While we will talk more about the Dow project in Alberta on Sunday, one of the problems that the stock faces in the light of the announcement is largely unrelated, which is the growing expectation that margins in 2022 will be significantly lower than in 2021. This is the view coming out of the recent EPCA meeting and as the ethylene/propylene chart below shows, monomer pricing is already weakening in the US as production ramps back up following the recent storms – we note in Exhibit 1 from today's daily report the squeeze on ethylene margins as prices fall, while costs rise. But it is also worth noting that margins remain quite healthy, while well below their highs. Those companies who built new ethylene capacity in the US over the last 5 years would have had a margin similar to the current level shown in Exhibit 1 in an optimistic capital case.
Source: Bloomberg, C-MACC Analysis, October 2021
Separately, there are still apparent pockets of tightness as illustrated by the disconnect between auto production and the price of auto-related polymers and chemicals as shown in the exhibit below. This likely reflects the price protection that the auto industry enjoys with prices lagging demand and raw material costs. While the automakers may suffer from the dual problem of lower production and higher materials prices in 3Q and 4Q 2021, the input prices are likely to reverse, perhaps more quickly than they increased as we head into 2022. Lower demand from the automakers should give them ample leverage to push prices lower especially if chip supply remains constrained. Conversations with one automaker this week confirmed the multiple forecasts that suggest chip shortages will continue. Within chemicals, the impacts will be broad, but because of the very premium pricing we see today for polypropylene and the discussion yesterday about increased polypropylene imports, we see the downside risk to prices here as most significant.
Source: Bloomberg, C-MACC Analysis, October 2021
