Today, we discuss global chemical sector supply chain takeaways from 2Q reports, strength mid-week in US PGP and USGC methanol market support. We discuss June-quarter profit reports (e.g. BASF, Celanese, Enterprise Products, Orbia, OMV and Solvay among others) and profit outlooks. BASF has to date been more cautious than many for 3Q20 – possibly because of its heavy consumer durable focus (similar to Huntsman). Other items noted include European and Asia naphtha market trends, PE and PP market developments, and a resurgence in EV battery pack demand.
We discuss the August polyethylene price hike nominations following a few read-throughs from packaging sector reports and other industry findings. The packaging sector remains strong but there is risk of inventory build. We discuss several relevant 2Q20 reports (e.g. Huntsman, Michelin, RPM, Avery Dennison, Tokuyama & Koppers), and our view generally aligns with the Huntsman call for a “W” shaped chemical sector recovery. Other items worthy of note include news of Hanwha bidding for a stake in Sasol LCCP, three petrochemical facilities targeted for August start-up in China, and India PVC has been abnormally pushed toward China.
We were concerned that overly cautious 2Q guidance would lead to overly optimistic 3Q and 2H20 expectations, and that appears to be the case so far. The nature of our business model has us working with as close to real-time data as you can get – this is not the time to rely on stale models or forecasts. We do not have a crystal ball and there are no guarantees that our view of the market will be correct, but many of our near-term expectations are emerging We would hope that companies reporting in the weeks to come take a more measured approach when setting expectations – we are reminded of 4Q 2019 calls – those reporting early dismissed COVID – those reporting later had more information and were far more conservative.
Since April 1st 2020, we have seen something quite unprecedented – almost all chemical companies have shown positive stock performance, while almost all have seen significant negative revisions for 2021 earnings, pushing up forward multiples for many companies at levels we have not seen previously. While this is against a backdrop of a broader market which seems to shrug off every piece of negative news (despite us being “Far from out of the woods”) and follows a first quarter of significant stock declines, we see trouble ahead. A bubble of packaging-based demand coupled with outages in Asia have inflated prices over the past 8 weeks against a backdrop of ever worsening economic projections. Many chemical companies have done better in Q2 versus very low expectations and this has inflated hopes for the future, in our view. The conclusions discussed in this report suggest selling almost all stocks in the chemical space, especially on any 2Q20 earnings report/update driven strength.