Chemicals
Harvey Wreaks Havoc on Chemicals
• Harvey hit the US Gulf Coast hard. As always, our first thoughts are always about the safety of people in the path of this (ongoing) storm. That said, with Hurricane Harvey having hit the Texas coast as a category-4 storm on Friday evening, our initial assessment is that the initial impact on US commodity chemical production capacity will be even greater than expected. As indicated in our pre-storm note on Friday (click here), the prospect of record rainfall is indeed wreaking havoc with personnel, chemical production assets, access to electric power as well as with logistics, including rails, ports, barges and ocean freight. Procurement of natural gas liquid (NGL) feedstock and other pipeline-related considerations remain of concern as well. We assess the market impact on chemical production assets as of noon on Monday in Figure 1. The situation remains fluid. As Harvey moves eastward, additional assets in eastern Texas and Louisiana may experience heightened risk of flooding in coming days.
• Over one-third of US ethylene capacity is offline. In addition to numerous precautionary outages announced as of Friday, additional ethylene capacity was shuttered over the weekend at Chevron (CP Chem), Shell, ExxonMobil and Ineos. At this point we estimate that more than 40% of US ethylene production capacity and a similar amount…
• Supply restriction should support commodity chemical prices in coming months. At this writing we see the greatest potential for a boost to chlor-alkali and vinyls (CAV), where pre-hurricane market conditions have been..
• Specialty chemical effects tend to be neutral or marginally negative. Nearly one-third of US crude oil refining capacity lies in the “cone” of Harvey’s potential path. In this context, we expect industrial gas producers, such as Air Products and Praxair, to suffer marginally from diminished demand for hydrogen used to remove sulfur from oil. Similarly…
• Our preferred way to play is Westlake; Lyondell appears most affected thus far. Among stocks in our coverage, our preliminary view remains that Buy-rated Westlake Chemical (WLK) is perhaps best positioned given competitors’ outages in nearly all of Westlake’s major product lines: ethylene, polyethylene (PE) resin, chlor-alkali and PVC resin. We note that Westlake’s own assets are located in Lake Charles and points east in Louisiana as well as Kentucky and Europe. While assets in Lake Charles, Louisiana could be affected, our latest read is that assets there are likely to continue to run. Among other companies in our coverage, LyondellBasell had pre-emptively shut operations at Corpus Christi, Chocolate Bayou, Matagorda, and Victoria, Texas, while reports this morning indicate…
• Overall, we remain Market Weight on US Chemicals exposure, albeit with a healthy appetite for risk. Within the chemicals sector we continue to prefer value vs. growth, preferably with a catalyst. Notwithstanding the strong performance of most commodity-linked chemical stocks YTD, our bottom-up work on cash flow and valuation leads us to believe that exposure here remains attractive, whether through pure-play or diversified chemical names. Our Buys of this ilk are DOW, EMN, HUN and WLK having shifted CE down a notch to Hold in July. Among growth-oriented specialty chemical producers, the pickings are slimmer in our opinion, although we did launch on WR Grace in May 2017 with a Buy and have since become (even) more constructive. Elsewhere among specialties we’ve shifted to a less bearish, although still not constructive posture on industrial gases having upgraded Air Products to Hold from Sell in early August. For the first time in nearly six years, we consider coatings and gases to be on equal footing in terms of risk-reward, as the former group struggles to defend margins.
