The linked China polyethylene headline highlights a possible risk for US producers, as we link much of what is happening in China to logistic challenges. China has high production costs in a high oil environment, which is driving some of the cutbacks, but a portion is likely driven by an inability to move product and a huge disincentive to build inventory at break-even or negative margins. If the current shipping challenges in China roll over more aggressively into the rest of the world and container and vessel availability fall again, the US may face more challenges exporting polymers. As warehouse space fills, especially on the Gulf Coast, we may see some need to cut back rates, even if all of the material in storage currently has an agreed home and an agreed price. The US can afford to build inventory, as production costs still remain attractive relative to international prices, but if the supply chain is full there could be nowhere to put more material. One of Union Pacific's issues highlighted last week was too much inventory in rail cars, snarling up the system.
Source: PPG – 1Q22 Earnings Result Presentation, April 2022
The logistic commentary above ties well into the PPG chart, which summarizes the logistic and labor challenges that the company has faced and is facing. Margins in the business are lower. While raw materials are a large part of this, logistics are also causing cost headwinds as things like truck and labor shortages are being addressed through higher freight costs and higher wages. One of the issues we had been looking for in 1Q 2022 earning more generally was how much working capital would increase – partly on pricing but partly on supply chain concerns. PPG’s inventories increased quarterly, but receivables jumped more meaningfully and overall working capital rose by close to $1bn. Dow reported higher working capital in its release yesterday, but not by as much as PPG. We see working capital increases consuming cash in all industry sectors in early 2022. See more in today's daily report.
