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IEA Projections Fail To Recognize The Near-Term Hurdles
Given our coverage of cost, permitting, and power challenges facing hydrogen, we are not surprised to see a slowdown in general news and new projects and slower progress on announced projects.
Assumptions for 2030 in the recent IEA study of hydrogen costs assume meaningfully lower power costs and equipment scale efficiencies – neither of which is evident today or looks likely soon.
We will not get the equipment scale efficiencies if we do not build the equipment, and the momentum today has the industry moving in the wrong direction to achieve that – alarm bells should be ringing.
But the IEA work shows one very clear economic reality: capacity factor for electrolyzers is critical, and with so many projects backed by wind and solar, delays are inevitable because the math fails.
None of the objectives suggested in the IEA study will be met unless the current momentum can be reversed, and as most of it is focused on costs, power, or electrolyzers, subsidies will need to rise.
Global Chemical Update – Commodity Strength, Higher Specialty Costs
Global commodity chemical prices reflected strength WoW, a positive for North American producer profit relative to Asia and Europe. Non-integrated specialty producers face 3Q cost pressure globally.
We are more constructive of fertilizer and agricultural chemical value support in 4Q23 than the broader global commodity market, partly due to our fewer concerns with the global farm economy.
Global chemical feedstock values declined on average WoW, with USGC ethane falling more than Ex-US naphtha and Brent Crude, mostly mirroring the WoW percentage drop in US natural gas.
Unevenness Of Basic Chemical “Costs”: Challenging Rationalization
Our pre-COVID study showing long-term chemical profitability headwinds was early, but now materializing – the market is in trouble, and a fix looks challenging.
A combination of overbuilding and a step down in demand growth poses a major threat to the industry, and we suspect that it will look structurally different in 2030.
Integration/job dependence may expose companies as marginal producers who otherwise look reasonably safe on the cost curve, leading to lower/painful prices.
Turning Points – Agricultural Chemicals To Face Fewer 4Q & 1H24 Challenges Than Commodity & Specialty Chemicals
Fertilizer and agricultural chemical equities have bounced from recent lows relative to the overall S&P Chemicals index, led by rising underlying commodity prices, such as ammonia.
Commodity chemical equities bounced from YTD lows in early 3Q, partly due to strength in crude oil values lifting export prices, spurring a US production response and price risk for 4Q23.
We are more optimistic about the fertilizer and agricultural chemical market than commodity petrochemicals, as we see fewer end-market demand challenges and less risk with oversupply.
Many mid-year specialty chemical 2H23 profit predictions factored in falling raw material prices, not expecting the surge in crude oil values. This sector is at risk of 2H23 downgrades.
We also discuss US rail traffic data, recent movements in base chemical and feedstock prices, 2H23 trends in lithium values and batteries, and highlight numerous other relevant items.
Peak Oil Debate Is Complex: Policy Backtracking Supports Oil Use
The IEA supply/demand models assume policy can be enacted as stated – the flaw in this approach is that policy could backtrack, and costs are delaying progress.
As noted with the UK this week, as estimates of complying with net-zero goals increase, governments must choose whether to bear the costs or change course.
Cost increases that we are seeing to meet decarbonizing goals in the West are driven by hard-to-fix labor and materials issues as well as higher borrowing costs.
As we have noted in prior work, delays in the West impact hydrocarbon needs but also allow China to gain an increasing experience edge and lower costs.
Otherwise, we look at the CBAM and why it is upsetting so many countries, we look at the near-term shipping fuel options and talk more about RNG.
Come Together Or Adjust Product Suite – Sitting Still Is Not An Option For Most In Energy & Chemicals
Energy and chemical sector strategic ties will strengthen as value-chain integration benefits rise this decade, with global cost positions shifting in favor of those marrying these positions.
We view ExxonMobil in an enviable position regarding its integration and discuss a couple of takeaways from its product solutions presentation, displaying its further push into chemicals.
Those lacking upstream integration, such as Dow, are taking action toward cleaner feedstocks, energy, and more sustainable products. Those sitting still will face rising competitive challenges.
We discuss movements from ADNOC, who appears to be evaluating Braskem and Covestro, per news reports – low-cost feedstocks targeting high-cost regions will remain a global trend.
We also comment on the growth in China’s crude oil imports from Russia in August, several sustainability and clean energy trends, and numerous downstream demand developments.