Free Access | Sunday Thematic & Weekly Recap

Things Have Changed – Updates Needed; WCF Timing is Excellent!
August 13, 2023
Commodities Mentioned:
Plastics, PVC, Polyethylene, Polypropylene, PU, PC, PET, Critical Minerals, Carbon Dioxide, Hydrogen, Natural Gas/NGLs, Crude/Naphtha, Ethylene, Butadiene
Companies Mentioned:
Celanese, Aramco, Cabot Corporation, IFF, Covestro, Deepak Fertilisers & Petrochemicals, SABIC, Sherwin-Williams, Kumho Petrochemical, Lanxess, Lotte Chemical, Meghmani Finechem, Mitsubishi Gas Chemical, Rio Tinto, Nippon Shokubai, ExxonMobil, Tata Chemicals, Trinseo, LyondellBasell, AdvanSix, Sempra, ConocoPhillips, TotalEnergies, Tellurian, Phillips 66, EOG, Woodside Energy, Reliance Industries, Sumitomo, Neste, Glencore, Tigo Energy, Energy Vault, New Fortress, Siemens Energy, Williams, UPS, Toyobo, Dow, Nova Chemicals, Baystar Polymers, Chevron Phillips Chemical, Brenntag, Berry, Solvay, Idemitsu, DIC, Osaka Soda, Kureha, Sakai Chemical, Hikal, Enbridge, ICL, Albemarle, American Vanguard, Nutrien, BASF, Bayer, Corteva, FMC, Evonik, Borouge, Borealis, Piedmont Lithium, Ballard Power Systems, PCC Hydrogen, Danimer Scientific, Ways2H, ESS Tech, Continental Tires, The AZEK Company, Braskem, Kuraray, Nippon Paint, Orion S.A., Daikin, Toda Kogyo, Huntsman, FREYR Battery, Crescent Energy, Origin Materials, NuScale, New Tucson Electric Power, BYD, ADM, PTT Global Chemical, Yara, CF Industries, Opal Fuels, Largo, Gunvor, GeoPark, Excelerate Energy, NGL Energy Partners, GreenFirst, Shell, Tetra Tech, Univar, Kalsec, Amyris, K+S, EDF, Orsted, Amazon, Vestas, Siemens Gamesa, GE, Larson & Toubro, Plug Power, Sadara, Petkim, Pidilite Industries, Petro Rabigh, Fastenal, Trex, Henkel, Chevron, Cummins, Toray Industries, Occidental, BP, Petrobras, Chart Industries, First Solar

C-MACC Sunday Thematic & Weekly Recap 181

Things Have Changed – Updates Needed; WCF Timing is Excellent!

  • The CMA World Chemical Forum (WCF) is a timely, vital event for followers of chemicals and associated industries – its benefits are beyond our hydrogen panel.
  • Aside from the debate about transition, carbon, hydrogen, etc., the chemical industry faces many troubles, requiring strategy reviews less urgent 6 months ago. 
  • The debates and panels at WCF will be valuable for many – our daily research at C-MACC shows rising structural and cyclical global chemical industry challenges.
  • Data-based analysis, industry experience, and real-time insight into emerging short- and long-term industry trends are needed to determine the best positioning.
  • This report also includes our weekly ESG research discussing rising sustainability challenges across most sectors and our views on how bad the downturn could get.   

If you are going to read one of our recaps from end to end – it should be this one!

See PDF below for all charts, tables and diagrams

The chemical industry has historically gathered in the US each March for several back-to-back conferences. So, we were skeptical when CMA suggested moving its conference to September after its divorce from S&P. But the current timing of its WCF conference could not be better! And our hydrogen session on the last day will provide value toward the end of an event that chemical and associated industry followers should attend from its start. There has been more change in sentiment and uncertainty in the chemical sector in the last six months than in many 2–3-year periods, and much more change likely lies ahead of most market sectors. Data-driven insights and the ability to gain a perspective of critical industry debates from all relevant points of view could not be more timely. CMA has lengthy historical data across many industries. For those who do not know its history, CMA is essentially the market analytics sleeve of CMAI (before its acquisition by IHS in 2010). One of the key topics at the September WCF conference will be how bad the current downturn will be – some sectors are in better shape than others on paper. However, history shows that a chemical industry downturn generally impacts everyone.   

Exhibit 1: Combining data from old industry conferences, recent news, and our industry research, this is our view of the state of the market today.

We already know that the forecast presented by S&P in March is wrong as demand has deteriorated (and was deteriorating at the time of the conference), and more new capacity has been announced – mainly in China but in other markets as well, and increasingly by many non-traditional players. The recovery shown in the blue line is likely now a very long odds probability – even if some companies are offering guidance that suggests it may still happen and even if most sell-side analysts still choose to believe it – more on this next week. We have the operating rate data shown by ICIS in the chart below, which is consistent with what we display above – although this is for more than just ethylene, and ethylene generally runs at higher rates than the overall industry. Anyone in the early 1980s industry should remember how depressing it was but will also remember the extreme reversal of fortune that followed. The red line in Exhibit 1 looks very bad for the industry. Insights from the CMA Forum will provide more detail into what may happen or need to happen for a better outcome – we discuss one possibility below. In the 80s, we saw consolidation and plant closures, but that was because all hope was lost at the time! Corporate reports and the earlier S&P forecast suggest that all hope is not lost – yet. We are always intrigued by what discussions might go on about industry conditions at any industry gathering, but current debates hold many more variables than most have over the years, and more items than the usual strategy “tool kit” are needed by most. The WCF conference is indeed timely, and if you are focused in or around this industry, this could be money well spent – especially as CMA is offering a discounted rate to C-MACC clients – see the invite below and the relevant agenda for basic chemicals in this link to the Forum website. Contact us directly if is more convenient, as we can also further discuss the benefits of attending the conference. Plus, we would like to see you at the event and use it as a time to catch up with you in person amidst the WCF debates!

