As we have been suggesting for some time, there are pockets of real strength in chemicals; identifying them is the hard part. It is not enough to have pricing strength in a market where raw material prices are volatile daily and we have seen plenty of examples of companies with very strong end demand dynamics missing earnings because of a cost squeeze. We continue to highlight the competitive strength in the US in basic chemicals because of the decoupled and relatively low natural gas price and this is likely a large piece of the Dow earnings strength – strong polyethylene demand against a backdrop of relatively stable and lower costs. While polypropylene (Braskem) remains extremely profitable in the US, it has seen more sequential weakness than polyethylene – as we show in Exhibit 1 of today's daily report. That said, both polyethylene and polypropylene margins in the US are significantly higher than was likely expected this year and certainly what has been reflected in stock valuations, even with the commodity chemicals rally. Dow is also seeing the benefit of a very strong silicones market – something that was covered in detail in Wacker’s release earlier this month.
A couple of weeks ago we raised the idea that US methanol could be a significant beneficiary of the conflict in Central Europe, not just because it is very economically unattractive to make methanol in Europe, but because it might be possible for Europe to import methanol for its energy value - $40 per MMBTU natural gas can make all sort of alternates look attractive. The impetus behind the methanol spot price increase in the US may be in part rising local natural gas – or the fear of further increases – but export demand is likely the larger driving factor and this could continue or even increase further if potential European importers work out how to convert to use methanol as a fuel.
While the Linde results were very strong and surprised to the upside, we also want to focus on what messages they send about the broader economy. As recently as 10 years ago all of the industrial gas companies' results provided a reasonable barometer on the state of the industrial and other parts of the global economy. Industrial gases are an enabling raw material or process gas for so many industries that their direct use is generally a function of operating rates for the industry that they serve. Over the last 10 years, Air Products has deviated from the traditional model, with some very large investments targeting specific projects in Asia and the Middle East and their results are a less useful measure of overall economic activity. While both Air Liquide and Linde continue to reflect the broad economic backdrop well, both could be dragged into large projects around hydrogen over the coming years, and depending on how they choose to report earnings, we could lose the tangential “information” in their reported results. For now, the Linde results are very supportive of the broader industrial-economic strength that is being reflected in earnings and guidance across many industries, including chemicals and refining. The company has added comparisons with 2019 to show how much underlying growth has happened over the two years. While inflation and interest rate increases could slow things down, the Linde numbers confirm that we have a very positive demand backdrop today, and the company’s guidance would suggest that they think it can continue.