Free Access | Sunday Thematic & Weekly Recap

Un-Plugged: The Worst of The Drunken Sailors – Making Life Harder
November 12, 2023
Commodities Mentioned:
Plastics, PVC, Polyethylene, Polypropylene, PU, PC, PET, Critical Minerals, Carbon Dioxide, Hydrogen, Natural Gas/NGLs, Crude/Naphtha, Propane, PGP, Propylene, PDH, Recycled Polymers, rPET, Plastic Waste, Syngas, Renewable Fuels, SAF, Ammonia, RNG, Methane, Solar, Hydro
Companies Mentioned:
ExxonMobil, LyondellBasell, Dow, Chevron Phillips Chemical, TotalEnergies, Baystar, Westlake, Oxy, Formosa Plastics, Celanese, Fertiglobe, Aramco, Air Products, LInde, Covestro, ADNOC, Shell, bp, Enbridge, Sempra, Henkel, Solvay, Braskem, Oxiteno, Evonik, SK Innovation, CF Industries, Nutrien, LSB Industries, Yara, Neste, Topsoe, Kinder Morgan, HGenium, New Fortress Energy, Cooper Energy, Unigel, Duke Energy, SABIC, Trinseo, Borealis, Albemarle, Piedmont Lithium, Enterprise Products, Shin-Etsu, Lanxess, Bayer, BASF, ICL, DuPont, Unifi, NextEra, Johnson Matthey, OCI, Vestas, Engie, RadiciGroup, Indian Oil, Siemens Energy, Air Liquide, Black & Veatch, Pineapple Power, Ceres, Helion Hydrogen Power, FMC, CNH Industrial, Thyssenkrupp Uhde, Proman, Aker Carbon Capture, Mitsui Chemicals, Maersk, Ebay, Mosaic, Lotte Chemical, American Vanguard, Ascent Industries, Sinopec, QatarEnergy, EuroChem, Innospec, Rio Tinto, Nova Chemicals, Amcor, Nippon Shokubai, Mitsubishi Gas Chemical, Kuraray, Arkema, Corteva, Ashland, Pilbara Ports, Nippon Soda, Enviva, FREYR Battery, Forsee Power, Sunnova, Atmos Energy, Eni, Saipem, Petrobras, Pemex, Aspen Technology, OMV, KBR, Rethink Plastic, Tallgrass Energy, Bloom Energy, Interzero, Nio, Plug Power, Lummus, Citroniq, Purecycle, Gunvor, IMCD, Ube, Kureha, Aekung Petrochemical, Posco, Osaka Soda, DCW, PI Industries, SK Chemicals, Citgo, Orico, Petro Rabigh, New Era Helium, Chart Industries, Reliance Industries, Equinor, Trecora, Kansai Paint, Arakawa Chemical, Ami Organics, Songwon, Flux Power

C-MACC Sunday Thematic & Weekly Recap 194

Un-Plugged: The Worst of The Drunken Sailors – Making Life Harder

  • We had other plans for this report, but the Plug Power release on Friday commands “front page” analysis, as the implications for others could be severe.
  • Absent stimulus for hydrogen spending, which looks unlikely, Plug will probably fail, as an acquirer would be purchasing too many liabilities this side of Chapter 11.  
  • This could ripple through the hydrogen and other emerging technology markets, making already hard-to-find public market funding more scarce/expensive. 
  • We look at the growing wave of negative results and expectations coming from Europe and can confirm that on the ground the industry is facing some challenges.
  • Otherwise, we question what will happen to the US NGL surplus, how deflation will impact China, new hurdles for recycling, and how else we find hydrogen.

Last week we discussed 29 Chemicals and Related Products and 135 Companies.

Following our very negative report on electrolyzer producers – Déjà Vu – Are Electrolyzers Heading The Way of EVs – Too Many Players we had a couple of meetings in Europe over the last two weeks where the hydrogen hype remains real, and our conclusions were questioned.  There may be not so much doubt now, but what concerns us most is that we were both sell-side research analysts for many years, and the warning signs in this sector and many others have been flashing for many months – the stock price chart in Exhibit 2 has a negative trend, and this has been the case since – 2021 – see Exhibit 3.  Yet we have predominantly “buy” ratings across the entire coverage universe – not just hydrogen.  Some of this is business model-driven, with the coverage dictated by corporate access opportunities and possible capital markets opportunities (lots of money has been raised), but some of it is too little resource and a poor understanding of what constitutes fundamental research.  We suspect that legal action will be taken against Plug as the company has been telling the “all is OK” story, and quite recently. Whether anyone takes a closer look at the analysts covering the stock is unlikely, as their defense will be that they followed guidance from the company.  The more concerning knock-on from Plug’s problems is that it will likely dry up capital flows even further, possibly forcing better-structured companies down the same path.

Exhibit 1: The successive EBITDA downgrades should have been a warning, but before Friday, the 27 analysts covering Plug had a strong consensus “buy” bias.

Source: Capital IQ, November 2023

Exhibit 2: The stock market has seen many of these sectors going sideways, or worse, for some time.

Source: Capital IQ, November 2023

The Plug Power story may turn out to be a somber lesson (for the hydrogen industry and for others) in the difference between hype/hope and practical economics.  To be clear, it is our view that Plug will eventually file for Chapter 11 protection, suggesting that the stock has considerable further downside.  Easy money in 2021 allowed Plug and others to raise lots of cash and this has been deployed chasing demand that looked solid, but has proven either not to be real, or not real on the timeframe originally expected.  The inventory that Plug Power built-in 2023 (and which has consumed a lot of cash) is a function of chasing demand that is not there on the timing expected.  Plug is not alone with these issues in the electrolyzer world, but has taken the biggest leap, spent the most, and lost the most money on the “hope” that the promised demand would materialize.   Plug is now likely on a spiral with its need to move to positive cash flow, hurt by demand shortfalls, and its questionable finances are likely to push demand to others with better balance sheets. The low stock price will make raising any new capital challenging – the assets and the working capital may be valuable – but the other liabilities could deter a pre-Chapter 11 buyer.  We would buy the limited debt, if you can get it, or consider offering secured help, backed by assets.    

