Chemical Industry Summary

After trading in a stable range of US$5/Bbl. for several months, the last week has seen global crude oil prices soften roughly 10% with WTI prices now trading belowUS$48/Bbl. The current weakness of pricing is related to recent inventory and production data that have cast doubt on the potential for global crude oil rebalancing in 2017. It is increasingly unlikely that WTI prices will achieve the US$60/Bbl. target by the end of the year as some forecasters have called for. The key issue is not demand, but supply as US shale oil producers have shown an ability to quickly ramp up production and achieve profitability at low oil prices. Compliance with OPEC production targets has been good thus far, but as time goes on, the agreement becomes more likely to unravel. In the US, efficiency improvements have driven down well costs significantly as companies have repeated cited in their Q2 financial conference calls.

The first US grass-roots cracker, the Oxy/Mexichem unit has started up and will be followed by three others in 2017. Ethane requirements for these crackers, in addition to requirements for recent and planned debottlenecks, will increase ethane demand by about 300,000 Bbl./d. Along with an anticipated 200,000 Bbl./d of exports to Europe and Asia, ethane supply/demand will significantly tighten in the next 12 months setting the stage for price increases.

Macroeconomics and Geopolitics

Americas 

Macroeconomic indicators for the US continue to trend positively for the US, but expected 2017 GDP expansion of near 2.0% is significantly under the current administration’s nominal target of 3.5%. In early March, the US stock market hit an historic high with the Dow Jones Industrial Average topping 21,000 for the first time. The market’s rise has since cooled a bit, coincidence with the easing of energy pricing. 

The Atlanta Fed now projects Q1 growth of only 1.2%, a bit below consensus estimates. In its current forecast, the Conference Board expects the full-year 2017 GDP growth of the US economy in 2017 to be 2.1%, down 0.2% from the February estimate. The forecast calls for accelerating economic activity in the US throughout the year.  

The US jobs report for February came in at 235,000 jobs added, a very positive result and nearly flat with January’s revised result of 238,000 jobs added. The construction industry added 58,000 jobs and the manufacturing sector added 28,000 jobs as generally mild weather helped with an early start for the US construction season. The unemployment rate dipped down 0.1% to 4.7%. Work force participation edged up slightly as more discouraged workers have decided to re-enter the workforce. The labor participation rate of 63.0% also edged up 0.1%.   

Spurred by the positive jobs report in February, on March 15th the Fed increased interest rates by 0.25% to a range of 0.75% to 1.0%. After the December rate increase, the Fed had signaled that three more interest rate increases totaling 0.5% to 0.75% were likely in 2017.  

In February, the US manufacturing PMI index improved to 54.2, down slightly from January, but still in strong expansion mode. In February, US auto sales of light cars and trucks were 17.47 million units, flat with both the January result and last year’s February number. US housing starts in February were very strong at 1,246 thousand on a seasonally-adjusted basis, up 10.5% from last year. In its March forecast, the NAR (National Association of Realtors) is projecting annual increases of 8.7% in each year. Existing home sales in January were 5.69 million. Average housing prices for existing home sales in January was US$228,900, up 7.1% from last year. 

Mexico’s PMI in February of 50.6 was barely in expansion territory, similar to the last several months. US President Trump’s trade policies could prove to be highly significant for Mexico, the US largest trading partner. Canada’s PMI of 54.7 recorded in February continued its run of strong months and was at its highest level since December 2014. 

Brazil’s manufacturing sector recorded a PMI of 46.9 in February, improved from the level of 44.0 recorded in January. While at a 13-month high, this result is still in contraction territory. The Brazilian manufacturing sector has been in contraction territory since the end of 2014. In its Q4 forecast, the IMF expects Brazil’s GPD to fall 3.2% in 2016, following a 3.8% drop last year. The IMF does not expect a return to 2% growth until 2019.  

Europe 

European elections in the very near term are quite significant in terms policies related to trade, immigration, and EU participation. In many respects, election choices mirror the recent US presidential election in terms of potential policy swings to the right of the political spectrum. The Dutch election currently underway will decide is far-right leader Geert Wilders and his anti-immigrant policies will prevail. In France, a potential run-off election scheduled for May 7th could come down to head of the National Front, Marine Le Pen, Republican candidate Francois Fillon, or social liberal candidate Emmanuel Macron. Ms. Le Pen has advocated for France leaving the European Union. 

The European economy continues to improve in part due to continued economic stimulus from the ECB. Growth in Europe has continued to move closer to that of the US.  For 2016, the European Union expects GDP growth of 1.7% as final numbers are tallied. For 2017/2018 the EC expects GDP growth at 1.6% and 1.8%, both estimates increased 0.1% in recent weeks. In December, the €2.3 trillion stimulus program was extended for 9 months.  

