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.
More confirmation from Covestro that global demand growth is strong, supporting reports that we have seen from most companies over the last few weeks. Some have struggled with raw material cost squeezes and either late attempts to raise prices or pricing lags in contract agreements, but almost all have pointed to very strong demand outside of auto OEM. We have questioned how much of this strong demand is inflation-driven, but it is very hard to tell as the last time we had significant inflation we did not have such an interwoven global supply chain as we have today, and consequently, it is harder to assess how much pre-buying may be going on, not because of fear of higher prices but because of fear of supply. Note that we have at least two European automakers (VW and Renault) shutting down facilities this week because they cannot key parts from Ukraine. This adds to the already problematic path for parts from China as well as the semiconductor shortage. If everyone is looking for a little bit more it would explain the very high 1Q 2022 demand that all are talking about and it likely means that inflationary pressures will continue as chemical and polymer makers try to make more, against a backdrop of higher raw materials and find it easier to increase their prices because their customers are as concerned about availability as they are prices.
As Avient and the linked paint article remind us, there are sectors of the US chemical industry that rely on imported products – in these cases pigments, and the supply chain challenges and logistic delays have caused production problems in the US and price increases in 2021. The automotive segment of the paint industry has seen lower demand because of the auto OEM production slowdown, and pigment shortages and price spikes would likely have been worse if automakers had been running at full rates. There is no sense of impending relief in the logistic issues as we go through 4Q earnings reports and we could continue to see issues for a while. This should be good for US-based pigment suppliers, but while Chemours, Venator, and Tronox all have capacity in the US, they also have capacity outside the US which likely faces some supply chain challenges.