Exhibit 3: The hype and the relatively free money of 2021, set demand and borrowing ease expectations too high and the many who have not adapted, or spent too quickly may go the way of Plug.

Source: Capital IQ and C-MACC Analysis, November 2023

Many of the smaller start-up companies in the energy transition space are likely spending far more time than they ever expected contemplating survivability today.  The combination of way too much enthusiasm 24-36 months ago (with the benefit of hindsight), relatively easy money at the time, and open-ended encouragement from potential buyers of their products, drove business plans that are not holding up today.  One of the most significant errors has been mistaking notional order books for real business.  Anecdotally, one of the first red flags that we saw was late last year, when we saw an opportunity to exploit a USDA grant program to increase US fertilizer production, something that we thought we could “turbo-charge” with clean hydrogen.  When we started enquiring about how long we would have to wait in line to get electrolyzer capacity, something we thought could be rate limiting, we were told 6 months!  The reality was that many of the orders the electrolyzer producers were getting were loose promises, not firm orders.  The companies were building substantial capacity in the hope that these promises would turn into real demand – none of the demand was firm or backed by a take or pay agreement – another reason why new capital is drying up.  Electrolyzer demand is not materializing as quickly as expected for all the reasons we have covered at length in our work, the most important of which is the absence of sufficiently low cost, high capacity factor, and renewable power.   Very few would be willing to submit a firm order (and payment) for electrolyzers before they have confirmed a source of power.  The 45V incentive in the US is compelling, but only if you can find high capacity-factor power – low capacity-factor power drives much higher capital costs per ton of hydrogen, more challenging in a higher interest rate environment.   

We struggle to see how the macro environment is going to change positively for the hydrogen, and many of the other transition industries, quickly, and this matters a lot if you are cash flow negative as it extends the time you will remain cash flow negative and raised the “going concern” question faced by Plug Power.  If you have plenty of cash, you have the option to regroup and change your investment plans, possibly encouraging potential customers to think about “take or pay” like structures, or partnerships, to get what they need – especially if they have made commitments to their customers.  This is less likely in the electrolyzer space as there are already too many suppliers so you can just switch horses – ideally to someone with deeper pockets – see the table we showed a couple of weeks ago – SBL, Siemens, and Cummins could be the winners – Bloom also because of the cash flows from the successful fuel cell business.  Note that the list below is not complete and does not include the very real threat from low-cost producers in China, who are getting the benefits of economies of scale because of local demand and could be very competitive and a major market disruptor for everyone on the list below.

Exhibit 4: Do The Smaller Players Have Enough Technology “Special Sauce” To Counter Large Balance Sheets

Source: Capital IQ and C-MACC Analysis     

With the capital markets risk tolerances much lower, which is understandable, the publicly traded companies face an unfriendly and challenging backdrop, and those that have avoided any lure to go public, perhaps through a SPAC are likely counting their blessings.  We see a couple of opportunities where current public companies could go private again, but the stars must be aligned around cash on hand, cash burn, and most importantly, real medium-term demand for the product offered.  

Exhibit 5: US Consumer Sentiment and confidence in the Western energy transition fall in 2023.

Source: Bloomberg, C-MACC Analysis, November 2023

But this is not isolated to the hydrogen market, and while wind, solar, and lithium stand out in the chart below, there are weak balance sheet stories in every sector, and these are where the “going concern” risk is the greatest.  Some of the trends we see in the sectors, and we would include all those below, except water, have large well-funded, and well financed participants, who can weather a delay in development, and/or a price war.  It is the new guys who are in trouble, and, as the second chart below shows, even lithium may not be spared as some of the start-ups are relying on higher prices and market confidence to get their businesses moving.

Exhibit 6: The averages are bad for many groups, but there are companies in trouble broadly.  

Source: Capital IQ and C-MACC Analysis     

Exhibit 7: Albemarle warns of losing lithium market share to China as prices fall. Piedmont Lithium Reported 3Q23 Results.

Source: Bloomberg, C-MACC Analysis, November 2023

So, what happens next?  Some companies will fail, some will be acquired where the technology has value and where they are not overburdened with debt, and others will restructure and adapt their strategies to find lower-cost ways to market. Those in the last category will only be able to do this if they have something that others want, ideally critically important to the customers’ own transition strategies.  This path is unlikely to be available to Plug Power as there are plenty of other electrolyzer producers that green hydrogen projects can turn to.  It is going to be an interesting 12-18 months, and not one many of the companies in the energy transition space were planning for at the beginning of 2023.

Otherwise, Last Week – Many of The Old Industries Are In Poor Shape Too

The theme in the last week of reporting has been more missed earnings and/or lowered guidance, and while this has not applied to everyone in the most recent quarter, it applies to most. Established chemical, material, and energy businesses are dealing with lower commodity prices and shrinking margins – although energy has done better than most this time. Those investing heavily in energy transition are wrestling with cost overruns (see above) and, in many cases, much higher capital and financing costs. We would expect meaningful strategic direction changes over the next few months, with more aggressive cost reduction plans, further curtailments to capital plans, and some M&A in the limited instances where valuations are aligned today. M&A will pick up as relative valuations make more sense, as we do not expect to see many cash deals near term, although the “no-premium” mergers we have seen in the oil and gas space will likely not spread to chemicals. Given the negative trends in profits in Europe, which seem to impact everyone, it will be interesting to see what happens with the ADNOC/Covestro discussion. With each passing data point, Covestro should want the deal more and ADNOC less!