For February, Eastern Europe and Russia’s PMIs continued to be in expansion territory, but at incrementally lower levels. Russia’s manufacturing PMI dipped to 52.5 in February after registering a 70-month high at 54.7 in January. Poland’s manufacturing sector has been in expansion for nearly two years.  For February, Poland showed a manufacturing PMI of 54.2 nearly flat with January’s result. 

Asia 

China’s Q4 GDP growth came in at 6.8%, slightly ahead of the expected level of 6.7% and in the middle of the targeted range of 6.5% to 7.0%. The current growth target for 2017 GDP is 6.5%. February’s PMI index for China accelerated to 51.7, ahead of January’s 51.0 result. Higher exports and production activity drove early 2017 improvement. Chinese imports in February were quite high with an unusual deficit of US$9.15 billion recorded. This reflects stronger commodity pricing and good demand. Surveys of business optimism are positive in the near-term as the country restructures its economy and executes its anti-corruption policies.  

China’s auto production in January was 2.37 million vehicles, up 16% from the same month in 2016. January sales of 2.52 million vehicles are significantly ahead of those in January of 2016, up 23% for the one-month period. For the full year of 2016, auto sales of near 28 million are up 14% from last year, a significant rebound from 2015 that saw 24.5 million vehicles produced. 

Polyolefin prices in Asia remain stable reflecting stable oil-based feedstock pricing and firm demand. Thus, far in March, Far East Asian HDPE blow modeling prices have increased slightly, to a range of near US$1,130 to 1,180/MT. Spot ethylene prices in SEA are currently near US$1,100/MT, down US$50/MT in the past two weeks co-current with crude oil declines.  

In the last month, spot propylene and butadiene pricing in SEA have come off peak levels that were see in mdi-March. Propylene spot prices are currently near US$900/MT, down US$50/MT from peak. Current injection molding PP in SEA remains in the range of US$1,100/MT to US$1,150/MT providing a spread for PP of near US$250/MT. Chinese propylene prices have remained volatile, recently trading in a range of US$900/MT to US$1,100/MT. 

Since the beginning of March, SE Asian butadiene spot prices have come down significantly from their peak levels that we near US$3,000/MT throughout February. 

Feedstock – Natural Gas & NGLs 

Thus far in March, US natural gas prices have strengthened by nearly US$0.50/MM BTU and have currently topped the US$3.00/MM BTU benchmark. A late season cold spell has resulted in 68 billion SCF of withdrawn from underground storage the week of March 3. This contrasts with a mild re-injection the prior week. The current level of underground storage stands at 2.295 trillion SCF, representing 54.6% of total capacity. This level is 27% above the 5-year mean storage level for natural gas for this time of year.  

Ethane spot prices for February averaged near US$0.25 per gallon, up about 3c/gallon. With the current excess of ethane, prices tend to track natural gas on an energy-equivalent basis. The EIA has reported total volumes of ethane exports in 2016 were 34.7 million barrels, up 80% from 2015 and at about 8% of domestic cracker usage. These exports are equivalent to 95,000 barrels per day. Exports are now supplied out of Enterprise’s new Houston terminal. With rejected ethane near 500-600,000 Bbl./d, these volumes are not having much impact on pricing. However, Incremental exports are expected to increase ethane to 200,000 Bbl./d by the end of 2017 and then up to 300,000 Bbl./d by 2018. 

It has been reported that the new Oxy/Mexichem cracker is in commissioning/start-up mode. Ethane requirements of 40,000 Bbl./d are associated with this cracker. By the end of 2017, four additional US crackers are expected to come on-line requiring 200,000 Bbl./d of ethane. 

The oil-to-gas price ratio has softened to below 16:1, reflecting firmer gas prices and recently reduced oil prices. As a reminder, the economic equivalent price for cracker feedstock is near 8:1. US ethane crackers currently remain advantaged, but not by a large margin as in the near past.  

For the week ending March 3, the EIA reports that US propane/propylene inventories were 45.2 million barrels, down 8% from last month, and down 27.4% from a year ago. This is cited as a contributing factor for the recent strength in US propylene pricing. The current inventory trends reflect strong domestic demand (weather related) and increased US export capability. Spot prices for propane are currently near US$0.68/gallon, up about US$0.23 per gallon from last year, but still below international prices.  