Exhibit 2: INSIGHT: Shrinking China trade signals trouble for chemicals everywhere | ICIS

Source: ICIS, August 2023

In what is now (an embarrassing to admit) 40 years of working in and covering the chemicals industry in one form or another, we have never seen consistent headlines that are as negative and worrying as what has emerged over the last few weeks. Granted, fewer companies were reporting 40 years ago, and companies at the time felt less obligated to issue a statement anytime anyone sneezed. Still, we have the combination of a significant global mismatch between supply and demand for many materials but especially some large-volume chemicals and polymers, compounded with some very unattractive costs in Europe and a few other countries and economic uncertainty that is driving down inventories. Plants are being delayed – see Celanese below and note Nutrien’s blue ammonia plant delay was announced last week, but not many. At the same time, companies like Aramco are pressing ahead with oil to chemical-based investments, especially in China as they see chemicals as the lesser evil in terms of potential consumption of crude oil medium term. In our view, too much hope is being placed in a 2024 recovery, which means that estimates are too high. However, this is a normal company reaction as while some may think the downturn may be worse, there is not much to be gained by saying so unless you feel you could force either closures or delays to new projects. In the past, little attention has been paid to talk, with much more attention paid to action. We would still expect one of the large ethylene players to shut down marginal capacity, even in the US, but more likely in Europe – these decisions take time as you need to work out what to do with other streams that either feed the ethylene plant or rely on its output. Plants on the US ethylene network or the ARG in Europe are likely the easiest closure candidates, as they can be done without requiring the owner to make larger and broader-reaching decisions about other products.

Exhibit 3: Within its 1H23 earnings report, Aramco management notes, “Aramco continued to strategically expand and integrate across the hydrocarbon value chain, advancing its goal of building a world-class integrated Downstream business centered on long-term value creation and crude placement security.” This downstream push is spreading across many oil and gas companies.

Source: Aramco – 1H23 Earnings Presentation, August 2023

The Lanxess and the AdvanSix headlines below are likely part of a growing trend in our view, which is that as profits fall, companies will look for help to protect domestic markets. The political climate is likely more attuned to these sorts of requests than at any point in the last 20 years, as globalization is going backwards, especially in Europe, and the next couple of years could see some protectionist moves globally to support industries that are not only worried about China but are also worried about their overall competitive positioning. More protectionist moves will likely come from those countries looking for aggressive decarbonization changes as the industries that face the most pressure are those making less money today and unable to afford changes. Raising carbon allowances in the UK and dropping the carbon price as a consequence was the wrong move to make here, as it will slow the pace of change in the UK without other incentives (moving money from one pocket to another but ultimately getting it from the consumer) or the UK will face a flood of imports of cleaner products from Europe or the US, eventually leading to higher trade barriers – of course, all this will happen after the next election cycle!!

It is also important to remember that it is not just the ethylene chain that is in trouble and we show the state of the US methanol market in Exhibit 4. Part of the problem, especially for ethylene and polyethylene is that there has been too much capacity added, but the problem for every product is the slowdown in demand, and while it is a global problem it is mostly focused on China and especially demand relative to expectations (and expectations drove investment). We have also talked at length about the weakness in the global ammonia markets over the last several months.

Exhibit 4: US methanol production margins remain advantaged relative to China margins, and we flag the uptick in US methanol values and decline in natural gas prices WoW – this development supported the first US methanol margin uptick WoW in 3Q23.

Source: Bloomberg, C-MACC Analysis, August 2023

The utilization estimates in Exhibits 1 and 2 result from a world where demand is slowing while capacity additions march forward. The more interesting data point in Exhibt 2 is the operating rate in North America, given the substantial natural gas cost advantage in the region. It suggests proactive cutbacks from producers to avoid local bloodshed in many downstream markets. In past prolonged downturns, this tactic has not ended well, with all producers likely to look for small opportunities to gain local share, especially when the margin opportunities are high – eventually, the gloves come off, and it all falls apart. A more aggressive US domestic market might drive more aggressive US exports, and given the cost advantage, North America should be at higher operating rates than the rest of the world. On the subject of the gloves coming off, the pricing line in Exhibit 5, which may be the scariest chart this week, shows China cutting export prices dramatically to try to maintain export volumes – volumes are off, but pricing has collapsed. The effect of cutting prices has not raised volumes but may have prevented a larger volume decline. With limited inflation in China versus the West over the last three years (Exhibit 6), China may not be losing the money that the chart would imply, and there may be room for further price movements. Despite the national security issues around re-shoring and near-shoring in the West, the price cuts on Chinese exports will make it harder to justify local investment in the West without some significant tariff protection. Making matters more challenging is that the quality issues with goods produced in China are going away, and as China upgrades its manufacturing, the competition may be between BYD and Ford.  

Exhibit 5: China exports are lower YTD, but most of the decline is due to lower prices (not volume).

Source: Bloomberg, C-MACC Analysis, August 2023

Exhibit 6: Asia Pacific consumer price inflation expectations for 2023 have been fallen notably since the start of 2Q23, led by falling price expectations in China, while consumer price inflation in the West does not face similar downward pressure.

Source: Bloomberg, C-MACC Analysis, August 2023

But having set a bleak scene for basic chemicals, and an overall reason to attend the CMA conference, let’s switch to energy transition, which is just as important. All the industry fundamentals and some other troubling factors impact energy transition, our hydrogen panel, some of the other presentations and panels at the conference, and some of the stories that have emerged over the last week. Energy transition, while seen as an imperative by most, is getting more expensive by the day, and for the chemical industry, the expense is rising as profits are falling. Note in the two charts below how much lower the integrated profits of polyethylene appear to be today in both Asia and the US. The US situation is better than what is presented in the chart, as there is an unusually large gap between spot and contract polyethylene prices and the chart uses spot prices. This disconnect between the two markets is the subject of another interesting debate, which we may see at CMA and which we discuss later in this quite long report. 

