Chemical Industry Summary
The recently completed first quarter financial results reported for US chemical companies indicated year-over-year revenue growth and solid, if not record-setting margins for many commodity chemicals. Earnings were generally flat from last year’s Q1 levels, except for those companies leveraged to the commodities titanium dioxide and methanol, and to a lesser extent chlor-alkali all of which benefited from positive price and volume improvement. Price momentum for these products continues into Q2. However, prices for commodity polyolefins have stalled, unaided by softening feedstock costs associated with lower oil and gas pricing.
Currently, the major focus in the global chemical sector is an unprecedented wave of industry consolidation highlighted by the Dow/DuPont merger, the Tronox/Cristal merger, the Sherwin-Williams/Valspar merger, Linde/Praxair merger, and the recently announced Huntsman/Clariant merger. In addition, the Ag sector is undergoing major consolidation with the Bayer/Monsanto acquisition and others. In many cases, smaller parts of companies are being sold off to satisfy regulatory agencies concerned with anti-trust and industry consolidation issues. Huge potential synergies have been claimed and improved valuations are given as the motivations for these moves, but only time will tell if each business transaction will accomplish its intended goals.
Macroeconomics and Geopolitics
Americas
The US economy continues to show incremental upside, but 2017 is not shaping up to be a breakthrough year in terms of growth. Recently, US GDP growth for Q1 was revised upwards to 1.2% from a 0.9% initial estimate. The Atlanta Fed now expects 3.6% growth in Q2 vs 3.0% prior. However, the composite growth expectation for 2017 is in the range of 2.3% to 2.5%.
For May, the US jobs report reported that 138,000 jobs added. The last three months averaged 130,000 jobs added compared to the 2016 average of 187,000 jobs added per month. The US unemployment rate edged downwards to 4.3%, at a level that has been historically seen as full employment. However, the labor participation rate decreased to 62.7%, down 0.2% for the month, and many of the new jobs were in the lower-paying service sector.
In May, US sales of light cars and trucks were 16.58 million units, down 1.4% from April and down 4.5% from last year. On a year-to-date basis through May, US auto sales are down 1.4% from last year. This result is in-line with the recent consumer spending trend in the US. Consumer spending is expected to be up only 2.3% in 2017, down from 2.7% in 2016, per the US Conference Board.
For May, the recent momentum of US manufacturing activity declined, but was still in mild expansion territory. Markit’s reported May US manufacturing PMI index cooled to 52.7, down from 52.8 seen in April. New orders increased at a slower rate and the deceleration was partially due to a pull-down of inventory by producers.
US housing starts in April declined slightly to a level of 1,172 thousand on a seasonally-adjusted basis, about 4% below the prior YTD average. In its updated June forecast, the NAR (National Association of Realtors) is projecting 2017 starts at 1.265 million, up 8% from 2016 and very near its prior forecast. The 2018 forecast calls for US housing started of 1,375 thousand, an additional increase of 8.7% over the revised 2017 projection.
Sales of existing houses in April were 5.57 million units, up 2.6% from last year, but down a bit from the record-setting level of 5.70 million see in March. The average housing price for existing home sales in April was USUS$244,800, up 5.3% from last year. Per Freddie Mac, the average interest rate in April dipped down for the first time this year to 4.05% from a prior YTD average of 4.17%. Sherwin-Williams reported same-store paint sales growth in Q1 of 7.5%, a relatively strong result. Architectural paint sales in the past have been a strong function of existing home sales.
The manufacturing sector in Mexico improved slightly in May with a PMI index of 51.2, up from 50.7 in May. The business outlook has improved as has business confidence. The recent agreement concerning the US and Mexican sugar tariffs suggest that US President Trump’s pledge to “tear up NAFTA” may be closer to campaign rhetoric than political strategy.
In May, manufacturing activity in Canada declined slightly from a very strong March/April level, but overall remains in strong expansion territory with an index of 55.1. continues to accelerate on improved domestic demand and a strong outlook. Canada’s April PMI of 55.9 was the highest in three and one-half years and well ahead of the 55.5 level recorded in March. In May, production volumes, business orders and job creation all improved.
