Line ‘Em Up– Market Indicators Mixed to Start The Week, Long Term Factors Favor Commodity Support

Commodities Mentioned:
Plastics (PVC, PP, PE, PU, PC, PET, etc.), Clean Energy Minerals, Carbon Dioxide, Hydrogen, Natural Gas/NGLs, Crude/Naphtha

Companies Mentioned:
WACKER, Shin-Etsu, Dow, Elkem, Olin, Kuraray, Formosa Plastics, OQ Chemicals, Solvay, SQM, Albemarle, Livent, BASF, BP, Shell, LyondellBasell, Nova Chemicals, Westlake, Peabody Energy, Ecolab, Covestro, Brenntag, Mitsui Chemicals, Celanese, Trinseo, Sipchem, Lubrizol, Nouryon, Oerlikon, Reliance Industries, Exide Industries, Svolt, Williams, Sadara, Amcor, Ascend, Mitsubishi Chemical, Republic Services, Sabic, TotalEnergies, VentureGlobal, Samsung SDI

Daily Chemical Reaction

Line ‘Em Up– Market Indicators Mixed to Start The Week, Long Term Factors Favor Commodity Support

Key Points:

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.

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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.

Energy/Upstream:

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.

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

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.

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

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

Exhibit #9: WACKER and SFC Energy Sign Letter of Intent on Supply and Distribution of Renewable Methanol

Source: WACKER, March 2022

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.

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

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.