US Olefins & Polyolefins 

US contract ethylene prices for February settled at up 2.25cent/lb., resulting in a net transaction price of 31.75cent/lb. for the month. This is near the highest level seen since the beginning of 2015 and reflects higher global crude pricing seen until a week ago. Ethylene prices increases reflect slightly stronger ethane pricing, and do not yet reflect the recent drop in crude oil pricing. The new Oxy/Mexichem cracker is reported to be in the commissioning process and is expected to be operating at full rates in April. This is the first of four new start up in the first half of 2017, including CP Chem Cedar Bayou, ExxonMobil Baytown, and Dow Chemical Freeport. While LyondellBasell’s Corpus Christi cracker is now back on-line following an extended turnaround, the company have reported that an operational issue will prevent the newly expanded cracker from running at its new capacity until modifications are made. Spot ethylene prices have recently cooled to US$0.25 to US$0.27/lb. from levels of over US$0.30/lb. seen in early February. 

US contract propylene prices for March have not yet settled. In February, us chemical grade contract propylene was up 6.5cent/lb. to 46.5cent/lb. This was the highest level since early 2015. Current spot prices for propylene are in the low US$0.50/lb. area, up approximately US$0.25/lb. from December. 

The US contract butadiene price settlements was in March were split with settlements up either 20cent/lb. and 24cent/lb., depending on supplier. The weighted average benchmark contract price contract price of US$1.10/lb. is over three times the level of 36cent/lb. seen last March. 

In February, US contract PE prices settled at up US$0.05/lb., offsetting decreases seen in November and December. For March, the industry has proposed an additional US$0.06/lb. increase, but this may be hard to achieve with current weakness in the energy sector and recent softening of spot pricing for ethylene. This increase may be partially implemented or pushed to April. Producer inventories of PE were about 30 days of equivalent production at the beginning of 2017, typical for this time of year.   

US exports of PE in January of 416 thousand MT were down 4% from December, and down an equivalent amount from the full year 2016 average. On a YTD basis, net exports in 2016 were up 2.3% from a year ago. Gross PE exports in 2016 represented from the US represented 26% of industry capacity in 2016. 

US polypropylene exports in January increased significantly and were at 147,000 MT, up 44% from December. This number was 72% higher than the 2016 average, and up 40% over the full-year 2016 average. There numbers reflect global shortages and strong demand. Imports of PP were 15 thousand MT in January, flat with December. 

Contract prices for US PVC in February were up 4cent/lb. in February and an additional 3cent/lb. increase has been proposed for March.  Export pricing for both EDC and VCM have increased in the last month, with EDC up 22% in one month. Along with a seasonal demand uptick, the March increase appears to be achievable. 

European Olefins & Polyolefins 

For March, European the contract ethylene price €1,035 of settled up €15/MT. Since the first of the year, spot prices for ethylene in NWE have firmed about €200/MT to the area of €1,120/MT. Contract European propylene prices were up €50 per MT for March, the third such increase in the last three months, to a level of €865/MT. Since the beginning of February, spot propylene is up €230/MT, and is up €330/MT on a year-to-date basis. Current spot prices, FID NEW are near €1,0000/MT.  

European contact butadiene prices for March were again up strongly, this time by €350/MT from February, to €1,750/MT. However, spot prices appear to have come down from peak levels see in late February that were near €2,750/MT. Current spot pricing is now closer to €2,000/MT.   

The European benzene contract price for March is down €46/MT to a €937/MT reflecting the recent softness in crude oil. However, this is still 56% higher than a year ago, and additional increases appear likely in the coming months. 

Polyethylene prices in Europe remain firm. Prices for HDPE injection molding grade for NWE thus far in March remain like February levels of near €1,250/MT, in a range of up €75/MT to €100/MT from the beginning of year.  

Global Chlor-alkali 

The US Chlorine Institute reported that US chlorine production in January was 1.06 million short tons, up 3.5% from last year and up 1% from December. Reported operating rate of 88% was relatively high and reflected a recent industry capacity shutdown. For the entire year 2016, US chlorine production averaged 84% of effective capacity. Recent movements of export prices for chlorine-containing PVC intermediates VCM and EDC have been positive. In 2016, caustic prices improved for seven consecutive months, and producers implemented a significant portion of the announced US$40/ST Q1 increase. In addition, an increase for caustic prices of US$60/ST has been announced for the second quarter. Spot prices for export caustic in January averaged US$370/ST, up 34% from last year.  

Eurochlor reported chlorine production for Jan 2017 at 841,277 MT, up 2.4% from last year. Operating rates were reported at 83.9%. European chlorine Production for the entire year of 2016 of 9.38 million MT was 2.1% below last year and represented an overall 80% industry operating rate. At the end of the year, caustic stocks were reported to be only 200,623 MT, 18% below last year, near their lowest level in over 10 years. Inventories are beginning to reflect permanent shutdowns and conversions associated with the phase out of mercury cell technology units. CMR believes that during 2016 and 2017, 31% percent of European mercury cell capacity will be shut down, representing 8% of total European capacity. This will push operating rates up and likely will necessitate caustic imports.