022
Sustainability, Clean Energy, Recycling & ESG:
The annual review of World energy from bp shows a stark reversal of the company’s position only a short while ago. When the pandemic hit, bp went on record suggesting that we may have seen peak oil demand in 2019. It was an interesting theory and one that we discussed at the time, but it underestimated the impact that aggressive COVID-related stimulus would have on consumers globally and we suspect that bp, like many others, overestimated the rate at which renewables could be added. Now the company is exploring a very different scenario, one in which the current momentum in the energy market continues and the rate of renewable additions slows, either because of more limited capital or because of material constraints – or a combination of both. This momentum case puts the world very far away from the Paris goals for 2050 and is likely a bit of a shock tactic from bp, possibly aimed at waking governments up to the impact of their lack of coordination and incomplete policies. Historically, bp has presented some very solid analysis in this report and it would be in everyone’s best interest for all those chasing net-zero goals to pay attention. There is an acute need to attract capital to both conventional (but cleaner) energy and renewables markets today, and a clear regulatory playing field is necessary for that to happen.
Separately, Wacker, like many others, has used its earnings release to highlight its ESG initiatives, from GHG reductions to a new renewable methanol project. The project seems a little circular to us as Wacker needs renewable power to make the methanol from green hydrogen and will then make methanol which will be used in fuel cells to make electricity. The plant is small and likely seen as a large pilot project by all partners. Where the fuels cells are used in transport we can see the appeal of using methanol rather than hydrogen because of ease of moving and storing methanol. Use in stationary power generation seems like it would be very expensive. Like many others, a large piece of Wacker’s planned emission reduction by 2030 is based on the increased use of renewable power, which sounds doable on a stand-alone basis, but which may be challenged when everyone has the same ambition. Wacker has the obvious offset of the polysilicon demand growth and margin, but like others we expect Wacker to get into a bidding war for incremental renewable power as we approach 2030.
Exhibit #7: We highlight a slide from the BP Energy outlook that highlights a gradual shift in energy demand: declining role for hydrocarbons, rapid expansion in renewables and electrification
Source: BP – Energy Outlook 2022, March 2022
Exhibit #8: We highlight a slide from the BP Energy outlook that displays its expectation for the share of fossil fuels in primary energy falls as renewable energy increases rapidly.
Source: BP – Energy Outlook 2022, March 2022
- Aligning PCR supply with demand
- An odyssey into the world of biofuels
- Ascend Elements’ battery recycling process recovers over 99.9 percent pure graphite from EV batteries
- Australian government overturns climate change ruling
- Amcor develops compostable paper packaging for butter
- BASF closes EPS recycling loop and launches Neopor® McycledTM containing recycled material
- Build wind farms to cut UK reliance on Russian gas imports, says renewables chief
- Canadian midstream companies propose CCS hub for Alberta industrial region
- Climate group prepares legal action against Shell directors
- ‘Imminent’ tipping point threatening Europe’s permafrost peatlands
- Center-South Brazil hydrous ethanol sales jump 26% in February
- China’s Solar Giant Sees Green Hydrogen Driving Panel Demand
- Tech, timing of lithium projects must be addressed to overcome EV battery supply-chain constraints. This trend remains generally positive for global lithium producers, such as Livent, Albemarle and SQM.
- Dubai’s DEWA utility to launch IPO as renewables push moves ahead
- Europe R-PET March monthly price talks well underway
- Europe’s ocean energy installations surge back to pre-Covid levels
- Global Banks’ ESG Factors Are Dominated by Governance Issues
- Ford to ramp up EV offering in Europe, plans major battery facility in Turkey
- Louisiana first Deep South state to get onboard with initiative to lower greenhouse gas emission
- Mitsubishi Chemical, Toyota Tsusho study olefins, derivatives production from bioethanol
- More plans under way for Malaysian HVO/SAF plant
- Next-Gen ‘Bio-Based’ Synthetics Are Here, But When Will They Replace Polluting Polyester?