The challenges in Europe are profound, and the Lanxess results and forecasts today show that a more focused specialty portfolio does not seem to be the way to go in a depressed demand market where all inputs are expensive, especially from higher energy. Interestingly, the market sees today’s release as good news – i.e., the average investor thought it would be worse following its pre-announcement earlier this week or now thinks Lanxess will get acquired – perhaps the Covestro effect. At the same time, we see Bayer considering a further breakup of the company in the headline below. One of the factors impacting the Bayer decision is likely the valuation arbitrage that sits between the pharmaceutical business, the agriculture business, and any conglomerate discount they are getting. The same sum of the parts difference could be said of BASF, but here, the company has stuck to its Verbund strategy, and while that may not be helping that much in the public market, it does appear to be helping earnings and cash flow – at least for now. BASF has also performed well since confirming earnings for the last quarter. What is becoming clear in Europe is that a specialty portfolio is not offering much protection, with demand weakness making it very challenging to get any price relief as costs remain high. We see some significant challenges ahead, as much because of the capital needs that might be required to meet decarbonizing goals, as because of lower operating margins and weaker demand. We see 2024 and 2025 as years for global portfolio changes, especially in Europe.

Exhibit 8: Persistently weak demand impacts third quarter – Lanxess

Source: Lanxess – 3Q23 Earnings Presentation, November 2023

Exhibit 9: Lanxess faced significant headwinds in 3Q23 and many of them are expected to continue in 4Q23

Source: Lanxess – 3Q23 Earnings Presentation, November 2023

The interesting takeaway from the PVC chart below is that the European PVC price reflects the high cost of PVC production in Europe (ethylene and power). In contrast, the Asia and Brazil prices are likely well below the local cost of production for many. The US price is high enough to make money because ethylene and power costs are low. US exports and some exports from China keep the Brazil price low, while China prices and availability keep the Asia price low. China’s ability to export PVC at these prices, as for a few other basic polymers, is likely reflecting support from cheaper inputs – Russian crude and condensate – as the math does not work if you assume that China is buying naphtha at the prevailing Asia price.

Exhibit 10: European chlorine output hits new year-low in September; and APLA ’23: US PVC exports strategies increase market share competition for new projects in Brazil.

Source: Bloomberg, C-MACC Analysis, November 2023

Exhibit 11: Oxychem highlights that PVC and caustic prices have returned to pre-covid levels, but 2023E profits are higher than 2019.

Source: Oxy – 3Q23 Earnings Presentation, November 2023

Based on the comprehensive work that we have done on the current ethylene cycle, we could not disagree more with the headline below about closing ethylene plants – we see significant pressure to keep them running despite apparent negative margins. This cycle is likely to be dominated by decisions around the benefits of integration, especially upstream integration. Consequently, we could see vulnerable ethylene units acquired by those with hydrocarbon surpluses, and they would continue to run. Indeed, there is far too much capacity, and something needs to happen, but who does what is less obvious than it should be – please contact us to learn more about what we have done to evaluate this topic.

Reading the first headline below, it is interesting to see someone debating a topic that has been front of mind in our client discussions for the last three months. As you get into the details of how to counter the significant oversupply we see today in the global ethylene market, almost every unit has a reason to keep running – or secondary and tertiary reasons why they are unlikely to close. But given that demand is unlikely to bail us out, some capacity will need to close, and for this to happen, some who believe that it is not them will need to be persuaded. We cannot come up with a high probability alternative scenario with very poor margins – worse than today – and for a long enough period to change thinking – or force companies to create workarounds for the secondary and tertiary obstacles. The risk is that the axe falls in Europe hard, putting Europe even more at the mercy of imports from the US and other regions. Another reason to delay would be to watch the US election cycle, as a Trump Administration trade policy and international policy in general may make the US less reliable as a trade partner.

Exhibit 12: Polymer prices relative to 2019 have not kept pace with feedstock costs.

Source: Bloomberg, C-MACC Analysis, November 2023

For years, the business conditions in Asia suggested: “Build and produce, someone will buy it,” and plans like those that Lotte Chemical outlines below come from many years of this proving to be the right strategy. The continued investment momentum in Asia, including China, is running headlong into prolonged severe oversupply. We would advise Lotte and others to cancel anything that is not mostly complete. Even with the region’s best demand outlook, it will take years to catch up with local supply, let alone increasing surpluses in regions where feedstocks are compelling from a cost perspective. While Lotte and others try to put a brave face on expectations, we hope they are more cautious in their internal views. The challenge for the region is that even though profits have been okay for the last few years, spending has been high, so the question of cash flows will inevitably come up if 2024 shows no improvement from where we are now. We believe 2024 could see another downward move in profitability in Asia and Europe.

Exhibit 13: Lotte Chemical suggests supply burdens easing, but this could prove too optimistic for 2024.

Source: Lotte Chemical – 3Q23 Earnings Presentation, November 2023

Exhibit 14: Unless the Asia Ex-China cost position improves or demand surges, these projects appear at risk.

Source: Lotte Chemical – 3Q23 Earnings Presentation, November 2023

The US has been the last holdout in terms of margin strength. Still, we remain concerned that slower demand locally, coupled with more capacity, especially for polyethylene, and the possibility that export markets become choked in the near term, will negatively impact the margin structures in the US also. The rail data below suggests that this is a valid concern. For rail volumes to fall while availability for export is rising – polymers are moved mainly by rail to the export ports for the most part – implies that chemical makers in the US may be running globally competitive facilities well below optimal operating rates – we doubt that this discipline can survive ever lower implied operating rates. The industry is likely relying on a reversal of the recent inventory trends to save the day in 2024.

