The linked China polyethylene headline highlights a possible risk for US producers, as we link much of what is happening in China to logistic challenges. China has high production costs in a high oil environment, which is driving some of the cutbacks, but a portion is likely driven by an inability to move product and a huge disincentive to build inventory at break-even or negative margins. If the current shipping challenges in China roll over more aggressively into the rest of the world and container and vessel availability fall again, the US may face more challenges exporting polymers. As warehouse space fills, especially on the Gulf Coast, we may see some need to cut back rates, even if all of the material in storage currently has an agreed home and an agreed price. The US can afford to build inventory, as production costs still remain attractive relative to international prices, but if the supply chain is full there could be nowhere to put more material. One of Union Pacific's issues highlighted last week was too much inventory in rail cars, snarling up the system.
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.