Following on from the core theme of today's daily report, demand could provide the lifeline that the US chemical industry needs to get through what looks like a potentially oversupplied 2022 – note the successful start-up of the ExxonMobil/SABIC facility in Texas, announced today. While we still think that the US market will be looser in 2022 than in 2021, barring any above-trend weather events, strong demand growth could offer some pricing protection for the industry – especially given the input inflationary pressures that we are seeing. If the customer base is looking for increases in deliveries, which we expect to be the case in 2022, it will be easier to defend pricing and gain pricing where costs are higher. Some of the momentum that we are seeing in the commodity stocks year to date is a function of a broader inflation trade, but some is likely in anticipation that 2022 will not be as bad as had been expected and on that basis, the sector looks particularly inexpensive – even today after the early year rally. It will be a little harder for the specialty and intermediate companies depending on how long they have to play a lagging catch-up game with costs. But if, and when, costs peak, they should see margin expansion as costs fall and will be able to keep some of the gains, especially if their demand is also growing.
We are not surprised by some of the DuPont stories this morning. We had predicted a long time ago that Mr. Breen was far from done on the restructuring of the company and that COVID might have caused a delay in some of the plans but not changed them. Mr. Breen did a very value-enhancing job of taking Tyco from a slightly out of control, then GE wannabe, to a group of focused companies, separated from the whole. What he has panned for DuPont comes from the same playbook in our view. The divestments and acquisitions announced today will create a core at DuPont – focused on electronics, water, protection, industrial technologies, and “next generation” automotive. Given some of the recent industry moves, we would expect significant interest in the engineering polymers and other resins platforms. After these moves are complete, while not yet obvious from a valuation perspective, we could see a further split, carving out an ESG friendly piece focused around water and protection, although the moves announced today may be enough to get the company an earnings multiple boost.