Exhibit 15: US chemical rail volume has fallen to the low end of the 2015-2022 range despite higher US commodity chemical producer profitability at the close of 3Q23 relative to mid-year levels

Source: Bloomberg, C-MACC Analysis, November 2023

Abu Dhabi’s ADNOC has presented a non-binding offer of R$10.5 billion (USD 2.14 billion) to acquire conglomerate Novonor’s stake in Brazilian polymer major Braskem. If successful, ADNOC would become the controlling shareholder, given Novonor’s 38.3% stake with 50.1% voting rights. Brazil’s state-owned Petrobras holds a 36.1% stake with 47.0% voting rights. Novonor, previously Odebrecht, is seeking to reduce its debt, with Braskem shares acting as collateral. ADNOC’s offer represents a substantial premium per share, and its completion depends on conditions including due diligence and alignment with Petrobras. Previous offers expired, Braskem’s financial challenges persist, while Petrobras retains the right to acquire Novonor’s stake. The timeline of prior offers and related commentary are available on Braskem’s website HERE.

We do not see the logic in this deal like we did not see the logic when LyondellBasell was looking. Braskem is the cheapest way to buy ethylene capacity today and probably the only option where you might find willing sellers at prices that reflect the discount over asset replacement value. The first question would be who would want to buy ethylene (and other base chemical capacity) today, and the only answer would be a hydrocarbon seller – like ADNOC. However, this deal does not provide that integration opportunity as Petrobras is the hydrocarbon supplier to Braskem in Brazil. Selling its stake to anyone without ironclad offtake agreements would be very foolish. This is also not a very efficient place to make chemicals unless you are looking at the advantaged ethanol position, but that has limited local growth, given renewed efforts in Brazil to stop deforestation. Note that we have seen plenty of recent stories about the chemical imports into Brazil from North America, Russia, the Middle East, and even China, and Braskem is under significant pressure because of the imports. 

Exhibit 16: We highlight the estimated cutback in Braskem 4Q23 Brazil production relative to the US, Europe, and Mexico. With this exhibit in mind, we also highlight the Braskem production and sales report for 3Q23 HERE.

Source: Braskem – 3Q23 Earnings Presentation, November 2023

Exhibit 17: Braskem estimates US PE and Asia PP will improve relative to naphtha in 4Q, but US PE will fall relative to USGC ethane.

Source: Braskem – 3Q23 Earnings Presentation, November 2023

Given the natural gas exposure chart below, it is unsurprising to see the US adding capacity and Europe cutting back. The fact that Asia continues to build suggests that producers there do not really believe that the current dynamic is likely to continue – or there is a self-sufficiency play (India and China), or there are feedstock opportunities (India and China with Russian crude oil and other locations with NOCs as partners). The Middle East has some of the power and feedstock advantages that the US has. The other significant driver of natural gas investments in the US is the much lower cost of decarbonization in the US because of the 45Q tax incentive for CCS. This should continue to drive a meaningful competitive advantage but may hit issues if the US cannot provide the construction supplies – materials and labor – and regulatory efficiency to move projects forward. Possible investors may walk away if the hurdles are too high and offset the tax incentives. 45Q is by far the most critical investment lever in the US as it has bipartisan support, although Joe Manchin has been the big advocate on the Democrat side.

Exhibit 18: We provide estimates for chemicals with the most exposure to the price of natural gas and electricity.

Source: Bloomberg, C-MACC Analysis, November 2023

Hydrogen Economy – Weekly Theme: Alternates

One of the conclusions slowly bubbling to the surface, evident in pockets at the FT Energy Transition conference last week in London, was that cheap green hydrogen will be hard to find. Expectations of rapidly falling renewable power prices are fading, although some continue to believe that something transformational is just around the corner on power. As you accept the challenges of making power and hydrogen affordable, you become much more focused on what are only a few ways to get affordable electrolyzer-based hydrogen today, and you look harder for other ways to get to hydrogen. One of the more obvious things to look at is where we are currently either wasting hydrogen or not getting full value for it. Hydrogen is produced, often quite dilute, in several processes, including natural gas or coal-based furnaces. The coal gasification processes used for “town gas” 100 years ago, for example, often had more than 25% hydrogen in the gas. Venting this valuable component of any off gas in the current sought-after market is a waste of potential value, and you do not need to separate the hydrogen, you just need to extract it in a useable form, fuel, or material. 

Ethanol or other alcohols as precursors for fuels or materials, where that alcohol is produced through fermentation, is another way to get a “renewable” hydrogen molecule into a renewable fuels or materials application. Separately, several large-scale chemical processes make hydrogen as a by-product – ethylene, styrene, VCM, and chlorine – and where these are captured, they can find higher values where hydrogen is in short supply, but even if they are recycled into a fuel stream, they generally displace natural gas use and consequently lower the carbon footprint of the process. For this hydrogen to get a low carbon label it will be important to decarbonize the process itself, either by using hydrogen as a furnace fuel or with electric furnaces. Hydrogen can also be produced from pyrolysis – of wood or waste – and gasification of anything from crude oil fractions to wood (or other plant materials), coal, and waste (plastic or otherwise). 

Exhibit 19: There are some other nascent technologies/routes that are not yet ready for primetime.