Exhibit 7: Avg. Asia integrated HDPE margin – 2015-2023 YTD

Exhibit 8: US Integrated HDPE Margin Ethane – 2015-2023 YTD

Source: Bloomberg, C-MACC Analysis

Capital is becoming more challenging for energy transition initiatives and as one example there are some very distinct differences between what has happened to Amyris and Origin Materials this week. Amyris declared chapter 11 because it has a technology that does not work or cannot be made to work by Amyris commercially. Origin has a technology that appears to work based on guidance for the balance of the year, but the costs of building additional facilities are rising quickly and investors appear to have taken the smaller second facility announcement as an indication that the process does not work or the demand has been underestimated rather than what is a more likely jump in the cost of building the next unit. Capital cost escalation is impacting everyone (note the increased size of the DOE loan that Danimer is looking for, and discussed this week, versus the original ask – up almost 100%). The challenge for the start-up companies like Origin is where to find the additional money – the lending environment is not good for new technologies in general and for anything that might have been associated with a SPAC. We see Origin as a really interesting option here, with the downside coming from the risk that the company is exaggerating the success of the first unit – i.e., it does not work, or it does not work reliably, or the costs are much higher than originally suggested. This week, the string of collaborative announcements from Origin could indicate that others believe the process works or it could be an elaborate distraction to try to counter the more negative news around the second plant delay and higher costs. The upside comes from the process working and the company delivering material at the anticipated costs. If this is the case, there is a chance that Origin will be acquired by someone with deeper pockets and possibly better construction experience.

But the takeaways from the news this week are that many of these new materials, or new routes to traditional materials, are fraught with complications that were not taken into account when many of these companies went public. If you can find a copy, take a look at the projections that Jefferies made around Danimer Scientific at the time a SPAC acquired it and compare them with where the company is today. Danimer is running out of cash, and the macro environment for chemicals and polymers is not working in Danimer’s favor and probably not in Origin’s favor either. The world is awash with polymers and prices are falling, making it more challenging for any new expensive polymer to find buyers and making new routes to plastic look relatively more expensive – something that is impacting the recycling business also. We do not believe in a “hockey stick” recovery for the chemicals and plastics industry and expect 2024 to be possibly worse than 2023 as it will likely not benefit from a good first and second quarter. This suggests a challenging lending environment for everyone and those acting aggressively to conserve cash and drive top line growth without added expense will likely stand the best chance of survival. As we noted in an earlier report this week, Danimer may not benefit from a DOE loan, as the loan can only be used for the purpose stated, which would be to build a second plant – none of the cash can be used to support the existing businesses by providing operating cash. Danimer needs to focus on increasing sales and liquidating its inventory, while slashing costs, such that the existing facility is at least break even. Origin may have to do the same to ensure that the first plant revenues cover as much operating costs as possible.

Exhibit 9: US Origin selloff, Amyris bankruptcy deal double-blow to biochemicals. We also highlight the Origin Materials 2Q23 business update [see the presentation in LINK], as it notes that its second plant (Origin 2) will be more expensive than planned.

Source: Origin Materials – 2Q23 Earnings Presentation, August 2023

One of the factors that may raise the red operating rate line in Exhibit 1, is that the impact of new materials and greater recycling may be more muted and may eat less into demand for virgin polymers. The demand from consumers for lower carbon or lower environmental impact materials will still be there but as the costs of providing these alternatives rise it is unclear how much buyers will be willing to pay. Both Danimer and Origin could easily finance expansions if they had customers willing to lock in pricing or pricing spreads that satisfied project financiers.

We see exactly the same issue with hydrogen, and we show again the chart that featured in our weekly hydrogen report last week. The projects that we have evaluated over the last couple of months sit in the very expensive quadrant for the most part, with those that have access to lower power prices generally a long way from a hydrogen or ammonia market, raising other costs. The companies in the “green” are Chinese green projects, based on low cost power and low cost electrolyzers and in some cases proximity to consumption, the large blue projects in the US (although all are likley subject to construction cost inflation (see the Nutrien headline above), and NEOM (16), which scrapes in despite its high capital costs and high freight costs.

Exhibit 10: Lots of very high-cost projects in the works

Source: Capital IQ and C-MACC Analysis

Separately, the Plug Power comments on hydrogen costs below are either nonsense or very selective in what they are comparing. Even with the best of subsidies and low-cost power, green hydrogen in the US will struggle to get close to pipeline supply of hydrogen from the industrial gas company SMRs or future ATRs. However, the claim may be accurate if you can locate a green hydrogen facility alongside a customer who is taking hydrogen by truck. In our hydrogen reports, we discussed the opportunity for niche green hydrogen applications – small installations to solve very specific but generally small problems. These will work if they are replacing high-cost truck-based delivery – the cost is in the compression and the trucking not the production – or where a user can get a premium price. We see the Plug headline as one using very selective data and likely trying to attract business in an environment that we have noted is slowing down rather than speeding up, in part because of the high cost of electrolyzers but mostly because of the challenges of getting access to reliable low-cost renewable power, without which you cannot get the 45V credit- see chart below. This will be one area of debate in our panel discussion at the CMA conference in September

Exhibit 11: Don’t Let Me Be Misunderstood – Hydrogen’s Colors Hog the Spotlight, but Tax Credit Puts Focus on Carbon Intensity