Brazil’s manufacturing sector recorded a PMI of 52.0 in May, the highest level in 51 months. This is the second consecutive month in expansion territory and may indicate that the sharp manufacturing downturn is over after a two-year decline. In its April 2017 forecast, the IMF expects Brazil’s GPD to be nearly flat after falling 3.6% in 2016. GDP growth could return to modestly positive territory in 2018/2019, in the 1.5% to 2.0% area.
Europe
In the UK, Prime Minister Teresa May is trying to assemble a new government following a surprise poor showing in the recent election in which her Conservative party lost a significant number of seats. The UK appears to be wavering on the policy of a ‘hard Brexit’ and may seek more accommodations with the European Union ahead of the mandatory exit deadline. In France, the recent election of pro-EU centrist Emmanuel Macron scored a decisive victory in the presidential election over far-right National Front Candidate Marine Le Pen. In Germany, Angel Merkel’s re-election bid is gaining momentum and Europe’s swing to populism and anti-immigration, isolationist policies appear to be losing momentum.
The European economy continues to show strength in part due to continued economic stimulus from the ECB. As a region, the Eurozone recorded a strong manufacturing PMI result of 57.0 in May, up again from 56.7 seen in April.
The German manufacturing sector showed strength in May recording a PMI of 59.5. Ireland’s PMI was at a 22-month high at 55.9. The European Central Bank extended its €2.3 trillion stimulus program in December, through the end of 2017. In its April 2017 forecast, the IMF expects the EC’s GDP growth at 1.6% and 1.8% in 2017 and 2018.
For May, recently improved growth trends for Eastern Europe and Russia have moderated but remained in expansion territory. Russia’s manufacturing PMI was recorded at 52.4 in May, down from a 50.8 reading seen in March. Poland’s manufacturing sector activity moderated, registering a manufacturing PMI of 52.7, down from 54.1 in April. The Czech Republic saw a manufacturing PMI in May of 56.4, down from a 57.5 level recorded in April, according to Markit.
Asia
For the first time in 2017, China’s manufacturing sector in May posted a PMI index below the neutral mark of 50.0 The reported index was 49.6 in May. After a positive start to 2017, Chinese growth appears to have moderated and GDP growth appears to be below 6.5%. Slower orders and rising costs have trimmed activity the manufacturing sector.
China’s auto production in the first quarter was 7.133 million vehicles, up 8.2% from 2016 on a YTD basis. Full-year auto sales were at a record in 2016, up 13.6% from 2015, but are expected to be near 5% growth this year per the China Automotive Association, like 2013/2014. In April, China’s passenger car sales fell 3.7% to 1.72 million. The strong growth in Q1 is due in part to a sales-tax incentive that pulled sales forward. This incentive was curtailed in April, helping to explain Aprils shortfall.
Polyolefin prices and monomer prices in Asia in recent weeks have eased in concert with lower feedstock prices. Thus, far in June, Far East Asian HDPE blow modeling prices have eased to the area of USUS$1,125 to 1,1175/MT. Spot ethylene prices for FEA are now US$885/MT, down from US$1,155/MT seen in early May. Asian Propylene is currently US$825/MT on a NEA basis, nearly flat with prices at the beginning of May, despite lower prices in NA and Europe. However, Asian butadiene has followed global prices and has come down substantially in recent weeks. Current BD pricing in SEA is US$870/MT, down from US$1,250/MT at the beginning of May.
Feedstock – Crude Oil
In May, OPEC decided to extend its November 2016 initiative for crude oil production cuts for another nine months. Compliance by member countries to reduced targets has been reasonably good, but the overall impact of the cuts has been muted by additional supply from non-OPEC producers and mediocre compliance from non-OPEC producers to targeted production levels.