As hydrogen from electrolysis remains stubbornly high cost, these alternate routes look more interesting, and given the need for lower carbon fuels and materials, we will likely not make a surplus of hydrogen any time soon. This suggests that the risk of investing in these alternate routes may not be that high – especially if you do not believe the more optimistic views of how quickly green hydrogen costs can fall. The gasification process, regardless of the feedstock, is essentially looking for hydrogen. Everything else that is produced in the process can be sourced alternatively, assuming it is needed at all – it’s hydrogen that is the challenge. If we had a surplus of hydrogen we might also have a cheaper route to carbon capture, as there are technologies today that can capture dilute CO2 streams with hydrogen to make fuels – while these are still mostly in development, they do have some niche applications today where there might already be a source of hydrogen, but they could become more widespread if hydrogen was available, even if dilute. It is not necessary to have a pure stream of hydrogen if you can selectively react it to make something useful.  

The problem with any incomplete combustion of gas is that everything in there is dilute and therefore harder to separate. There are, however, some emerging technologies that can capture the hydrogen and the CO2 and CO to make either a fuel or materials precursor and these technologies could become even more interesting where there are pockets of available surplus hydrogen, as adding hydrogen to the stream could result in the complete elimination of CO2 and CO from any vented gas. This is another set of technologies that likely have a handful of very situation-specific opportunities today but may have more widespread use later.  

Despite some very bad prior experiences with gasification, and some quite public failures of a couple of projects over the last decade, we see real potential for this process and for pyrolysis that is not targeting polymer recycling. Gasification works if you have the right feedstock and the right scale – modular works and large-scale reactors are too challenging – but there is as much art to making this successful as the process and the challenges are quite focused around the homogeneity of the feedstock. Feedstock impurities are the most significant challenge and companies using municipal solid waste have had more problems than many. Gasification and pyrolysis of wood waste or agricultural waste could become a major business in our view, as the process is established and practiced today, although not at a huge scale, and in most cases that hydrogen is then burned for heat. Combining this process with something that can then add value to the hydrogen in the stream looks interesting. 

The plastic story below is interesting because it brings up the potential competition between different sustainability goals. Plastic producers are very focused on circularity and the ability to show that their waste is being recycled into the same or similar use applications. Taking that waste stream and converting it into hydrogen and graphene may be more value-added, assuming you can generate the heat needed without a substantial carbon footprint, but if this becomes a widespread idea, it will limit the availability of recycled plastics.

Sustainability and Energy Transition: Good Enough versus Perfect applies to plastic waste as well as hydrogen

We were asked more than once in meetings in Europe this week what the EU could do to improve its odds of a successful path towards energy transition. One of the answers, in our view, relies on Europe widening the tram lines meaningfully and being far less prescriptive about how to get there. The challenge is significant enough without limiting options. While Europe would probably benefit the most on its path to emission abatement from embracing CCS, some more flexibility in the recycling narrative would also help. Plastic waste may generally see its highest in-use value recycled into same-use applications, but it may not. The issue is perhaps more interesting in the US with the incentives around renewable and low-carbon fuels. This setting creates an uneven playing field for those who might want to recycle plastic (no incentive), those who want to burn mixed waste for power (possible power incentive and CO2 incentive if you capture the CO2), and those who want to produce fuels from syngas. Some in the recycling business still expect a surge in premium pricing from the packagers. However, in a world of slower growth and tight margins (and even in a world with better margins), we would not expect the packagers to pay up unless they can recover the costs through product pricing – which is not happening today.

Exhibit 20: Alternatives for plastic waste vs landfill.

Source: Client Discussions and C-MACC Analysis, November 2023

In our hydrogen report, we looked at alternative routes to hydrogen and suggested that they might become more critical as green hydrogen expected costs rise. Gasification of wood waste, municipal solid waste, and other hydrogen-rich streams may, under certain circumstances, prove to be an attractive source of hydrogen through syngas as a starting point for fuels or materials. In some cases, leaving plastics in that feed stream may make sense, with the incremental hydrogen worth more than the recycled plastic. In several countries, including the US, hydrogen, carbon, and fuels subsidies support chasing hydrogen over recycling, as there are no similar incentives for recycled plastics, and based on what is happening in the polymer markets today, even those that suggest they want increased recycled content, are not willing to pay for it. While common sense and unsubsidized economics support efficient recycling, the economic reality may differ in many situations. This would suggest that we should focus less on prescriptive pathways and more on objectives. The objective is to eliminate plastic waste, in the most environmentally and economically sound way possible, not to maximize the use of recycled products.

In a perfect world, all packaging and other consumer-based plastic use should focus on a few key polymers, and packaging design should focus on standardization in use and a drive to increase ease of collection and reuse. But this is not the case and may never be the case. Brand owners want to be able to market a look and feel to their products, and we will not get useful standardization without mandates. Even with the standardization of products, we still have huge inconsistencies around collection and sorting, and even in Europe, which boasts the highest levels of recycling for many products there remain huge inconsistencies around recycling policies and collection, before any material arrives at non-standard sorting facilities. Making matters worse, recycling for same-use applications, mechanical and chemical, even where it is most efficient, remains expensive, and as we discuss below, few are making money as virgin polymer prices fall, dragging down recycled resin prices with them. The chart below is interesting in that it shows how very different recycling rates are in countries that are all supposed to be singing from the same song sheet. The difference between Europe’s best and worst comes down to local recycling enforcement and how to handle the recycled streams. It is clear, and we see plenty of examples of this in the US, that there is no standardization of process within Europe, and this ought to be easier in Europe because you can mimic best practices from those countries that are showing the best results. It will be tough to get rates higher than we see in the better markets in Europe without more progress on the design for recycling, and in the meantime, there may be some cases where there may be more value-added things to do with the rest of the waste.