Source: RBN,, August 2023

Sticking with cost inflation but switching to wind, Siemens Energy is facing a systemic failure in its engineering and design business, likely caused by too much urgency to create bigger and better turbines with too little focus on the engineering robustness of new designs and too little field/stress testing. This is a risk of trying to push technology forward too quickly to try to meet more aggressive RFPs for new projects and is a little surprising given the limited number of players. Part of the challenge may be what many in these new industries are facing, which is the fear of being overrun by China as a large-scale low-cost and high-quality competitor. This is a real risk as China now has the manufacturing skills to meet very high technology standards and has something that many countries in the West do not have – very high unemployment with a well-trained demographic willing to work hard. Siemens Energy has not only set itself back years but runs the risk that if it cannot fix the problem, it may become a distressed seller. The stock has lost 40% of its value since mid-June and almost 60% since its 3-year peak. What is more disturbing is that the average analyst covering the stock during that period has maintained a buy rating – an indication of how worthless sell-side research is becoming. Readers of our work will have noted our concerns around the wind industry for a couple of years now. The broader implications are that wind power expectations will fall below plan – renewable power availability will be more limited. Therefore, prices will be higher, and natural gas demand will be higher than forecast to compensate. The sooner governments take the pressure off the wind and solar industries by supporting natural gas power with CCS the sooner the industry will be able to get back onto a sustainable footing. Vestas is not in as much trouble as Siemens from a share price perspective, but the company lost money in 2022, and estimates for 2023 EBITDA have been falling steadily. We would suggest that the wind additions in estimates for 2023 and 2024 should be revised.

Exhibit 12: Siemens Energy’s flop puts brakes on green race.

Source: Siemens Energy -3QFY23 Earnings Presentation, August 2023

All the challenges that the wind industry faces point to higher costs and project delays with the ultimate impact being higher power costs, especially in Europe where the bet on offshore wind is huge. Linking back to hydrogen, the key takeaway from the power chart below for Europe is that none of the costs support affordable green hydrogen – they would in the US at the low end with the full 45V credit, but in Europe even the best-case average shows as UK offshore wind would drive a hydrogen cost more than $8 per kg. especially given the high cost of matching electrolyzer capacity with offshore wind-based power and then managing the power variability. The other challenge is that this chart shows power cost. Power values in all the countries shown are much higher and producers would get higher returns selling into local grids than making hydrogen.

Exhibit 13: Interactive: Platts Renewable Energy Price Explorer – Europe

Source: S&P Global Commodity Insights, August 2023

Digressing (and flying our own flag), the chart below showing pumped hydro storage growth in China.  Given the US and European unhappiness with its dependence on imported Chinese solar modules and the severe headaches that the wind turbine industry is having trying to keep up with demand while keeping costs down, it is extraordinary to see how the US in particular has its head in the sand with respect to water based power – focused on small river based projects that help local communities in remote areas, but seemingly disinterested in pulling large scale power of what are an abundance of large rivers with ample flow rates. Our very conservative estimates suggest that the US could pull 50 GW of power off large rivers with a 95% plus capacity factor and no need for foreign based manufacture or use of materials that are in limited supply. However, developers would rather work with tried technology – wind and solar – despite the issues above because they perceive that the risks are lower – maybe a couple more failed wind projects will change the attitude, but for now, what appears to be the sort of new idea energy transition really needs is being largely ignored.

Exhibit 14: New pumped-storage capacity in China is helping to integrate growing wind and solar power

Source: EIA – Today In Energy, August 2023

In summary, there is a lot going on, and none of it is very positive, whether you are trying to run a chemical business today or whether you are trying to develop a strategy to decarbonize that or any other business. Confidence is falling everywhere and that is driving investor concern for newer businesses with technology risk and especially those that need to raise capital from a less welcoming lending community. While capital costs appear to be rising quickly, we wonder how much of this is EPC companies anticipating a squeeze on resources and pricing for that risk – if quotes are too high more projects will be delayed and cancelled and many of the fears that are impacting pricing quotes today may go away. In this world of greater uncertainty –the CMA Forum should provide guidance and opportunities to debate, if not complete answers on what are listed below and many other questions.

We have chosen this panel quite deliberately as we wanted perspectives from different angles:

  • Bloom Energy produces what are by far the most power efficient electrolyzers today, but their capital costs are high, and it is clear from Bloom’s earnings calls that there are more discussions going on than contracts being signed today. Rick joined Bloom a couple of years ago after a long career at Air Products, more recently in new projects development including hydrogen.
  • Chart Industries is a specialist in hydrogen equipment and handling and expanded its footprint meaningfully this year through the acquisition of Howden and hold the position of the best performing stock on the broad hydrogen and industrial gas space year to date. Bob will be able to help us understand the current market and where developments are moving forward.

Exhibit 15: Select hydrogen related stock performance year to date

Source: Capital IQ

  • Benjamin brings a completely different perspective, as GCS is likely first in line for a Class 6 injection well permit in Louisiana for carbon sequestration. The compnay has a partnership with Climeworks for a possible project in Louisiana and was a likely beneficiary of the Biden DAC grant announced last week. Benjamin and his team have talked to everyone looking for sequestration in the region over the last two years and can speak directly to the CCS challenges in the US.
  • Gevo is a buyer/producer of hydrogen for its Net-Zero SAF projects and will help us understand the challenges with getting all the pieces in place – including the power and the constant supply of either renewable power or hydrogen or both – i.e., what do you store.

Sign up for the conference – it will be money well spent

Otherwise, Last Week – More on market weakness and some odd pockets of strength

In the energy section below, we note the risk to the chemical industry of rising energy prices given the significant global oversupply of many products. In the butadiene charts below, it is worth remembering that crude oil prices climbed 17% in July and butadiene is largely produced from ethylene units that use a crude oil-based feedstock – naphtha or in some cases gas oil. Benzene is also a crude oil-based chemical and note the higher price for benzene in the last chart below. The weakness in the US ethylene market is shown clearly in the ethylene spot price, which reflects the considerable oversupply of ethylene and derivatives in the US and the limited capacity for ethylene exports. Spot sellers are competing either for the limited space on an ethylene ship or to persuade marginal ethylene derivative producers to make more product for export – most likely EDC, ethylene glycol, styrene, or ethylbenzene, which are more fungible and more easily traded than the polymers.

