While we remain advocates of “stronger for longer” with respect to chemical demand and pricing in the US, the auto data does suggest that the US consumer may be cooling off a bit in reaction to higher prices and higher borrowing rates. Historically, the chemical industry has a habit of running headlong into a downturn while waving an “everything is great” flag, and the RPM results and outlook have a vague “deja vu” feel to them. We also note some surprise at the robustness of the MDI market in the chart below, and it would be wrong not to admit that our cautionary antennas are rising. The auto exposed products should still see some upside from higher auto production in the second half of the year, but otherwise, a possible consumer pullback to take the wind out of the sector sales, especially if the US is constrained moving out products because of container and shipping issues. The significant cost advantage remains in the US but the ethylene market over the last week is a reminder of what can happen when you struggle to find someone who can take the last pound. Given infrastructure, energy, and clean energy investment, as well as reshoring, many materials could see significant offsets to consumer spending pullbacks and our focus would remain on PVC and building products, as most of the hit would be in consumer durables. Metals demand should remain strong regardless. For more see today's daily report.
The exhibit below looks at the difference between a strong butadiene market in the US and a much weaker one in Asia. The strength in the US is a function of the stronger US economy and consumer spending as well as logistic issues with products containing butadiene derivatives, but also because there is no incentive to increase heavier cracker feedstock use right now in the US and consequently co-product butadiene supply remains constrained.
The relative strength in US propane versus ethane is something we have talked about before, with the strong export pull on propane, pushing prices higher, despite equally strong demand for ethane in US ethylene units and for export. The projects to consume propane coming online in the next 12 months overwhelm the projects to consume ethane in our estimate and consequently, we believe that the delta (in chart below) will remain high and may widen further. On a cost basis, this could put US propylene and a distinct disadvantage to US ethylene and at the margin might help ethylene derivative demand relative to propylene derivative demand – most likely in paint additives, but also in some polymers where polypropylene can be substituted with other materials – it may provide a bit of a lifeline for polystyrene if the polystyrene recycling initiatives gain traction. See our daily report for more.
The concerns about supply chain inflation hurting chemical demand are likely very end-use specific. While the packagers and consumer goods sellers are seeing significant inflation in all raw materials, not just polymers, the packaging is a minor component of the cost and value of what they are selling and while it may hurt their earnings, it is unlikely to stifle demand – none of us is likely to stop buying milk, orange juice or cookies if the prices rise a couple of cents because the manufacturers are trying to cover some of their higher costs.