US polymer markets reflect premium values in many products relative to overseas markets despite a sizable reliance on export demand – in this report, we discuss relative spreads and recent price strength in ex-US markets. Other items discussed in this report: the global petrochemical production cost curve steepens WoW; Asia PVC rises to another five-year high; Global BD market strength persists; NW Europe Methanol market further tightens
Production costs for base chemicals and polymers will unlikely drop dramatically over the next few months, but prices could. Integrated margins are high, and with global chemical production rising to full run rates, a sudden (fear induced) demand shock could trigger all sorts of problems. The odds of such a shock are not zero. COVID is rampant and lockdown restrictions are likely to rise in the US, as they appear to be paying off in Europe. There is a real risk that COVID combined with the increasingly aggressive rhetoric in Washington could lead to a consumer “ah-ha” moment and shutdown buying all but essentials – assuming stockpiles are high. In recent work we have suggested that demand for basic chemicals and polymers could step down dramatically post the holidays, but there is increasing risk that it happens within days, if not weeks. We discuss multiple product chains and frame sector areas where industry optimism is likely misplaced in this report.
We discuss two key items today: 1) the positive momentum in US existing home sales which adds further support to our positive construction & home product thesis; & 2) the viability of US polypropylene contracts upticks to close the year. We discuss numerous corporate items (e.g. AkzoNobel, Linde, Orica, Shell & Sinochem updates; LyondellBasell, Formosa & Braskem price hike news; multiple industry capex and restructuring announcements, etc.). Other sector items worth note range from the recent spot market strength in China petrochemicals, to the rising price of Brent Crude relative to USGC Natural Gas, to the acceleration of GM electric vehicle ambitions.
The durable goods boom of the last 5 months is very likely a bubble, and one that could get a little bigger before it bursts, probably dramatically. While we believe for multiple reasons that history is a poor guide to evaluate underlying fundamentals these days – pendulums tend to always swing back. It is extremely difficult to judge what is cyclical, situational, and normal during COVID, but those companies suggesting with 3Q earnings that unnaturally strong demand in non-consumable end markets can and will likely continue are in need of some better advice. You may buy a pumpkin (or two) every year, but you do not buy a couch that frequently – or other durables that are currently spiking. If the COVID related dislocations stretch well into the next year and global economies weaken further – the money will not be there to keep durable demand elevated. On the other hand, if vaccines are successful, the at-home durable good purchase boom will fall also. There is no happy ending – the swing is inevitable.