Exhibit 16: Butadiene prices Rise Globally Amidst Rising Feedstock Costs, but remain near the low end of their 2015-2022 range.

Source: Bloomberg, C-MACC Analysis, August 2023

Exhibit 17: US spot ethylene prices are lower YTD amid increased production but less derivative demand.

Source: Bloomberg, C-MACC Analysis, August 2023

Exhibit 18: Global ethylene sport prices rose WoW compared to USGC ethane, though regional ethylene spot prices remain near the low end of their 10-yr range relative to USGC ethane, but the export arbitrage remains. 

Source: Bloomberg, C-MACC Analysis, August 2023

One odd apparent pocket of strength which we have commented on many times is in the nominal contract price for polyethylene, which is so disconnected from the rest of the world that it looks to us like it could be the result of some manipulation. The plastic packagers are making a lot of money, which would suggest that their sales contracts largely reflect the nominal contract price for polyethylene, while they themselves are likely paying a lot less for the polymer, either because of increasing discounts or because of purchase agreements that include the polyethylene spot price as a factor. The polyethylene producers in the US are likely pushing for contract price increases to drive a much lower “net” price higher. The reporting disconnect has resulted in a couple of “non-market” pricing adjustments from the price reporting services and the chart below suggests that another one is coming, probably at the end of the year. This is peculiar to the US and peculiar to polyethylene and suggests that some combination of manipulation or incompetence is at play, or things work very differently in US polyethylene – there – we said it out loud!!   

Exhibit 19: The average US average contract reference price for polyethylene (PE) remains at a sizable premium to US, Europe, and Asia PE spot prices, signaling a needed non-market adjustment.

Source: Bloomberg, C-MACC Analysis, August 2023

While we recognize the need for the EIA to issue forecasts as they help with planning for both government bodies and for corporations, the reality is seldom as unexciting as the EIA forecasts, and the last couple of years have been very good examples. We see significant uncertainty in the market in the immediate term as the recent bullish argument for crude which was based on China and India demand growth is being supported by India but let down by China based on the most recent stream of economic data. In the second EIA chart we would bet against the wind, solar and battery targets for all the reasons we have highlighted above and in recent weeks, and which are covered again below. Consequently, we would be more bullish on natural gas consumption, even if that does not require more facility additions. We see ample natural gas in the US to handle a shortfall in renewables relative to expectations.

Exhibit 20: The EIA estimates the price of Brent Crude will rise in 2H23 and mostly stay at that level in 2024, while it anticipates US gasoline prices to fall in 2H23 and face downward pressure YoY in 2024.

Source: EIA – August 2023 Short Term Energy Outlook (STEO)

Exhibit 21: We highlight the EIA estimated US electric power market shift away from coal, natural gas and nuclear, and towards solar, wind and batteries in 2023 and 2024

Source: EIA – August 2023 Short Term Energy Outlook (STEO)

Hydrogen Economy – A Little Bit Here and a Little Bit There – Hydrogen for Renewable Fuels

Last week we wanted to show our project tracker to date as we are seeing some interesting patterns developing that will be relevant to the discussion we will be hosting in September and features in many of our client discussions (Exhibit 10 above). The only things that appear to be economic are some green projects in China and the large blue projects in the US. Everything else requires premium pricing, but that may be the case in many cases. Except for NEOM and the large blue US projects, everything else is relatively small, and where there are some large projects, mainly in Australia, they are a long way from a consumer. Each project has been covered in detail in a prior report or is included in today’s project tracker.

Most of the large projects we cover in this report focus on large-scale hydrogen for ammonia or methanol and large- and small-scale projects targeting transport hubs. But other smaller volume hydrogen uses are equally important, not least of which are many renewable fuels projects and some chemical recycling projects. Note that we are talking about renewable fuels rather than synthetic fuels – synthetic fuels need a lot of hydrogen. Unsaturated hydrocarbons do not burn well, which is why refineries are such large consumers of hydrogen today – cracking processes generally produce unsaturated hydrocarbons and hydrogen – some produced in the refinery – is used to make cleaner burning fuels. Renewable fuels, especially from waste oils and crops often have the added challenge of oxygen molecules in the streams and require dehydration, again with hydrogen. If you read any of the releases or website-based content from Gevo, you will note the very heavy emphasis on all levers that need to be pulled to get a net-zero fuel – see below – a renewable fuel is not a zero-carbon fuel unless the hydrogen needed to improve the fuel is low carbon and the power is renewable or low carbon. Most of the renewable fuel projects we see today in the US are relatively small regarding hydrogen needs, especially when you compare them to large ammonia and methanol projects. If you look at the Gevo schematic below – the hydrogen requirement is around 20MW for the first net-zero facility, but a lot of renewable power is also needed. For other projects we are tracking, the hydrogen need is sometimes lower but still material. In addition, some chemical recycling processes can take less pure streams of polyolefins as feedstocks if they have hydrogen to deal with unsaturated hydrocarbons in the output stream.

Exhibit 22: Gevo’s math to get to net-zero requires a lot more than clean corn

Source: Gevo, August 2023

Unless you are located close to a large blue hydrogen project and can access a stream of blue hydrogen that is not allocated to a large ammonia or methanol project, these renewable fuel projects lend themselves to smaller-scale green hydrogen projects, but these are also not straight-forward in some US states because of regulated utilities. The fuel projects need renewable power for the hydrogen and for the power consumption of the fuel plant. Some fuel users may be willing to trade a lower carbon footprint renewable fuel for conventional fuel, but most will want as close to zero as they can get, suggesting that anyone buying power from a regulated utility would only get some renewable power in the mix – 30% in Mississippi for example. The challenge with that is that you do not get most or all the credits on the power or on the hydrogen, which will seriously degrade the economics of any project.