Exhibit 21: Rethink Plastic launches petition to ban EU plastic waste exports

Source: Eurostat, November 2023

So, in recycling, we have a process that does not value the hydrogen in the polymers very highly, and if you are collecting polymers a long distance from anyone who could use either the mechanically recycled plastic in like-for-like applications or who could use a chemical recycled output stream, your economics look even bleaker, and the hydrogen looks less valuable. Here is where the alternates come in, but for them to make sense the pressure around precise circularity needs to come down. As noted in Exhibit 1, the best use of the waste might be as a fuel for power generation or for transport fuels if any pyrolysis output is closer to a refinery than a chemical plant. Mixed recycled resin might also be better used in non-similar applications, such as building and construction projects. Some plastic may make sense left in a mixed waste stream or even added to a mixed waste stream to create better syngas from gasification, especially where there is a high-value fuels market – such as renewable natural gas or SAF. We are still big believers in the economies of large integrated waste projects as opposed to small, directed initiatives with one output focus. See the illustration below. The challenge with this idea is that today different companies are pursuing each of the initiatives shown independently, whereas the solution requires an overarching waste optimization mindset. While we see the polymer producers as the logical owners of mechanical and chemical recycling outputs, maybe the waste companies are the ones most likely to be interested in the integration concept. They are faced with the high cost of collection and sorting, and anything that can be done to optimize how value is extracted from what they collect should be of interest.

Exhibit 22: Scale could be limited by collection radius, but the more efficient the operation the further you could look for inputs.

Source: C-MACC

But one of the more significant issues that the recycling industry faces today is that the margins are too low to justify investment, and the recycled PET results in the UNIFI slide below show some of the challenges the broader mechanical recycling industry faces today. As virgin polymer prices have fallen globally, so have buyer expectations of recycled prices, which is driving negative recycled margins in some regions. We think the independent recyclers are in for a rough ride over the next year or so, especially if polymer consumers cannot be persuaded to pay up for the recycled content. In a challenging period for virgin polymer makers, when prices are unlikely to rise without higher input costs, recycling may not be profitable – it has not been in similar market phases in the past. There is hope that this time will be different because of the increased focus on circularity, but those who want more recycled content will not get it if they are not willing to pay for it – the food, drink, and consumer and household products companies. Recycling businesses make more sense to us as part of more extensive polymer portfolios within the large manufacturers – here, you have economies of scale, stronger balance sheets, and a circular story/logic that presents well with customers and stakeholders.

Recycling for something as easy to sort and identify as PET is still not widespread as noted in the second chart below and tends to be where there are large populations. But PET is consumed everywhere, as are other polymers, and some of the alternative use cases might make more sense where collection volumes of mixed plastic may make sense, but sorting to individual polymers may not be economic. Smaller pyrolysis or gasification investments targeting local fuels opportunities might be interesting, especially where there is a carbon capture option – see the section below. The other challenge with the weak recycling economics, which we also illustrate for PET below, is that poor economics will inevitably slow investment initiatives and the supply shortfalls suggested in the third chart are highly likely, assuming that PET users stick to their recycling goals. The reality is that these companies will be responsible for their own missed targets as these are the same companies who will not pay a premium for recycled materials today and so are partly to blame for lost momentum. In the current margin environment, the supply assumptions in exhibit 25 are likely too high and many consumer products and food companies will need to walk back targets for 2030.

Exhibit 23: Unifi, a recycler of PET bottles into recycled fiber for apparel, footwear, home goods, and other consumer products, faced a challenging October quarter and sees a consistent December quarter  (see HERE)

Source: Unifi – 1QFY24 Earnings presentation, November 2023

Exhibit 24: Recycled PET Prices Trending Down Amid Weak US Demand

Source: ICIS, Recycling Supply Tracker – Mechanical, 2023

Exhibit 25: Filling the gap: Boosting supply of recycled materials for packaging

Source: McKinsey, 2023

While mechanical recycling economics are making it very difficult for the independents, the polymer producers are continuing to invest and set up JVs aimed at either lowering costs or optimizing collection, which should also lower costs. They also continue to press ahead with chemical recycling investments, and as the chart below shows, although our sense is that many of the earlier plans for chemical recycling are proving more challenging as projects look for sale and must deal with less homogeneous inputs. We hear of a handful that are taking longer to commercialize than expected. Chemical companies are generally very good at solving problems like this so we would eventually expect to see the investments work, but the more delayed they are and the more “tinkering” they need, the worse the economics will be. We also see chemical recycling facing challenges on the carbon footprint front, and while they may tick a plastic waste disposal box, they will not tick a low carbon box without renewable power as a heat source or carbon capture. Integration of these units with other process equipment will lower these costs, but this does not help those chemical recycling projects that are looking at locations close to waste but distant from the polymer industry – here the output should be used for fuels, as long as it can be sufficiently decarbonized to meet low carbon fuel standards.

Exhibit 26: Chemical Recycling of Plastic could grow eightfold by 2030: BNEF

Source: BloombergNEF, November 2023

If you look at the polymer analysis below, you can see the other major dilemma that the industry faces today. The difference in new virgin polymer capacity required over the next 17 years varies dramatically depending on the scenario you believe in, with the lower end of the range being – ZERO. Making matters worse, we would question the underlying growth in the assumption below: demand destruction or replacement by other products could be higher. There is a scenario where virgin demand could fall significantly if some of the recycling initiatives improve – either through scale efforts – such as the one suggested by OMV this week or with better collection and sorting.

