Sunday Thematic & Weekly Recap

The Irrelevance of the Sell-Side – Does Anyone Care – Maybe Those Looking for Capitulation?
February 4, 2024
Commodities Mentioned:
Methanol, Polyethylene, Polypropylene, Hydrogen, Power, PVC, LPG, Ammonia, Carbon
Companies Mentioned:
Methanex, Shell, Dow, LyondellBasell, Westlake, ExxonMobil, Arkema, Ineos, ADNOC, LSB, CF, Bora, Tesla, Meta

C-MACC Sunday Thematic and Weekly Recap

The Irrelevance of the Sell-Side – Does Anyone Care – Maybe Those Looking for Capitulation?  

  • As chemical companies all talk about a better second half of 2024, we question whether the sell-side will simply rebroadcast that theme or do any work to form an independent opinion, but we also ask whether anyone cares.
  • Where it does matter, however, is where some are relying on a “Wall Street” capitulation, something we saw in past cycles, to drive a broader acceptance of the need for consolidation and to align values.
  • Several 2H 2024 “it will get better” narratives rely on consumer durable growth, with most assuming continued strength in the US and sizable improvement in Europe and Asia – this could set profit expectations too high.  
  • The relative and currently growing feedstock advantage in the US can mask just how much more troubling industry trends are elsewhere. Asia is presently hurt further by higher costs of shipping materials to Europe. 
  • Otherwise, we look at another boost to US polyethylene profits, why LNG permit delays may help methanol and Methanex, more controversy for Shell, China’s unstoppable exports, grey hydrogen, and clean power.

Exhibit 1: 2024 performance has been quite muted relative to earning misses and guidance.

Source: Capital IQ, C-MACC Analysis, February 2024

As we roll through earnings season, we are getting much more cautious guidance in the chemical sector, at least for the next 6 months, with many suggesting that 1Q 2024 is looking no better than 4Q 2023, although all hope that the inventory correction is over. But 6 months out, the “hope” banner is flying high, although few are putting much substance behind the hope. Some interesting discussion points are emerging, such as LyondellBasell’s claim that this is the worst downturn in its history. Helping this to be a true statement is the short history of the current version on LyondellBasell – the company did not exist in its current form in the downturn of the 80s and 90s, but filed for bankruptcy in the 00s, so that was likely quite bad! The other thing that LyondellBasell has done to hurt is position is taking a stake in a loss-making Chinese venture, though few could have faulted the decision at the time. While this does not drive empirical analysis, if you try to adjust for the impact of COVID, the supply chain challenges, the Ukraine war and the natural gas advantage in the US you could conclude that the basic chemical industry has been in an oversupplied downcycle since 2019 – and that would be one of the longest on record. The losses are there to support that, but only in pockets, and in every region, there have been some interesting periods of margin relief because of some of the extraneous circumstances listed above.    The US competitive edge is very real and those with a strong US bias reflect that in both their earnings and, where public, in their stock valuation – note the regional differences in Exhibit 2. In Exhibit 1, note the outperformance of Westlake, some European exposure, but mostly US. This is one of the reasons why we have suggested Westlake as the consistent go-to investment in the US since we began C-MACC in early 2020. The other reason was because we did not see PVC being overbuilt the way polyolefins were. Westlake has outperformed the index of all the others in Exhibit 1 by roughly 100% since early 2020. It would still be our go-to investment today – the sell side has higher (marginally) recommendations on both Dow and LyondellBasell.      

See PDF below for all charts, tables and diagrams

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