We show the regulated and deregulated power states in the chart below, as the difference between a regulated and deregulated state when you are looking for green power is significant as you almost always have to build the power behind the meter in a regulated state if you want to make any progress over any realistic time frame. Our direct dealings within Mississippi have given us firsthand experience of this. One of the challenges for Louisiana and the blue and green hydrogen projects discussed in the fertilizer companies releases today and last week, is the lack of access to a dedicated stream of renewable power in Louisiana – minimal in the second chart below. The green hydrogen/ammonia projects need renewable power for everything, but even the blue projects need renewable power for utilities, compression, and transport if they are to claim a net-zero product. One of the more obvious applications for our waterpower concept would be to provide behind-the-meter clean power in modular quantities for anyone on the Mississippi looking to decarbonize a new or existing project. It is interesting to note that so far, all that we have been in discussion with are instead but hoping that other sources of renewable power will emerge (versus taking some new technology risk), or they will be able to rely on combustion (perhaps oxy-combustion) with CCS. See our comments below on CCS in Louisiana and look also at the river flow chart in Exhibit 5. We could set up several medium-sized hydrogen facilities along the river, especially where the water flow is high – contact us for more details.

Exhibit 23: Deregulated vs. regulated electricity markets by state. Regulated states make it harder “green” projects to source renewable power without their own behind-the-meter production (solar, hydro, etc.).

Source: Electricchoice, August 2023

Exhibit 24: Which States Generated the Most Renewable Energy in 2022?

Source: Bloomberg, C-MACC Analysis, August 2023

Exhibit 25: Waterpower is the missing link in Mississippi and Louisiana

Source: US Army Corps of Engineers

Complicating matters further is that those looking at crop based renewable fuels also need the crops to be low carbon, and while some of that comes down to farming practices, all of it is driven using low carbon fertilizers – carbon free of carbon negative urea for example. As urea consumes CO2 in the manufacturing process, it is possible to make carbon negative urea. But here we need the clean hydrogen-based ammonia, and one of the challenges for ammonia is that while all the potential new uses – such as shipping fuel, power station fuel and use as a hydrogen carrier will need to be clean, at the same time all of the old uses for fertilizers and other chemicals will also need to go clean. This proposition is simply impossible without carbon capture.

Some of the 2025 start-up targets for Blue Hydrogen/Ammonia, see the CF slide below, are going to look challenging if the EPA does not start awarding permits on the Gulf Coast for Class IV disposal wells. While many are looking just at the usual bureaucracy, and are assuming that it will happen, but just take time, the feet dragging, especially in Louisiana is perhaps more concerning. The EPA has some significant challenges in Louisiana, where it has openly been accused of racism and where communities opposing almost any sort of permitting in the state are better funded and better represented than they have been at any time in the past. Contracts with CO2 off-takers, such as ExxonMobil or Talos, will only work up to a point as both companies could be overwhelmed with CO2 supply if they do not have permitted wells to inject the CO2. Opportunities for EOR are limited locally, with the bulk of demand in West Texas, hundreds of miles away. We see some steel in the ground already on blue ammonia – Linde/OCI in Beaumont for example, and the CF project below. Air Products, ExxonMobil, LSB, and Nutrien have projects in various stages of development and BASF/Yara has one under study. NOTE THAT NUTRIEN HAS DELAYED ITS PROJECT THIS MONTH (the project is under review, but cost estimate escalation has been one of the causes of the delay). These projects will produce at least 30 million tons of additional CO2 combined and this CO2 needs to go somewhere – EOR or sequestration. This is likely to be one of the main topics of discussion at our Hydrogen round table at the CMA World Chemical Forum next month – see above, and our third panelist will have expertise in CCS with a focus on Louisiana.

Exhibit 26: CF Industries highlights progress in decarbonization and organic growth, and clean product demand prospects.

Source: CF Industries – 2Q23 Earnings Presentation, August 2023

Exhibit 27: ExxonMobil highlights the benefits of the Denbury transaction with its 2Q23, including enhanced CO2 handling flexibility.

Source: ExxonMobil – 2Q23 Earnings Presentation, August 2023

The news that Nutrien is pausing its blue ammonia project is interesting because the site is already connected to the Denbury system and would have had a slight advantage on the CCS cost front. On the call, the company pointed to a 15% cost overrun in the project estimates to date as the reason for the pause in the plan. There may also be a concern that the CCS is a risk because of the lack of permitting and the challenges with the EPA in Louisiana – see above. This announcement leaves Nutrien with nothing in the US on the green and blue front, while CF, LSB, and Yara are all either building something small and green or planning something large and blue. We still question to costs of the green projects and the timing of the blue projects and it is also possible that the producers are finding it hard to get volume commitments at prices that might make economic sense, especially if the view is that construction costs are rising.

The hydrogen headline below reminds us that there is a lot of debate around how tax credits will be handled and suggests that initiatives are being held up while we wait for guidance. We would argue that this is simply noise, and not at the heart of delays to investment decisions. Certainly, how the green power will be accounted for in determining credits is important, and an overly complex system may simply persuade some that it is too hard. Making the credits tradable is important as this allows companies that do not have taxable income yet to benefit, and this could be a sizable pool of developers. But even if the tax man gives a favorable ruling, not much may change, as the fundamentals still suggest that the incentives are too low, or even where they are not, access to power is more challenging. We made a proposal a couple of weeks ago that the way to turbocharge electrolyzer investment would be to offer the 45V incentive on any power source for a number of years and then ramp up the renewable power need – with penalties if the ramp up was not met – this would get electrolyzers built today and allow the industry to start progress along an experience curve that would lower costs – waiting for ample power could delay this by 5 plus years making all 2030 goals and many 2035 goals unattainable.

