In yesterday's Sunday thematic and weekly recap report titled "Waiting For The Big One – Is A Chemical Mega-Cycle Ahead?", we referenced the global shortage of basic chemicals and polymers in the late 80's. We think this could repeat because of limited capital spending to grow basic chemical capacity due to cost and long-term demand uncertainties and this could cause a mid-decade global profit mega-cycle. Emission abatement initiatives and concerns with feedstock prices/availability will work against the justification of capacity expansions in every global region. Demand growth mitigation from plastic bans, renewables, and increased like-for-like recycling is unlikely to impact materially pre-2026/27.
Source: C-MACC research, November 2021
The shortage-driven rally of the late 1980s was anticipated to repeat by the industry again and again but never materialized, largely because someone was always investing in anticipation of it. There has never since been a prolonged period of underinvestment such as there was from 1982 to 1987. In Exhibit 1 we show how the “old” Dow stock performed during the rally and compare it with the margin swing in the US. Note the anticipatory move in the stock price. The shortage and the profit spike were global and applied to ethylene, styrene, vinyls, and all of the polymers. In the second exhibit in the main report, we show the period from 1986 to 1991 for an average US feedstock – ethane, propane, and naphtha. At the time a far larger portion of US ethylene was made from naphtha and other oil fractions than today. Ethane margins spiked higher than the average – but Exhibit 2 (and the margin in the chart above) show the duration and at the time the margins more than justified new investment. At one point during the period the payback time on a new ethylene facility was less than 8 months, and that period of profitability lasted for about a year and a half. The more recent margin rally in the 2012 to 2015 period, while very good for US producers, is not comparable as it was specific to the US and driven by feedstock edge – in Exhibit 3 in the main report we show average global margins – US ethane, European naphtha, and Asia naphtha, and the contrast with what was happening in the US is significant.
The report goes on to discuss demand factors that might either enhance a peak or prevent it, ESG initiatives that are likely to either prevent or delay capital spending on new facilities and talks a little about the challenges of forecasting 2022.
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