Exhibit 27: Polymer demand scenarios: a little more conversation, a little less plastic

Source: Wood Mackenzie, November 2023


One of the harder-to-answer questions in client discussions today is what the US natural gas price will look like over the next 2-3 years, given the wave of new LNG capacity expected to come online. Those building the LNG capacity have secured most, if not all, of the feed gas for the projects, but it is unclear how much of that gas is already in the market and will be withdrawn when the LNG plants are online and how much will be from new production. The first group is perhaps the more critical for natural gas prices as diverting this material to LNG could tighten the US domestic market for natural gas. Suppose we got a meaningful increase in US gas prices. In that case, this might take away some of the local production advantages in the US, and what would happen next might depend more on who is in office in the US when that occurs as we see a Trump administration more likely to interfere to protect US natural gas prices, at the expense of export volumes than a Biden administration. It is not apparent that US natural gas will be in short supply, but it is a risk. However, any US chemical company should ask a different question as NGL surpluses are inevitable. For ethylene producers, ethane prices are more critical – discounts to natural gas could increase.

Exhibit 28: Brent Crude and Asia natural gas prices have trended lower recently relative to European and US natural gas.

Source: Bloomberg, C-MACC Analysis, November 2023

Auto Weakness.

China’s declining consumer price index is inevitable because of significant local oversupply and weak local consumer demand (relative to history), aided at the margin by cheaper inputs, not least of which is Russian crude oil. There is capacity to lower prices in several sectors of the Chinese economy, and as long as demand is weak and potential supply is very high, prices will likely continue to slide. This might have an incremental impact of local demand growth, but probably not enough to matter as while the direction of the price move is negative, it is not likely sufficient to impact consumer confidence and spending. However, It is a blow to the Chinese government as it is a clear signal that local stimulus is not working even if the economic indicators are more positive. The deflation numbers will ripple through the markets, and as we have noted several times over the last year, we see OPEC’s oil moves as a reflection of a more worried global economic model than most are looking at. Most of the OPEC concern rests with China.

Exhibit 29: We highlight Eurozone, US and China PMI trends through October, showing weakness.

Source: Bloomberg, C-MACC Analysis, November 2023

As we recall, the financial crisis of 2008 started with some of the incremental analysis and headlines that we see below – opinion pieces on a debt bubble (in that case, specifically on mortgage debt) – news of bad debt increases – etc. At first, the market ignored the signs – we ignored them completely at Macquarie as we were building a US business and had none of the exposure – and even when Bear Stearns failed, it was not seen as something systemic. As the first headline suggests, we are spending like drunken sailors in the US, and we cannot see how it ends well. That said, some of our predictions on more macro events – such as the ethylene turndown – were quite premature, and the pandemic and supply chain challenges of 2021 and 2022 changed behaviors and pulled us away from what might have been more collective behavior. Some of the spending today in the US may still be a reaction to that – a need to catch up or experience things today because tomorrow is now less certain. That said, this level of overspending cannot go on forever, and the unemployment chart below is yet another leading indicator to suggest that we should be more conservative about expectations for 2024. The mortgage rate is falling in the US because of a lack of activity – that should be another signal.

Exhibit 30: In the past half century, the beginning of a significant deterioration in labor markets began after the unemployment rate crossed above its 24-month avg

Source: Bloomberg, Crescat Capital, November 2023

Exhibit 31: IMF upgrades China growth forecasts on recent economic measures. We highlight China’s monthly trade growth 2020-2023 YTD discussed in this ICIS report, noting that imports improved in October but remains far from robust.

Source: ICIS, China Customs, November 2023

Exhibit 32: Consumer price inflation has been chiefly a Western market problem post-COVID.

Source: Bloomberg, C-MACC Analysis, November 2023

The macro data from China suggests the weak recovery that is feared will be very challenging to avoid. Demographics are working against the country as the “one child” policy now leaves China with an aging population and notes enough younger, upwardly mobile to drive the economy forward. Excessive youth unemployment is partly a lack of jobs but also somewhat a lack of motivation to work. The aggressive drive to up-skill in Chinese industry is leading to more automation and fewer new manufacturing jobs – this is very good for Chinese manufacturing quality, but again not good for jobs. If these trends happen in a developed nation there is an almost immediate consensus that growth will be weak – but because it is China, which until very recently was the growth engine of the World, the temptation is to look for reasons why the macro data may drive a different conclusion. We are advising our clients to have a weak China scenario in their longer-term plans. The economic expert survey below looks too bullish for China, although maybe not for the next few years, because of some further post-COVID rebound.

Exhibit 33: Deflationary pressures persist in China’s economy.

Source: Reuters, November 2023

The slowdown in Germany is not that evident from the experience of a couple of days in the country – airlines, trains, and roads are full, hotels are full, and restaurants are busy. However, the mood is not great, and the charts below indicate what is going on more than a couple of days of anecdotes. With Europe showing very little sign of growth and China struggling, it is challenging to rationalize the better earnings reflected in consensus estimates for many industries for 2024. We see a most likely scenario where demand growth is anemic at best and exposes oversupply in many regions – driving competition and lower prices and margins. We accept that inventory declines have played a big part in some of the 2023 data. Still, we see no “green shoots” that would encourage anyone to increase inventories, except for fears of more geopolitical unrest.

Exhibit 34: Business Climate in Germany’s Chemical Industry Improves Marginally

Source: ifo Institute, November 2023

Exhibit 35: Wave of cancellations in German housing construction at new high – Ifo

Source: ifo Institute, November 2023

The week of November 6th – 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 – Bracing For A Kick To The PP

  • The weakness in Brent Crude Oil values relative to US natural gas during the past three months has favored lower polymer prices despite outages working in favor of some, such as polypropylene (PP).
  • We view PP as likely to weaken more than polyethylene (PE) and polyvinyl chloride (PVC) from current levels by 1H24, and we view PVC as the most likely to see an outsized early 1H24 price rebound.
  • US propane is the most cost-advantaged integrated US ethylene cracker feed, and US PDH margins reflect a 2H23 high and 24% above its 10-year average – both favor propylene and PP production.


