Our clean energy mineral price index declined for the fourth consecutive month in July, after a period of considerable strength. We do not foresee a 2H22 collapse. US refining margins have declined from YTD highs, but domestic operating rates have moderated, and low inventories favor price (and margin) support near term. Low Rhine river levels could cut production of some chemicals in Europe, such as at BASF, which we view as a likely plus for North American export prices. Clean energy mineral demand growth will likely be amplified by emerging US climate policy, which will likely trigger more production growth announcements. Global food prices declined in July, following crop prices lower, but as discussed in recent research, prices remain higher YoY, and most crop markets remain tight.
The North American agriculture sector is benefiting from elevated crop prices that have lifted farmer income despite higher input costs – a quick reversal is unlikely. High Ex-US energy prices, notably natural gas, are benefits shown in many sector reports, but it’s only selectively spurring growth Capex for some, such as Occidental. North American petrochemical and fertilizer producers benefit from advantaged global feedstock cost positions, but their demand profiles are notably different. We highlight a few trends in carbon capture and sequestration noted in energy sector reports while further discussing recently proposed US Climate policies. Demand headwinds continue to mount globally relative to supply; however, logistic issues, such as European issues with low Rhine river water levels, continue to linger.
Energy sector growth investment will increasingly target derivative product chains, such as chemicals, as upstream long-term return risk and ESG pressure remain high. We discuss Enterprise Products 2Q22 results and highlight the US ethylene cost advantage relative to Asia, elevated NGL fractionation margins, and its ambitions. The Andersons 2Q results illustrate many areas of the US agriculture economy are in great shape, supporting our constructive near-to-medium term views. Berry Plastics highlights the GHG emission footprint of plastic packaging is lower than many alternatives. We also note hydrogen blending prospects with natural gas. We flag falling freight rates from China to the US, material sourcing issues facing German automakers, and US Dollar strength relative to other major currencies.
The Inflation Reduction Act – the reworded and watered-down climate policy for the US – stands a chance of passing. We think it could drive some real action. We suspect there will be much more debate about the tax aspects of the bill than the climate piece, and much of the climate piece could drive real investment. We like the changes to 45Q as we think the incentive is now more equitable and does not penalize the smaller emitters: the higher value will drive investment. We look at why some of the proposed materials investments matter – yet more shortfalls in renewable power installation – good for coal, but tighter natural gas. Otherwise, it’s reporting season, and we see many presentations displaying how well companies think they are doing on the ESG front – we are seeing a lot of fluff.
Those scrambling to support the case that the US is not in a recession are missing the point – a spending slowdown is happening, and 1H22 will not be the “worst”. Still, we find pockets of extreme strength and related investment opportunities – agriculture and some energy transition sectors top our list.