We continue to see significant volatility in US product prices, and this increases uncertainty around the underlying direction of the markets for the balance of the year. The recent storms have likely created enough production interruptions to take any slack that had been developing in August out of play, and while we see that in the most recent moves for ethylene and propylene – Exhibit below - it is likely more interesting to see what happens with polymer pricing as we move through the balance of September – as this will determine profits for most. While we focus on the high prices in the US more than we do the prices in Europe, it is also worth noting that European polyolefin margins remain very high, with one local producer confirming this week that records continue to be set in terms of cash flows and unit profitability. The frustration for the US producers impacted by the storm is that while their plant closures may be contributing to the tight markets, they do not get the benefit of the higher margins on the impacted facilities. While we would expect many to produce extremely high numbers for 3Q – a handful will likely lament how much they could have made had their plants operated fully. See more in today's daily report.
We have talked a lot over the last year about our preference for PVC as likely the better longer-term story within polymers – more stable growth – more limited global investment and less impact from the plastic waste moves, as very little PVC ends up in packaging. The exception is the medical device space, where demand for PVC in single-use applications is growing as illustrated below. While the medical device industry is setting up to use recycled PVC it is going to be hard to close the loop here as medical waste is generally quite contaminated and PVC does not do well in a conventional pyrolysis process because the chlorine molecule is a contaminant. The solution will likely be getting PVC from end-of-life consumer durables and recycling that PVC back into medical applications. Disposal of the medical waste is best done through a pyrolysis or gasification process that includes very high-temperature plasma technology. These facilities exist and operate well outside of the US, and we would expect to see broader acceptance within the US over time. See more in today's daily.
We talk at length about the weather risks in the US following multiple extreme weather events during the last 12 months, but we forget that other regions are equally susceptible. Not only are there many chemical facilities on the riverways impacted by the floods in Germany but a significant volume of chemical trade takes place by barge on the rivers for both gases and liquids. We do not have an industry impact assessment for this tragedy in Germany, Belgium, and the Netherlands, but on-site flooding, especially any flooding that impacts electrics, can result in extended shutdowns for repairs, as we have seen in the past in the US.
See today's daily for more on this, but while the freight rate moves are more than likely going to correct to a degree at some point, their continual escalation has multiple implications for the chemical and plastic industry as they are most impactful on cheap imports from Asia targeting low-cost furniture, appliances, toys, and household goods where the base cost of the product is low and the move from $3,000 to $10,000 per container wipes out any advantage of manufacturing offshore.
About a year ago we wrote a piece highlighting the longer-term risks to plastics supply and demand because of oil company interest in chasing a market that they perceived to be growing faster than other oil products markets, and potentially running headlong into a plastic market that was either seeing slower growth because of concerns around plastic waste and sustainability or was declining.
A year of COVID-related uncertainty put some of the projects on hold, but as we move through 2021 we have a couple of factors driving the plastic bet again. First, demand for plastics is very high and pricing is “off the charts”, suggesting that converting oil to plastics could be profitable as well as a home for some of the oil. Second, with the climate agenda now front and center in every economy and more discussions around electric vehicles, hydrogen, and biofuels, the future for oil demand is looking incrementally bleaker. The economics of NOW thesis would support large-scale investment in oil to chemicals – either directly – or through refining to more common feedstocks. But…
The theme of product shortages continues, with prices in China reflecting the global tightness and signaling that the import dependence is still there for some products, despite the recent and continuing capacity additions. The base chemical price rises in the US are contributing to the rising US producer price index for February and given that we have seen further price rises since February, March could show another jump.
Today we had earnings reports from both Braskem and Lanxess. It is hard to fault either company for the tones and expectations lined out in today's report. This is an industry where forecasting is generally problematic as there are too many potential influences that are not only outside the control of the companies themselves, but also prone to surprise movements regularly. Who could have foretold COVID and the early impacts of COVID on all commodity and specialty markets. Equally, no-one forecast the rapid rise in durable demand in 2H 2020 the subsequent impact that it has had on global supply chains – and then there is the weather!