The Weekly Catalyst
Global Chemical Update – This Bitter Earth
Key Points:
- Global chemical feedstock costs rose more than monomer and polymer values WoW, pushing profits lower. North America reflects cost advantages, though most product margins remain near 10yr lows.
- Brent Crude and Ex-US Naphtha prices increased more than US natural gas and USGC ethane values WoW – a positive development for North American chemical producers relative to overseas peers.
- Global polymer prices were primarily unchanged WoW, as US polymer price support offset relative declines in Europe and Asia. Monomer spot prices were lower across all global markets WoW.
- US ammonia prices and margins were unchanged on average WoW. We anticipate a tight crop setting well into 2023 and high Ex-US input costs relative to North America to favor domestic producers.
Exhibit #1 – Chart of the day: Global ethylene cracker margins took a step lower WoW to reflect more than a 10-year low. Global monomer prices broadly trended lower relative to rising feedstock costs WoW (see Ex. #49). Spot ethylene margins based on USGC ethane remain advantaged relative to peer US NGL feedstocks and Ex-US naphtha. Still, it is essential to note that USGC ethane margins are only marginally positive.
Source: Bloomberg, C-MACC Analysis, October 2022
A few general industry thoughts: Our final global chemical update to close 3Q22, Global Chemical Update – That Spells Relief, discussed international feedstock costs outpacing monomer (and polymer) prices lower to the benefit of petrochemical producers. Indeed, global ethylene production margins had contracted up to this point, and this development offered some profit support though at notably lower YoY levels. We want to flag today that feedstock values show much more support than monomer values, and global polymer values are also mostly flat-to-down. One of the significant risks facing petrochemical producers in 4Q22/1Q23 is that energy and feedstock costs rise during a period of downstream product oversupply. We take a broadly cautious view of non-integrated and integrated commodity petrochemical producer economics during this period, ranging from Dow, Nova Chemical, Enterprise Products, CP Chemical, ExxonMobil, Westlake, BASF, and Olin, to Formosa Plastics. With this in mind, we find some interesting commodity moves worthy of notice. For one, the price of US spot polymer-grade propylene (PGP) fell ~23% WoW, leading global average propylene prices lower. This trend suggests downward pressure on polypropylene (PP) ahead in 4Q22, which we view as a notable concern for Braskem and LyondellBasell in the near-to-medium term. But, the sharp decline in PGP also suggests that some are likely cutting derivative production to support price, which could lessen PP price declines. We discussed PP in our research, The Real Slim Shady – Polypropylene Faces A Buyer’s Market After Staying In The Sun Longer Than Peers. Another item of note is the decline in spot ethylene WoW, which is a plus for non-integrated buyers, such as Celanese, but the increase in global benzene prices, which is a headwind for non-integrated buyers, such as Huntsman. The decline in propylene discussed above could prove positive for coatings producers, such as PPG, as we suspect its product prices will hold up better than that of PP. Consumer demand in 4Q22 is also a broad-based concern. Turning to agricultural products, we find continued support for North American ammonia margins, which we view as positive for producers such as Nutrien, CF Industries, Koch fertilizers, and peers. We continue to take a more constructive view of agriculture markets than chemicals in 4Q22.
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