Oil Prices or Outages Likely Need To Increase To Spur Global Restocking; 1H24 Could Resemble 2H23 More Than 1H23

  • We remain more confident in supply improvement and the slope of the global chemical cost curve staying in favor of current low-cost producers in 2024 than in a substantial demand revival.
  • Chemical sector 3Q23 reports have mostly beaten estimates, while 4Q outlooks have mostly fallen short – we discuss Celanese and flag concerns that Street estimates for 2024 are too high.
  • We discuss the wave of LNG capacity poised to come online and the potential impact on US natural gas prices looking out 3-5 years, and we highlight Aramco’s recent strategic update.
  • Cost overruns are rattling investor confidence. They are rising as a theme surrounding global clean energy and chemical projects – we discuss Air Products 3Q results and its growth projects.
  • Global customer inventory destocking is a significant chemical sector theme in 2023, and many expect headwinds to persist in 4Q23 – we view a substantial restock as likely to occur in 1Q24.


Stuck In The Middle With You – European Specialties Hit By High Costs, Low Demand; US Propylene Strength To Fall

  • The US spot polymer-grade propylene (PGP) prices have surged higher amid rising crude oil values in 3Q23 and outages – a negative for non-integrated buyers but a positive for sellers.
  • Recent crude oil price weakness and notably positive propylene production margins in the US at its PDH units, RG splitters, and propane-fed crackers support a domestic PGP supply response.
  • PGP input cost relief will likely develop by 1H24 for non-integrated US buyers – this is unlike the setting for non-integrated buyers of petrochemical feedstocks, such as Lanxess, in Europe.
  • We flag Oxy 3Q23 results and discuss its OxyChem unit and the US PVC spot discount relative to Europe, Asia, and Brazil prices – we think US PVC prices currently reflect less risk than PP.
  • We discuss a potential breakup of the businesses at Bayer, the latest EIA short-term energy outlook, 2023 profit troubles at PET recycler Unifi, and several macroeconomic health indicators.


Western Inflation Has Slowed, But Is Far From Negative –Price Deflation In China Is A Threat To Western Industry

  • China appears well positioned to benefit from much lower relative inflation than Europe and the US for the third consecutive year – this development is negative for Western manufacturers.
  • Chinese chemical growth is the primary culprit of global oversupply in 2023 – it has limited North American cost benefits and put sizable pressure on Europe and Asia Ex-China profitability.
  • We discuss China’s October 2023 consumer and producer product price deflation, 3Q23 results from Lotte Chemical, and recent movements in global petrochemical feedstocks and cost curves.
  • The mixture of relatively lower China prices and its sustainability and green energy growth also pose a risk to the Western energy transition, which is desperate for higher prices/project returns.
  • We compare US, European, and Chinese PMI postings, highlight North American rail data and related trends relevant to chemicals and associated markets, and discuss other macro trends.


Weak Consumer Sentiment & Unexpected, Negative Clean Energy Sector Shocks – Not Positive For The Energy Transition

  • US consumer sentiment fell for the fourth consecutive month in November, and adverse clean energy participant notices have risen – both favor lower energy transition investor risk tolerance.
  • We argue that the unexpected magnitude of the issues at Plug Power has negative contagion effects on peers and new clean technologies seeking price, cost, and investor/funding support.
  • We discuss a few slides from the Braskem 3Q23 report, the renewed interest in Braskem from ADNOC in media reports, and we display Braskem’s results and ambitions in green polyethylene.
  • NW Europe and Asia natural gas prices have increased relative to US levels since mid-2023, and we display the chemical chains with the most significant links to natural gas and electricity prices.
  • We highlight the YTD increase in interest rates that is weighing on US consumers, discuss a few critical indicators coming from China, and display a relative rank of economic policies by country.

Weekly Climate, Recycling, Renewables Energy Transition and ESG Report (CRETER) No 154

Rules and Ideals vs Objectives – Should All Plastic Be Recycled?

  • Not enough consumers want to pay higher prices for recycled polymers, placing a low value on the hydrogen content – could fuel subsidies attract polymer waste?
  • It seems counter-intuitive, but where recycling costs are very high, hydrogen as syngas may win, especially if it can attract fuel or power-related incentives.
  • Participants should focus more on all mechanisms to avoid plastic waste and re-use in environmentally and economically optimal ways – more than just recycling.
  • The green lobby wants plastics eliminated rather than recycled, making recycling incentives appear unlikely – we will likely see more consumer mandates to recycle.
  • Otherwise, we look at more potential company failures and why Air Products strategy is less popular – we also critique the latest EIA forecast as misleading.

Weekly Hydrogen Economy Update No 19

Finding Alternate Sources of Hydrogen Will Likely Be Critical

  • As low-cost green hydrogen becomes more elusive, we would expect increased efforts to find alternative sources of hydrogen. Gasification and pyrolysis are technologies that show promise.
  • The history of gasification is not good, but technology is improving, and syngas production can drive both fuels and materials production – finding low-cost feedstock is the challenge, as is scale.
  • Pyrolysis is very dependent on what it is you are heating up and your source of heat – as with gasification, you do not produce a pure stream of hydrogen, but it can be captured for fuel/materials.
  • Europe appears very disadvantaged in the table below as it does not have the low-cost feedstocks or the energy at the right price – Europe should rethink its attitude toward CCS to add some options.
  • Our work with multiple clients and many technologies suggests that there will likely be opportunities for all options, but it will be very situation and location-specific.

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