We focus on the building products industry today and it is interesting to note the convergence of the S&P Building Products index and Westlake over the early part of this year, as Westlake has been recognized for its building products footprint, partly aided by the company’s re-segmenting with the last quarterly earnings. The company has reached an all-time high stock price over the last few weeks and has certainly been a great preferred pick for us over the last two years. As interest and mortgage rates rise, we may see a slowdown in home buying as there is generally a good correlation, but this often leads to more home projects as consumers choose not to move and improve what they have.
While the Shell headlines today are probably the biggest news, it should not be a surprise to anyone that earnings are lower in 4Q than they were in 3Q, as all of the market indicators have been telling us this for months, and Dow made a statement to this effect in early December. Given the location of Shell’s Norco facility, it took a full hit from Hurricane Ida and the company made several statements at the time regarding delays to restarts. We expect other chemical companies to post meaningful declines in earnings for 4Q relative to 3Q 2021, but unless, like Shell, they experienced meaningful production outages, we would still expect 4Q results to be above “normal” and higher than earnings in 2019. We still see share prices for the public companies as very low looking at values relative to 2019 and earnings relative to 2019, but the negative momentum in earnings is more important to investors today than the absolute level of earnings. As we have stated in prior work, we need to get through negative revisions before the sector could look interesting. The exception, as noted in our Daily Report today, could be PVC, where pricing could look better than is already implied in 2022 estimates and valuation. A positive tone in upcoming conference calls may be a turning point for the PVC-related stocks – Westlake primarily. We could see the trend in the chart below reverse.
The regional polymer price chart below shows the extreme divergence of prices between the US and Asia, and it has hit a level that has never been reached before. It is in part a function of the wave of new capacity that hit China in 2H 2020 and 1H 2021, which spurred oversupply in some chains, and the dysfunctional global trade backdrop that has kept global supply chains out of balance. As we noted earlier this week, the container costs alone to move polymers from Asia to the US are, best case, 34 cents per pound today, and this is estimate does not include the cost of moving the product to a port in China or from one in the US and also does not include a working capital charge for the time in transit. There would need to be an arbitrage of 10-15 cents a pound above this to make product movements between these regions worthwhile, assuming you can find a buyer in the US willing to experiment with imported products. The other trade impact is that US retailers and manufacturers are pulling on their US suppliers to maximize supply, pushing domestic demand for polymers above trend. The lumber price moves in the US – Exhibit 1 in today's daily report – if they spur incremental home building, it will be another boost for domestic PVC demand.
Prices for housing products such as lumber and PVC appear to have hit a pause on their upward march, in part because of lower housing starts, which may be linked to the higher costs – recent estimates suggested that the lumber price moves alone had added $15,000 to the cost of building an average home this year. The overall momentum in the housing market remains strong and the recent lower housing start number could be a one-off. We maintain our preference for the PVC players and still believe that the underlying fundamentals are less precarious than they are for other polymers. See more in Today's Daily.