Hot N Cold – US PE Price Premiums Have Turned To Discounts, High Prices Abroad Benefit US Producers

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

Companies Mentioned:
Dow, LyondellBasell, ExxonMobil, Sabic, Shell, CP Chemical, Nova Chemicals, Westlake, Formosa Plastics, Braskem, Ineos, Chevron, Sempra, TotalEnergies, Mitsui, Talos, Pemex, Atotech, Iluka, Mineral Resources, Albemarle, Ganfeng Lithium, Bartek, Covia, Croda, Evoqua Water Technologies, Hexion, Hexpol, Indorama, JSR, Koppers, Mesaieed Petrochemical, Milliken, Polynt, Seqens, Synthomer, Solvay, Ecolab, Air Products, Air Liquide, Gevo, Mitsubishi Power, Primobius

Daily Chemical Reaction

Hot N Cold – US PE Price Premiums Have Turned To Discounts, High Prices Abroad Benefit US Producers

Key Points:

US spot polyethylene (PE) prices declined from a historic market premium relative to avg. NW Europe and Asia prices in 2021 to now reflect a discount. We discuss PE and other polymer market trends and our general outlook.
We flag pertinent energy, chemical, and other corporate updates (e.g., Air Liquide, Air Products, Aramco, Hexion, Polynt, Gevo, Ecolab, Fluor, others).
We discuss relevant ESG items that range from CA emission credit price strength to several sector GHG emission reduction initiative Capex updates.
We discuss numerous other pertinent chemical sector items in this report.

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Exhibit #1: During the past three months, NW Europe and Asia polyethylene (PE) spot values on average have increased more than US levels, and the significant price premium seen in US PE markets in 2021 has turned to a discount that now sits near a five-year low. This is despite US PE spot values increasing ~8% during the past three months, which has bolstered domestic contract price support, as shown in Exhibit #4. As a comparison, we find other major US polymers, such as polypropylene and polyvinyl chloride, remain at higher relative levels to their respective NW Europe and Asia price points as shown in our latest global chemical update yesterday. Our research discusses other relevant findings.

Source: Bloomberg, C-MACC Analysis, April 2022

General thoughts. In early March, we published research titled, Hard Knock Life – Asia and NW Europe Chemical Production Cuts To Spur Global Price Increases, and since its posting date, we have seen global polymer prices broadly rise, in part the result of broadly higher energy and chemical feedstock prices that further pushed the case for production cuts. An item that has caught our attention is the uptick in US polyethylene (PE) spot values during the past 30 days that has been dwarfed by average improvement in NW Europe and Asia prices. Yesterday, we highlighted the significant drop in US ethylene values in our weekly report, which we partly link to some ethylene production turning on ahead of new US polyethylene (PE) capacity. However, a higher Ex-US market that is priced at a premium to US levels is a significant plus for domestic producers, and unless supplies are landlocked due to export limitations, which is a real risk, we think a case could be made for US polyethylene prices to hold up better than most envisioned only a few months ago, assuming the current global ethylene production cost curve holds. US integrated PE producer margins have shrunk from late 2021 highs amid higher ethane feedstock costs and lower prices, but a supportive export market implying still notably healthy US integrated PE margins is a “win” for US producers facing capacity additions in 2022 from Baystar, ExxonMobil/Sabic, and Shell, but virtually no new capacity slated after these developments currently. We view Dow, LyondellBasell, CP Chemical, Nova Chemicals, ExxonMobil, Westlake, and peer PE producers in the US as well-positioned to benefit and likely highlight this general market view with their upcoming 1Q22 business updates. An item to also consider when looking at global markets is the significant premium in US polypropylene (PP) relative to both NW Europe and Asia price points, which has been exacerbated by recent production issues at LyondellBasell and Ineos, as noted in our supply chain news items. If import/export issues remain, US PP producers online could benefit more than US PE producers in the near term, however, the PP market holds more risk linked to a clearing of global supply chains compared to PE, given that US PE spot levels are at a discount to major overseas price points. Major PP producers include Braskem, LyondellBasell, Ineos, Formosa Plastics, and ExxonMobil, among others. Other items worthy of notice in this report include the recent shifts in NW Europe and Asia natural gas values and Brent Crude relative to US natural gas prices. We also highlight persistent concerns with the ability to source materials for manufacturing in Europe. Freight rates from China to the US remain high, though we find some emerging news of freight hold-ups into European markets that could help curb global rates. Overall, we find a global market still facing significant near-to-medium term uncertainty – this is a negative for new growth capital investment in petrochemicals, and we continue to take a positive view of a global sector mega-cycle development mid-decade.

Energy/Upstream:

The headline about US gasoline consumption echoes a point we made a couple of weeks ago when the IEA made its suggestions about how the world could conserve energy. We have no doubt that the world could probably survive with 10% or more fewer barrels of crude oil equivalent barrels of crude oil/natural gas, but we do not believe you can rely on consumers’ “good nature and community spirit” to make it happen. There will always be a handful of public-spirited people who feel they need to do their bit, but it is not nearly enough, and to get any sort of conservation, you either need government intervention or you need to let pricing do its thing. Reserve releases are also a “Band-Aid” as they can only help for a limited time – they send a positive message, but they have done very little to reduce oil prices. As we noted last week, we may be limited on refining capacity in the US today, and releasing more reserves may not generate more refining throughput – we may just be transferring one pool of contingency inventory to another – government to oil producer/refiner.

