We think industry restructuring and consolidation will be primary sector themes during the next few year – we provide a basis for our view from recent cost curve developments, upcoming production additions (notably Asia) and relative to basic chemical (notably ethylene) price trends. We discuss business updates from Huntsman and Sherwin Williams that support our case for strength in Building & Construction markets. Other items today range from oil-and-gas commentary, to global methanol production additions and a discussion of ACC specialty chemical data trends.
We see mixed signals for both building and autos but expect building and construction to show the more significant recovery – a positive for vinyl-chain (PVC) producers, such as Westlake, Shintech, OxyChem, Formosa (and Olin for EDC). The chart of the week focuses on the disconnect between what most industry observers/investors are watching (oil and gas) and what really matters for global ethylene cracker operators (ethane and naphtha). The ethane premium to natural gas has increased and of the strength in naphtha relative to crude – see chart #2. Cheap gas relative to crude is positive for US chlor-alkali and methanol producers. Asia ethylene price strength continues; something we still believe will a 1H20/early 2Q20 event, as our findings suggest it is already soliciting a supply response, as evidenced by Enterprise running its US ethylene export terminal at or above current design capacity and a rising level of product flows targeting Asia.
We discuss plastics targeting the Building & Construction market – we view current trends as most beneficial for PVC producers, such as Westlake, and flag PU products targeting this market from Huntsman, BASF and Dow. Our chart of the day highlights the five-year low reached this week in Asia Butadiene (BD) prices relative to avg. Asia ethylene – we continue to find stiff demand headwinds facing BD/rubber applications (most notably tires). Other items of note range from oil-and-gas commentary, to the PQ 2Q20 business update that rings positive for a refining services demand pick-up, to Tosoh expanding bromine production in China despite recent spot weakness.
The more we do to understand volume trends year to date in 2020 and predict possible rates of recovery, the more we note how poor domestic US chemical growth has been for the last 10 years, despite the strong economic backdrop.
Experience curve behavior at customers is a major contributor to the poor growth (we discuss the Industrial Gas example), innovation at chemical and polymer producers has also contributed, and there has been a continuous, albeit small these days, trickle of offshoring. Helping to reverse the offshoring trend is really the only pro-active move that US chemical producers can make, as the other factors are likely to continue to eat away at volume growth relative to economic growth and consumer spending. But reshoring must address significant logistics challenges in the US