While it might be tempting (and perhaps easier) to focus on the negatives in the Dow earnings release – such as price declines in polyethylene and higher costs in Asia, we think it is much more interesting to focus on the positives. For a while now we have been suggesting that the industry is gearing up for a mega-cycle of profitability, perhaps as early as 2024 – see report – and we see nothing in the current macro environment or in Dow’s release to suggest we might be wrong. Demand growth is very robust across the industry, with consumer spending driving some quite impressive GDP growth numbers in the US in 4Q 2021, as an example. We often see companies suggest improving global operating rates in earnings calls, and while it is mostly hopeful and self-serving, the chart below, from Dow’s report may be conservative. The very high ratio of Asia costs versus US costs in the 2012 to 2014 period (second image below), because of high oil prices, effectively shutdown new naphtha based ethylene investment in Asia for several years and it is what prompted China’s move into coal-based and methanol chemicals (China has almost no ethylene capacity from methanol or coal in 2011, but close to 6 million tons by 2016). As the price of oil rises and the cost curve works against China and the rest of Asia again, the move to more coal is less attractive because of the environmental footprint – coal gasification creates a lot of CO2 emissions and elaborates CCS investment would be needed to justify further expansions, which increases the cost of ethylene production.
Our latest Sunday Thematic report, "Damned if you Dow and Damned if you Down’t. Hard to win", centers around Dow's announced development of a new net-zero carbon emissions site in Alberta, Canada. It discusses company-specific and sector ramifications for Dow's strategic move to produce low-cost low carbon polyethylene in Canada while also expanding capacity.