- Oerlikon showcases new hydro-charging solution
- Reliance acquires battery firm Lithium Werks
Exhibit #9: WACKER and SFC Energy Sign Letter of Intent on Supply and Distribution of Renewable Methanol
Source: WACKER, March 2022
- Republic Services Aims for Vertical Integration with Planned Plastics Recycling Facility
- Sabic to supply renewable butadiene for Kraton’s certified styrenics block copolymers
- Samsung SDI starts construction of battery pilot plant in South Korea
- SK Geo Centric invests in PureCycle
- Solar, wind lift Brazil power capacity in January
- SEC plans to force public companies to disclose greenhouse gas emissions
- Today’s energy crisis makes supporting clean energy start-ups more important than ever
- TotalEnergies begins producing SAF at its Normandy platform
- Venture Global seeks quick FERC OK to allow higher peak capacity at Plaquemines
- Worldwide LNG Trade On Growth Path to 2050, with U.S. Share Doubling to 20%, Says BP
Exhibit #10: We highlight a few major WACKER initiatives to cut GHG emissions by 2030
Source: Wacker Earnings Release Presentation, March 2022
Other Chemical Industry, Demand & Downstream News:
With fresh shipping constraints relating to the Russia/Ukraine war and the availability of both vessels and sailors – many of whom are either Russian or Ukrainian – shipping costs are rising again – see charts below. This not only raises further supply chain issues but also puts a larger margin umbrella under any new US or European initiatives to look at re-shoring manufacturing capacity. In our ESG and Climate piece this week we will look at steel as a possible beneficiary of all the investment initiatives that are likely to keep moving forward regardless of the economic backdrop. While we are more focused on “green” steel in the ESG report we are also looking at what might be an exceptionally strong demand backdrop, with interest in more ships and containers just adding to the pull on steel. We suspect that the shipping and container markets will eventually become very oversupplied because of the very high incentive to build right now, but in a less certain world, we could see permanently higher inventories, and a lot of those inventories will sit in containers.
- China will ensure stable economic operations this year, cabinet says
- China’s Covid-19 focus on keeping stable global supply chain: Premier Li
- China’s GDP target of around 5.5% ‘achievable’
- China warns of retaliation if hit by Russia sanctions fallout
- China’s Economy: Economists optimistic about China’s future growth
- European financial institutions turn their back on Russia
- HSBC sells Greek retail bank as it sharpens Asia focus
- Federal Reserve set for lift-off with 25bp hike
- Global companies’ earnings estimates hit by Russia-Ukraine conflict
- EU member states agree new package of sanctions against Russia
- Ex-PBOC adviser expects China to cut rates further
- India’s Feb trade deficit widens to $20.88 billion – trade ministry
- Inflation Is a Problem. Today’s PPI Just Confirms It.
- Intel picks EU chip factory sites in race to boost supplies
- FBX Index: An unsettled and uncertain market
- France looks to overcome some EU members’ opposition to global minimum tax – minister
- ECB sanctions Bank of Cyprus on liquidity transfer to subsidiaries
- Euro zone banks must end delay in climate risk disclosures: ECB
- French central bank sees growth, inflation hit from Ukraine war
- Feb WPI inflation spikes to 13.11% on costlier crude; food articles soften
- From offshore to shipping, it is people that drive successful digital transformations
- IMO Council decisions on Black Sea and Sea of Azov situation
- India’s February retail inflation up 6.07% y/y – govt
- How China can end the war in Ukraine
- Impact of Russia-Ukraine crisis on container and port equities
- LME nickel trading to resume 16 March
- New Forms of Shipping Finance Underway
- Orsted’s North America chief says $4.4bn wind auction was ‘missed opportunity’
Exhibit #11: We highlight higher freight rates for the fifth consecutive week from China to US West & East Coast ports, reflecting a period of rate support at high levels.
Source: Freightos Index, Bloomberg, C-MACC Analysis, March 2022
- Panama Canal postpones Neopanamax lock draft restrictions
- Russia to spend $9 bln to rebuild supply chains, PM says
- Russian energy import stop could cost Germany up to 3% of GDP -economists
- Shippers fear rail strike in Canada this week
- Sullivan meets China’s Yang, with U.S. warning of perils of aiding Russia
- US producer prices increase strongly in February
- UK to end remaining Covid-19 travel restrictions
- US airlines trim capacity as fuel costs surge on Ukraine crisis
- US consumers to spend record $1 trillion online in 2022 – report
- US tells allies China signalled openness to providing Russia with military support
- VW to consider expansion outside Europe if Ukraine war continues
- Walmart to hire more than 5,000 workers, add two new hubs
- What to expect as Russia warns of historic debt default
- Xi Jinping faces a fateful decision on Ukraine
- Dry Bulk Market: Capesize Market Reaches New Highs
Exhibit #12: Baltic Dry Index Scales Near 3-Month Peak. We highlight this development to show global supply chain issues on average remain far from normal, with average rates at a five-year high for the time of year.
Source: Baltic Exchange Index, Bloomberg, C-MACC Analysis, March 2022