A strong consumer recovery, everywhere but China, has eclipsed industrial production recoveries since COVID lows. US retail spending in September is above the pre-COVID trend, suggesting that savings are being tapped, given high unemployment. This cannot last; stimulus is needed. We continue to note higher polymer prices in the US, in part driven by robust demand in select areas but also a consequence of storm driven production outages. US prices reflect a 5 year high versus Asia – unstable for an export focused country We maintain our preference for PVC exposure – price strength in this area has been driven by strong global housing and construction spending, and there are few new global capacity expansions on the horizon – though we see US operating rates normalizing, a coordinated stimulus could see a World increasingly short of PVC
We discuss two major items in our research today: 1) recent global MDI production disruptions that we think will result in further price support; and 2) the viability of US producer polypropylene (PP) contract upticks in 4Q20. We highlight several relevant corporate news/update items today (e.g. Covestro and Evonik business updates, Celanese and Sekisui price hikes initiatives, multiple production restart announcements, etc.). Other relevant items range from strength in Asia LPG markets, to Linde and Shell commercializing low-carbon technology for ethylene that adds to the list of other initiatives, to the record low setting for US mortgage rates.
Two items focused on Asia today: a) we view Sinopec on a path towards growth downstream and see its global competitive position expanding over time; and b) Asia prices are rising, but many remain below USGC spot levels. We note numerous corporate items (e.g. Gurit wind read-throughs positive for Huntsman; TPC Group operational issues in Houston; Covestro TDI force majeure; Occidental views on US oil production, etc.) Other sector items worth a mention today range from USGC polymer values reflecting reduced upward price momentum, to US natural gas price strength, to Ikea buying back used furniture in some areas for recycling.
While investment in a carbon neutral world will be substantial, we have not seen a credible analysis that suggests it will be a meaningful boost or drag to global GDP, with the risk of mismanagement leading to a drag on growth, offset by the same mismanagement resulting in likely over-spending. Chemical companies without a decarbonization plan could get dragged into the “bad fossil fuel” bucket and see more expensive, or hard to get, funding as well as continued downward pressure on equity multiples. The same issues may arise on the plastic recycling front if positive posturing does not become more positive action – this is not a problem that polymer producers can solve alone. We see opportunities for those companies with a vision of what they need to look like in 10-15 years, and who start to act on it, to outperform those who hope that no-one notices them and see business as usual as the right path.