On the Bloom Energy call last week, it is clear that the fuel cell business is doing well, and the company has recently introduced a new larger modular offering for fuel cells that looks interesting. The hydrogen business, by contrast, is moving more slowly – lots of interest but not much action yet. We see this as being less a Bloom issue and more an industry issue, with one of the major contrasts being that Bloom is not making an announcement after every cup of coffee it has with a potential customer, whereas some others are choosing that path.

Exhibit 28: There is not a lot of enthusiasm for hydrogen equipment despite this being in a better place in our view that hydrogen production and ownership

Source: Capital IQ and C-MACC Analysis

The slow pace in concrete orders for hydrogen capacity is a function of a lack of affordable renewable power in our view, with wind and solar-based projects either needing battery storage or more electrolyzes and hydrogen storage. We also see some evidence that there is a view that Solid Oxide is not yet ready for prime time, something that Bloom’s recent pilot project should have addressed. Our interest in the technology is biased by our view that we do not believe that renewable power will be free, and if that is the case, operating costs will matter and the chemistry and the physics of the solid oxide technology drive lower power consumption. It is interesting to see others now chasing this technology although they are years behind. It is not the technology that is holding Bloom back here in our view, it is the power challenge. Note that there is not a lot of excitement in our hydrogen index, suggesting concern that the moves are going to happen more slowly.


We have talked about the only thing we are certain of with LNG pricing for a while now – volatility – and the Australia strike threat has been enough to push up European prices today. Asian prices have not reacted, but Asia has a lot more power generation capacity options today than Europe, which is critically dependent on LNG imports to make it through the next winter. It looks like the Australia strike could be averted, but it is interesting to see the nervousness in the market. In the meantime, it is worth noting that oil prices continue to trend upwards (although down today), and Brent is now 17% higher than at the end of 2Q. This is happening against a backdrop of disappointing demand in China in recent months, which looks likely to continue, but the data may miss some of the imports from Russia.

Exhibit 29: We highlight the uptick in European natural gas prices YoY relative to US and Asia natural gas and Brent Crude. Also, see the article, Gas price spike underscores Europe’s vulnerability to global energy shocks. We note that strength in Ex-US natural gas prices in Europe is a notable driver of  price inflation in many global chemical chains, such as ammonia.

Source: Bloomberg, C-MACC Analysis, August 2023

Exhibit 30: First-quarter capital spending by public U.S. oil companies up, cash from operations down

Source: EIA – Today In Energy, August 2023

While we tend to focus on the impact of energy costs on the chemical sector, any rally in oil prices could help push some very fragile economies into recession as we head into the latter part of 2023 and 2024. The chemical industry is a special case, as the global market for many products is so oversupplied that chemical companies would struggle to raise pricing enough to cover energy costs in this environment, especially if those lower on the cost curve used their position to try to gain market share and increase operating rates. OPEC+ will not want to push the World closer to either stagnant economic growth or recession as ultimately that would be bad for oil demand, and consequently, after many months of restricting output, we would not be surprised to see some production increases from the group if prices drift above $90 per barrel. OPEC has demonstrated time and again over the last couple of years that it has a better handle on the supply/demand dynamics of the oil market than many other commentators and has managed supply to keep prices where they would like them to be. The uncertainty today, which we doubt even OPEC has a good handle on, is China, with the growth that was anticipated earlier in the year failing to materialize, while the country appears to have added meaningfully to oil inventories, taking advantage of lower cost crude from Russia. If Chinese growth continues to disappoint, a draw on local inventories could depress crude demand (despite the Saudi headline below) and provide a supply management headache for OPEC.

Exhibit 31: Brent Crude values have increased since mid-year 2023

Bloomberg, C-MACC Analysis, August 2023

China Again – What A Surprise

The macro signals are becoming more mixed, with ever weaker signals from China, but the US and parts of Europe largely hanging in there and so far, mostly avoiding recession. We share some of the China concerns suggested below around stability, especially when you combine the weakness with the very high youth unemployment and a manufacturing economy that is not working in a way that would increase employment. China is getting much more sophisticated with manufacturing with more factory-based robotics, such that increased manufacturing activity does not necessarily mean increased jobs, especially manual labor jobs. There are signs that the country is focused on retraining, but if we look back 20 or so years, keeping people employed and gradually raising the average standard of living was central to maintaining government control in China. With high unemployment on the back of a prolonged and very unpopular battle with COVID, China may well be the ticking time bomb suggested below.

Chinese deflation could be a real challenge for the rest of the world, but it is a consequence of huge manufacturing surpluses in China and the deflationary impact of price cuts to try and attract buyers. Imports of discounted crude oil probably help in pushing pricing lower, but the net effect is lower manufacturing profits, if there are any at all, and more aggressive moves to cut costs locally which will not help an already unhealthy unemployment rate. The government will need to tack and do so quite aggressively to change things this year in the hope that growth can return in 2024. Global instability will get worse if China cannot work its way out of the stagnation it finds itself in today.

Exhibit 32: China tips into deflation as efforts to stoke recovery falter. We highlight this chart from Bloomberg showing China PPI trends relative to US CPI trends, as the decline in China producer price inflation could favor lower US and global consumer inflation.