As of June 13, WTI prices were trading just above US$46/Bbl., down about US$5/Bbl. from late May. In general, the sentiment for future oil prices is bearish based on recent data, especially crude oil inventories that suggest that the anticipated global supply/demand re-balancing will not be achieved in the second half of 2017. In the US, the EIA reported total crude stocks in May at 1.2B barrels, down only 1.1% from January. OPEC reports total OCED oil stocks at 2.0B barrels, down only 2% from the beginning of the year.
US crude oil production for the week ending June 2 was 9.32 million barrels per day, flat with last month. This level of production is up 800,000 Bpd from last fall, and effectively offsets the majority of the OPEC production cut that is targeted at 1.2 million Bpd.
In its June report, OPEC reported crude oil production numbers for May that were up 336,000 barrels per day from the April production. Over half of this increase was due to Libyan production that bounced back from issues seen in April. The May level of production represented a 52% compliance with the cuts targeted in November 2016 (1.2 million barrels per day). Prior to May, OPEC compliance has been near 90%.
OPEC reported that Russia’s production in April was 11.18 million barrels per day, flat from the beginning of the year. This number implies a 50% compliance with the announced cut of 300,000 barrels per day pledged in November 2016. Total non-OPEC cuts of 558,000 offered by several countries have yet to be achieved.
For the week ending June 9, Baker Hughes reported that the US total rig count (both oil and gas directed) was 927, up about 40 rigs from a month ago and up substantially from last November’s count of near 570. Oil-directed rigs are 80% of the total. The rig count in the Permian basin grew by 20 in the last month, half of the total increase. All the Permian rigs are oil-directed.
Feedstock – Natural Gas & NGLs
US natural gas prices in the last month have generally moved sideways to slightly downwards. This is early in the summer season when demand traditionally picks due to increase air conditioning electrical load. In the last two months, prices have hovered near USUS$3.00/MM BTU at Henry Hub. The week ending June 2nd saw total US inventories of 2.63 trillion SCF, down 11% from last year. While this level was 17% above the 5-year average of 2.25T SCF, it was 11% below the recent 5-year maximum average. This reflects a reasonable balance between supply and demand following a period of chronically high inventories. This week’s injection to underground inventory was 106B SCF, the highest level of injection thus far this year.
Ethane spot prices for May averaged near USUS$0.246 per gallon, up 1.5cents/gal from April. The EIA reported ethane/ethylene inventories of 54.3 million barrels at the end of March, 54% higher than a year ago but down slightly from February. In March, US ethane exports shot up to 170,00 Bpd, 25% higher than the January/February average. This surge was facilitated by the start-up of Enterprise’s new ethane export terminal in Houston. Ethane export volumes are expected to be in the range 200,000 to 250,000 Bbl/d by the end of 2017. Also by the end of 2017, incremental ethane demand of 200,000 Bbl/d is anticipated for domestic crackers. The net result is additional usage of roughly 400,000 Bpd, bringing down substantially the level of ethane that is currently rejected into gas. Thus, CMR is expecting 2018 ethane prices to be over 40cents/gal and 2018 ethane prices will be more than 50cents/gal., prices that are higher than current forecasts by other consultants.
US propane exports for March were also at a high level. At 31.3 million barrels, exports were up 50% from last year. Propane inventories have dropped sharply since late 2016 as new export facilities have been commissioned. For the week ending June 2, the EIA reports that US propane/propylene inventories were 50.4 million barrels, down 35% from a year ago. US prices for propane are currently trading near USUS$0.60/gallon, up 25% from a year ago, but are still well below international prices.
US Olefins & Polyolefins
US contract ethylene prices for May settled higher by 1.25cents/lb., resulting in a contract price of 33.25cents/lb. and a net transaction price of 29.25cents/lb. Downwards price pressure is seen resulting from high industry operating rates, adequate downstream inventories, and stable, low feedstock pricing. Crude oil prices have softened and improved European/Asian cost positions, so that pricing momentum from export opportunities has been capped. US ethylene spot prices were in the mid-30’s in January, but dropped to the mid-to-upper 20’s in February and have traded in a relatively narrow range of US$0.25-0.30/lb. since this period. In the last couple of weeks, prices have trended to the lower end of this range. Operating rates for US crackers remain firm at or above 95% of capacity on average. The turnaround schedule for Q2 is light, and only 2% of US capacity is expected to be off-line.
