We note the polyethylene price nominations in the US, timed by some to coincide with earnings releases this week and next, and would remind clients that there is always price momentum in commodities, one way or another. In our view, the price increase moves aim to maintain directional momentum (upwards) while giving the polymer producers some cover should natural gas prices spike further. US ethane prices are now tracking natural gas more closely and have moved up meaningfully over the last few weeks, and US ethane-based ethylene margins have fallen around 80% since the start of the year, with at least half of that coming from cost increases. All polyethylene producers are integrated back to ethylene, and the price nominations will be attempts to recoup some of the cost increases. This is against a backdrop of still very strong polyethylene margins in the US, which although way off their 2021 highs remain much higher than in 2019 and 2020 and the longer-term average. This is covered in our Weekly Catalyst report each Monday. Ethylene margins are summarized in exhibit below and the chart shows the impact of higher costs in the US and falling spot ethylene prices as the US now has more surplus ethylene capacity and is looking for export homes for ethylene and easy to ship derivatives. As we have noted before, the jump in margins in Europe and Asia is because of extreme volatility in naphtha markets over the last couple of weeks. We would expect margins to be lower next week based on naphtha moves this week.
We have covered some of our Huntsman logic in today's daily report, but we would like to point out another concern that we find with Starboard’s proposal – the focus on operations and the nomination of Jim Gallogly as a potential board member. While we have nothing but great respect for Mr. Gallogly, and the work he did at LyondellBasell, we are concerned that Huntsman’s business model would not be best served with a “larger than life” board member with a very strong commodity background. We have seen several significant mistakes made in the past by commodity-minded companies and leadership, applying somewhat linear thinking to acquired businesses and we believe this could be a risk here. When Dow acquired Rohm and Haas one of the few mistakes that were made was looking at the acrylic acid business like a commodity and trying to drive more production through the units. The effect was to oversupply the markets and depress pricing and margins and it took a couple of years for the right management team to get the business back on track. Huntsman likely does not need more polyurethane and epoxy production if doing so creates a race to the bottom with competitors and destroys margins. The intermediate and specialty chemical business is as much about matching supply to demand as it is about plant throughput and efficiency. Every company can improve its operations and improve efficiency and costs but for some businesses, more material is not necessarily better. We believe that Huntsman’s stock would react negatively if the strategy changed to one of pushing as much volume as possible.
We still believe that there is a good chance that 2Q 2021 is the peak for polymer profits in the US and Europe, but it very unclear how severe the downside could be, given the growth potential. Seasonal turnaround will keep markets more balanced in 2Q, and the major uncertainty beyond that will be weather in the US. A series of storms like last year could hold the market up through 3Q and into 4Q, but an absence of any weather events could expose US surpluses quite quickly, especially for ethylene and derivatives. The new builds in China have focused on ethylene and polyethylene (and some glycol), propylene and polypropylene, and PTA and PET, and this is where the potential weakness will emerge. There has been some new styrene capacity and that is also a vulnerable segment in our view. PVC, acetic acid, and large parts of the polyurethane chains look much more balanced to us and we have more faith in the projections being made by companies like Celanese, Olin, and Orbia than we do the major polyethylene producers. See today's daily report for more details.