Source: Bloomberg, BEA, August 2023

The Chinese trade numbers are impacted to some extent by the inventory drawdowns around the world and we must ask just how much inventory there really was because we have not seen that dramatic a slowdown in consumer spending in 2023. At some point inventories will normalize, but also at that point we will get a better view of underlying demand and it will be interesting to see how much Chinese exports recover – if there is going to be a US holiday season surge, for example, it needs to start now. We see China being backed into a “must stimulate” corner and the country has a couple of options – sue for “effective peace” with the rest of the World, by making all the concessions that the West is looking for, including those in Taiwan, Russia, and human rights. While this is unlikely, it would be the best outcome for the population of China and might change consumer confidence and increase spending, just as exports rise – Chinese GDP could rebound quickly. The other option is to increase internal spending, and this comes back to our view on boosting renewable power spending even more aggressively – which would deprive the West of solar modules and other critical materials and components. See the price impact of the trade decline in Exhibit 5.

Exhibit 33: China’s trade slumps, threatening recovery prospects. Exports from China slumped 14.5% YoY to a five-month low of US$281bn in July 2023, missing forecasts, and China imports fell 12.4% YoY to US201bn, also missing consensus forecasts.

Source: TradingEconomics, General Administration of Customs, August 2023

The week of August 7th – click on the day or the report title for a link to the full report on our website.

Monday – Weekly Margin and Pricing Analysis

Global Chemical Update – Higher Crude Spurs Chemical Prices   

  • On average, global polymer and monomer spot prices rose WoW, with Ex-US feedstock costs rising more than domestic levels, yielding a positive relative setting for North American chemical producers.
  • European chemical markets were the worst hit WoW, as feedstock costs broadly increased relative to monomer and polymer prices. Asian producers also saw margin reductions in most product chains.
  • The most significant outlier WoW was US propylene, whose value declined relative to Ex-US markets and domestic propane costs. US ammonia and methanol producers also reflect higher margins WoW.


Chain Reactions – Chemical Producers Put Projects On Hold, Oil & Gas Producers Keep Pushing Downstream

  • Oversupplied chemical intermediate/derivative markets limit regional cost advantages and are putting some growth projects on hold, awaiting global market improvement unlikely until 2H24.
  • We discuss the North American methanol production advantage and the benefits of higher Asia prices. However, the weakness in derivative markets, such as acetic acid, limits this benefit.
  • Aramco 1H23 results highlight its continued push to boost its downstream products business to extend its value chains and lift crude placement security – a rising oil and gas industry theme.
  • The surge in renewable energy projects has hit some speed bumps, as shown by wind turbine issues at Siemens Gamesa, and many green power developments could face significant delays.
  • China’s import and export statistics for July fell below expectations, and we flag other industry data showing chemical product supply has lessened as an issue globally – demand is the concern.


Price Check! – Petrochemical Contract & Spot Market Disconnects Occur Amid Volatility, Eventually Normalize

  • US contract polyethylene prices seem set for another sizable negative non-market adjustment based on spot price trends – still, US producers have nominated contract price hikes for August.
  • US PE producers typically nominate prices higher throughout hurricane season so they can quickly implement upticks if outages occur – higher oil or outages are needed to spur prices.
  • We discuss the Brenntag 2Q23 report and market outlook, the ICL report and our findings of rising elemental bromine values in China and highlight takeaways from American Vanguard.
  • Berry continues to push its sustainability efforts in plastics, renewable power prices in Europe vary significantly, creating advantaged pockets, and we discuss a new hydrogen technology.
  • We discuss falling prices in China, lower consumer price inflation expectations for Asia relative to the US and Europe again in 2023 and highlight findings from the Continental Tire 2Q update.


China’s Acting Single (Everyone Else Is Drinking Double) – Oversupplied Markets Benefit Consumers, Hurt Industry

  • China’s self-sufficiency push has driven its significant capacity growth in petrochemicals. While demand will eventually catch up with supply, this move is now a key driver of global oversupply.
  • Commodity chemical markets will likely stay oversupplied through 2024 amid still increasing global capacity, led by China, with energy price increases being the major risk to all.
  • We discuss the recent strength in European natural gas, which is a plus for tightening some markets, such as ammonia, and chemical market views from the Braskem 2Q23 earnings report.
  • We comment on FREYR Battery redomiciling to the US from Europe and its positive view of the IRA in its 2Q report, the Braskem green polymer push, and Phillips 66 and ADM biofuel news.
  • North American rail traffic continues to illustrate the cutback of domestic chemical production, despite its attractive cost position, and we provide a few thoughts on global tire market trends.


Known Unknowns Need To Materialize To Spur Chemical Prices – Energy Shock or Hurricane? Take Your Pick!

  • US prices increased at the consumer and wholesale level in July. While most indicators reflect price support in August, further strength, notably in petrochemicals, requires a disruptive event.
  • We discuss trends favoring tighter energy markets and NOAA views for an above-average US hurricane season – these are the likely disruptive factors that could spur 2H23 chemical prices.
  • We follow recent tire industry views to highlight that global butadiene (BD) prices are at the low end of the 2015-2020 range. We also flag US refinery trends and related chemical supply.
  • Origin Materials’ equity sank more than 60% yesterday after its 2Q23 business update – we discuss this development, global CCS capacity, Hydrogen tax credits, and other industry items.

Weekly Hydrogen Economy Update No 6

A Little Bit Here and a Little Bit There – Hydrogen for Renewable Fuels

  • We tend to forget that many, if not most, renewable fuels programs, except those starting with syngas, need hydrogen to dehydrate or hydrogenate the fuels. They also all need green power.
  • Volume requirements are generally much smaller than for large ammonia/methanol projects, and tacking alongside a much larger blue hydrogen project may make sense where possible.
  • Green hydrogen is more modular in nature and would lend itself well to supporting renewable fuels as long as enough affordable renewable power can be found – challenging in regulated US states.
  • Most industrial manufacturers and fuel producers do not want to own their own power projects, but this may be something about which they have little choice, depending on their location.
  • Our project tracker this week looks at different scales and locations but draws a conclusion we have outlined before: China has a lead in green hydrogen – but it is not clear what that is worth.

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