As noted in Exhibit 1 from today's daily report, the jump in oil prices has plunged the European polyethylene producers into the red and pushed Asian polyethylene producers further into the red. This will inevitably result in price increases as basic chemical and polymer producers will shut down at negative margins, and these price rises offer an opportunity for the US, Middle East, and select other producers.
Source: Bloomberg, C-MACC Analysis, March 2022
As the chart above shows, US natural gas prices are weakening, and any near-term push to increase US crude output will lift natural gas and NGL production, especially if that production is focused in the Permian, which has a very high associated gas content. With a finite limit to LNG export capabilities, North America is essentially decoupled from the rest of the world concerning natural gas prices and while most of the Middle East is essentially in the same position, and there are pockets in Europe, based on either local gas or imported ethane, what is going on the in energy markets should just mean more profits for the US producers. We would expect the HDPE margin in the US to start trending positive again as US producers can raise prices against a flat to lower cost. Many of the major polyethylene producers in the US have significant capacity in Europe, and LyondellBasell has capacity in China, so all will have bad offsets for their good trends in the US. Westlake is less exposed to Europe, but European PVC costs are much higher because of natural gas and power prices, and significant volumes of European PVC had been moving to eastern Europe and Russia so this business is likely in real trouble today.
