As we have been suggesting for some time, there are pockets of real strength in chemicals; identifying them is the hard part. It is not enough to have pricing strength in a market where raw material prices are volatile daily and we have seen plenty of examples of companies with very strong end demand dynamics missing earnings because of a cost squeeze. We continue to highlight the competitive strength in the US in basic chemicals because of the decoupled and relatively low natural gas price and this is likely a large piece of the Dow earnings strength – strong polyethylene demand against a backdrop of relatively stable and lower costs. While polypropylene (Braskem) remains extremely profitable in the US, it has seen more sequential weakness than polyethylene – as we show in Exhibit 1 of today's daily report. That said, both polyethylene and polypropylene margins in the US are significantly higher than was likely expected this year and certainly what has been reflected in stock valuations, even with the commodity chemicals rally. Dow is also seeing the benefit of a very strong silicones market – something that was covered in detail in Wacker’s release earlier this month.
Source: Dow Investor Presentation – March 17, March 2022
US demand for chemicals and polymers remains very strong and we suspect that export opportunities have increased already, especially to Europe. The rail data below shows exceptionally strong growth and is in line with what we are hearing from producers. As we think about inflation and the possibility of a recession, it is worth noting that downcycles in chemical demand, when they occur, are sudden, and generally catch everyone off guard. There is, however, generally a trigger like a collapse in energy prices which starts a de-stocking cycle as buyers think they can buy for less tomorrow. We do not think a gradually increasing interest rate environment will cause that shock (a step change in interest rates would), and while energy costs remain high and volatile the natural reaction will be to hedge by opportunistically adding to inventory rather than reducing it. The Dow and Braskem sales numbers are very supportive of others in the space – while this will be good for LyondellBasell, we would focus on Westlake, with a better polyethylene market just adding to the many other positive trends at the company.
