With the rapid rise in energy prices, we are seeing price increase announcements for many intermediate chemicals, especially in regions of the world where margins were already very slim. The energy inflation issue is hard to call, with more and more commentators suggesting that it could be prolonged (which generally means it will be short), but lots of dislocations support duration. We would certainly be pushing prices today on the back of energy costs that could move higher again, and given that many chemical and polymer buyers have price protection in their contracts (for at least a month), producers could face a margin squeeze and an uphill climb to get adequate price coverage. Seasonally, demand for chemicals and polymers is at its weakest for the next couple of months, so the price hikes may be difficult. However, because of supply chain constraints, buyers may feel less confident and concede more easily. We could see a significant swing in sentiment from the chemical companies on 3Q earnings calls over the coming weeks as they talk about how good results were in 3Q but throw up all sorts of cautionary statements concerning 4Q.
The exception is likely to be PVC. Southeast Asia is very net short PVC and with Chinese prices rising because of lack of power and/or lack of calcium carbide, Southeast Asia prices will need to rise also to attract material. If India has its own power crisis, local PVC costs will rise as well. Higher energy costs all around the world are likely to impact PVC production costs and we could see prices go higher everywhere. While natural gas prices are up in the US and ethylene costs are up, the US has a much lower relative cost than the rest of the world and this could be a short-term (and perhaps prolonged) earnings boost for Westlake, Shintech, OxyChem, Formosa and Olin. See more on PVC in today's daily report.
Source: Bloomberg, C-MACC Analysis, October 2021