US contract propylene prices for May settled at down 7.5cents/lb. following a drop of 6.0cents/lb. seen in April. The May contract benchmark for polymer grade propylene was 37cents/lb., pre-discounts. Current spot prices for propylene are approaching the US$0.35/lb. area. Somewhat lower contract prices for propylene in June are expected when the contract settlement is reached in a few days. The start-up of the new Enterprise PDH unit is expected anytime and will add 750,000 MTPA supply to the US market.
US contract butadiene prices have fallen 60cents/lb. from the peak level of US$1.10/lb. seen in March. For June, the decrease slowed for 4cents/lb., sharply down from the 29cents/lb. drop seen in May. US contract benzene prices in June were up one penny per gallon from May at US$2.70 per gallon.
In May, the consensus view is that US PE settled down 3cents/lb. Producers have been pushing to implement the second half of a 6cents/lb. increase that had been proposed in March. However, a combination of lower energy/feedstock prices, tepid demand growth, anticipated start-ups of new capacity and adequate inventories have worked against implementation of additional increases. June could see another decrease in prices pending feedstock movements, and some analysts are predicting another 2-3cents/lb. decrease by the end of the summer.
In May, polypropylene prices fell an additional 7.5cents/lb. following a drop of 6cents/lb. in April. With monomer prices dropping an equivalent amount, margins have been relatively steady.
In March, US PVC producers got 2cents/lb. of a proposed 3cents/lb. increase. A further 3cents/lb. increase was proposed for April, but this increase has struggled and was partially implemented. US PVC prices appear to be flat in the coming months as higher chlorine costs will be offset by lower ethylene pricing, and demand is not firm enough to lift prices and margins substantially.
European Olefins & Polyolefins
For June, the European contract ethylene price decreased by €35/MT over, settling at €1,015/MT. Downwards pressure is coming from softening global oil prices and tepid demand. Naphtha in NWE is currently trading at, down US$/MT in the last month.
In May, spot prices for European propylene dropped nearly 15% from April to €855/MT. Contract European polymer grade propylene prices are currently €820/MT, down €60/MT from May. European prices for PP homopolymer are currently near €1,125, down €130/MT since the beginning of May.
Following a €225/MT drop in May, contract European contact butadiene prices for June slid an additional €300/MT to settle at €1,225/MT. Current spot pricing is near USUS$1,850/MT, about half of the level US$1,500 seen in early May.
In June, European benzene spot prices have slid US$20/MT to a level of US$840/MT following the recent decline in crude. Prices have held within a range of US$825 to US$850/MT since May.
Spot European high-density polyethylene, blow molding grade prices in Europe are currently near US$1,150, depending on grade, down from US$1,225-1,250/MT seen at the beginning of May.
Global Chlor-alkali
The US Chlorine Institute reported that US chlorine production in May was 31.5 million short tons, down 2.0% from last year. The reported effective operating rate in May of 82% (nominal OR of 80%) has declined following a strong March that recorded operating rates of 93%. Lower operating rates and hence exports were primarily due to planned outages, most notably at Olin and Occidential Chemical.
In its Q1 reporting, Olin reported that US domestic caustic prices increased US$10/ST in the first quarter and a further US$45/ST in April. Analysts are forecasting continued pricing improvement of around US$10/ST per month through the summer period. Domestic chlorine prices also improved during Q1 in a range of US$15 to US$25/ST.
Eurochlor reported chlorine production for April 2017 at 790,151 MT, up 18% from last year, a month that saw significant planned outages. Operating rates were reported at 80.0%. Caustic stocks of 194 thousand metric tons were 15% below a year ago, matching the lowest inventory in the last 10 years. 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 support global caustic prices and will provide a home for additional imports.
Contact us at ADI Chemical Market Resources to learn how we can help.