We wrote a piece in February about some of the limitations that the Biden Administration is placing on the oil and gas industry that we believe are counter-productive both from an energy security perspective and from an energy transition perspective. The government should not be preventing pipelines – as they are the most effective way to move hydrocarbons – in the same way, that they should not be preventing drilling. What they should be doing is raising the standards around both to ensure that we get both the energy we need and the emission reduction. There will be situations where the cost of emission abatement may make a pipeline or well uneconomic – but that then becomes a sound and efficient commercial decision as opposed to an inefficient government mandate – see the EIA pipeline analysis below.

Exhibit #2: Asia and European Natural Gas values mostly held up WoW, remaining significantly above USGC levels and 2021 average respective levels. Brent Crude values rebounded early this week after moderating late last week.

Source: Bloomberg, C-MACC Analysis, April 2022

Exhibit #3: EIA explores effects of not building future interstate natural gas pipelines

Source: EIA – Today In Energy, April 2022

Supply Chain, Commodity Chemicals, & Chemical Sector News:

It’s back to 2012/2013 for polyethylene, but with a potential twist. As we noted above, international prices for polyethylene are being pushed up by oil prices, and even with higher prices in Asia, margins are still negative locally, which suggests that they will go higher. This margin umbrella is what generated windfall profits for US and Middle East producers in 2012, 2013, and half of 2014. The upward pressure remains high for international polyethylene prices because producers are not covering costs locally and in theory, the US should continue to benefit and we see domestic polyethylene prices rising again, both contract and spot. The risk for the US is local overcapacity of polyethylene and potential export challenges. The pricing arbitrage to export US polyethylene is huge and rising, but we are in a constrained trade world and we understand that export terminals are at capacity and warehouses are full. It is possible that the sharply lower US ethylene price is not just a function of new ethylene capacity, but also a function of integrated polyethylene producers choosing to limit production and looking for homes for the extra ethylene. If the polyethylene producers in the US try to push more volume domestically we could see local prices fall well below their export alternative – this is possible, but unlikely, in our view. Polypropylene does not have the same significant net export and the two plant closure in the US are likely enough to drive the price support that we are seeing this week.

The fall in US ethylene prices has driven margins below those in Europe, which have jumped on much higher local ethylene prices. What the chart below does not show is that the US could very profitably supply Europe with ethylene today if the terminal and shipping capacity was available. We see the price weakness in the US as driven by a lack of options – partly because of logistics. Liquid carrier rates are higher and any attempts to move liquid ethylene derivatives out of the US, such as ethylbenzene, glycol, and especially EDC, face higher transportation costs and therefore require lower input costs.

Exhibit #4: US polyethylene (PE) producers are set to lift contract values in March, given strength in feedstock/energy values and recent spot market strength, though proposed increases MoM for April appear unlikely to us at this time.

Source: Bloomberg, C-MACC Analysis, April 2022

Exhibit #5: Recent production cutbacks in Asia and NW Europe have helped spur Ex-US prices higher, while the recent drop in naphtha cash costs provided a further boost to help producer margins in these regions entering 2Q22. As we flagged in our weekly Global Chemical Update, Avg. Asia integrated margins to polymer production remained negative WoW.

Source: Bloomberg, C-MACC Analysis, April 2022

Sustainability, Clean Energy, Recycling & ESG:

The Neom projects finally gets moving after a year plus of press releases and other PR. This is a very expensive project in our view and may get more expensive as the JV looks to secure the materials for the project, including the renewable power project. We see demand for the ammonia, but possibly a higher margin selling directly to Japan and other Asian-based power producers rather than shipping to Europe and converting back to hydrogen.

We have written extensively about carbon prices over the last two years and followers of our dedicated ESG and Climate service will know that our expectation is for all CO2 markets to see prices rise to levels that justify large investments to avoid CO2 production or sequester it. We see that price closer to $100 per ton than the $50 per ton that 45Q will rise to by 2026. The California price shown below has much more upside as credits demand rises. Many of the net-zero pledges made by manufacturers and energy producers today cannot be achieved without buying some sort of credit and we expect demand to rise relative to supply through the balance of the decade and possibly quite quickly.

The European wind and solar push looks much better than other regions in the chart below, but it is partly the cause of the energy troubles that the region faces today. The region has relied on renewable to meet energy demand growth but has also closed power production facilities that are needed today. As other regions build out more wind and solar, they should think about redundancy and the variability of power sources and ensure that they do not make premature shutdown decisions.

Exhibit #6: Prices for California’s emissions credits increase in early 2022 auction

Source: EIA – Today In Energy, April 2022

Exhibit #7: Europe exceeded its renewable energy goals for 2020 | World Economic Forum

Source: Ember, Financial Times, April 2022

Other Chemical Industry, Demand & Downstream News:

The auto industry problems persist and are reflected in the German sentiment below. We see the potential for a very fast reversal in this industry, which might initially be seen as positive, but likely will not be. The strength in semiconductor demand amidst increased supply suggests an inventory build through the chain and we could see the market awash with semiconductors as new capacity arrives this year and inventory chains fill. This may also be the case for other tight auto components today and if the auto suppliers get all that they want as consumer spending falls because of higher rates, we could go from auto shortage to auto glut within a few months – possibly as early as 2H 2022. This would still be good for the chemical and polymer suppliers to the auto industry as they care about volume rather than automaker profits.