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The investment landscape for 2024 is looking very cloudy, with uncertain economic growth, uncertain election outcomes, unclear regulations, and escalating costs of decarbonization – buybacks may appease everyone.
Investors unhappy with environmental progress may be forgiving if their returns rise, either through special dividends or buybacks – recall the explosive performance from LyondellBasell in the early 2010s.
Plowing ahead with capital investments that will likely drive lower returns because of escalating costs seems stubborn and inflexible. Consequently, we would expect more redeployment of cash as the year progresses.
General Thoughts: Global chemical production significantly grew YoY in 4Q23, and this momentum continued into 2024 in the West and China: this suggests oversupply if demand does not meet early-year 2H24 expectations.
Supply Chain/Commodities: ADNOC and OMV have a chemicals problem to solve. It may be complex, but the benefit of getting it right is compelling – there may also be some low carbon opportunities from the combination.
Energy/Upstream: European natural gas prices are lower relative to the weak US, and the European naphtha premium is pulling as much LPG to Europe for ethylene production as can be consumed.
Sustainability/Energy Transition: We highlight the collapse in Europe carbon prices, nearing 1Q21 levels and ~40% off 2022/23 highs, and comment on global challenges with obtaining enough renewable and low-carbon power.
Downstream/Other Chemicals: We highlight European manufacturing sector weakness but recent improvement in US manufacturing, though from low levels, and discuss North American rail traffic movements by sector YTD.
1st Topic of the Week: Power Shortfalls Suggest Higher Pricing – If power supplies are insufficient to meet demand, prices will be higher than expected and exceed costs – a setting likely positive for producers but not sustainability.
2nd Topic of the Week: Using Water For Storage – Location Is Everything – Europe’s opportunity to use hydraulic storage is an illustration that most transition solutions are situational – what and who are around you matter.
Otherwise – We discuss ethanol as a possible enabler for transition if it is cheap and low carbon, and we comment on the collapsing carbon price in Europe, ammonia ambitions, slower hydrogen activity, and likely ESG investor compromise (more on this next week).
General Thoughts: Our second global agriculture monthly report targets crop market and input trends in early 2024, with a notable focus on fertilizer and downstream biofuel price and profit trends after producer reports.
Supply Chain/Commodities: Crop consumers expect still high farm income to spur crop production, and crop input suppliers expect it (and lower costs) to spur usage – most demand views leave little room for upside risk.
Energy/Upstream: US natural gas prices are weak and inventories are high, driving higher margins and incentives to invest in the US to consume gas. With LNG on hold, chemicals should step up, especially (blue) ammonia.
Recycled/Renewable Polymers: We discuss the high cost of decarbonizing ethanol markets and different US ammonia producer growth (greenfield vs. brownfield; blue, green, or grey) views beyond cheap natural gas.
Downstream/Other Chemicals: We note crop price trends and food producer price hikes to lift margins (despite falling crop prices) which have lifted food costs to a 30yr high as a percentage of US consumer disposable income.
General Thoughts: We discuss recent movements in global commodity chemical production costs in light of a few recent producer reports, as those seeing a flatter cost curve and falling prices face more tepid growth investment.
Supply Chain/Commodities: We discuss the Methanex G3 facility delay, flag Celanese 1Q24 and 2024 outlook commentary, and highlight Westlake 4Q results, US PVC margin trends, and other relevant chemical trends.
Energy/Upstream: We highlight recent movements in Brent Crude oil prices and US, Asia, and European natural gas, note impacts to LNG movements due to Suez Canal issues, and flag 2024 US power market curtailments.
Sustainability/Energy Transition: We discuss rising concerns with the availability of low-cost and green power to meet surging demand and comment on the IEA World Energy outlook that, in pockets, could prove too aggressive.
Downstream/Other Chemicals: We highlight freight rate movements showing still high rates between China, the US, and Europe, and we flag the recent rebound in mortgage rates and Home Depot outlook commentary.
Feedstock Market Trends: US natural gas and USGC ethane prices slid lower (again) WoW relative to Brent Crude oil and Ex-US naphtha values, broadly benefiting North American ethylene and derivative producers.
Chemical Market Trends: NW Europe base chemical prices reflected the most broad-based improvement WoW, pushing NW Europe ethylene production margins positive for the first time in roughly eight months.
Polymer Market Trends: US integrated spot polyethylene production margins hit a YTD high last week, rebounding to a level last seen in 1H23. Asia polymer margins broadly reflect the greatest weakness WoW.
Agriculture Market Trends: The Ex-US natural gas price decline WoW led Ex-US ammonia prices lower, and we see this weakness negatively impacting US domestic ammonia prices in 1H24. US Corn prices fell further WoW.