Chemicals 
Commodity Chemical Calculus; Crude Cruising?

• Will crude oil prolong the commodity price party? In our inaugural edition of Commodity Chemical Calculus (CCC; click here), we chronicled various market dislocations following Hurricane Harvey and provided an update on commodity price and margin trends in that context. In this month’s report, we highlight the recent strength in crude oil and provide insight into earnings sensitivity for selected commodity chemical producers. Our conclusion: in a market where severe margin pressure is “conventional wisdom” for ethylene producers in 2018-19, a nascent, positive inflection in crude oil prices could help ease producers’ pain somewhat as 2018 progresses.  As a bonus, we expand the scope of CCC this month to include the TiO2 market, following our recent initiation (click here) on Buy-rated Tronox (TROX) and Venator (VNTR).

• Is crude oil poised for a breakout? With Brent crude oil now at a 29-month high of $64.11 per barrel, prices could soon break out of a trading range that has been the reality since January 2015 (see Figure 1). At the close of Monday’s trading, Brent crude oil is now up 13% year-to-date, 22% over the past three months, and 5% month-to-date, supported recently by geopolitical unrest, particularly in the Middle East. For US producers of ethylene, polyethylene, and PVC, this reinvigoration of the global crude market is welcome news. This is especially true for producers of ethylene and polyethylene, given the impending supply wave. As a general rule of thumb, our analysis suggests that every $10/bbl move in Brent crude oil translates to...

• Harvey disruption carries PE prices higher in 4Q17. As we surmised in our last version of the CCC, the polyethylene (PE) resin industry has been able to push through an additional round of price in the domestic contract market. This $0.03/lb increase for October is the third successive increase, following the initial $0.03/lb increase in August and $0.04/lb increase for 15 September. While price has been moving higher, we believe…

• Caustic soda price traction continues. The US chlor-alkali market has been operating at a fairly tight supply demand balance, and producers’ price initiatives continue to gain traction in the market following the outages caused by Hurricane Harvey. Diaphragm-grade caustic soda contract prices at the end of October were marked up nearly… 

• New chlor-alkali supply becomes visible on the horizon. On the producer front, we did receive initial indication of new domestic capacity expansion plans from Shintech. The US Army Corps of Engineers has disseminated Shintech’s permitting application for proposed construction at…

• Global price weakness is putting the US PVC price hike of $0.05/lb to task. Following the Harvey-related outages and subsequent spike in domestic ethylene prices, US PVC producers have been trying to push through a $0.05/lb increase in October. However…

• TiO2 prices taking in 4Q, is 1Q next? Global TiO2 pigment prices for 4Q17 have been assessed higher in the US and Asia by roughly $125 per metric ton (MT), and by $250/MT in Europe. While pricing in China has been a bit more volatile year-to-date, the situation appears to be stabilizing…

• MDI price traction bifurcates briefly. Global MDI markets remain quite tight, although we are beginning to see signs of price exhaustion in China in recent weeks. While prices in China are still up 58% in the local market this year, as of 1 November, spot MDI has…

• 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-plays or diversified chemical names. Our Buys of this ilk are DOW, EMN, HUN, LYB and WLK, plus now TROX and VNTR on which Matt DeYoe on our team launched coverage with Buy ratings on 23 October. Among growth-oriented specialty chemical producers, the pickings are slimmer in our opinion, although we see value in PPG and we maintain a Buy on WR Grace since having launched coverage in May 2017. 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 2017 and having previously upgraded 
Praxair to Hold from Sell in December 2016. Since mid-2017 we've considered coatings and industrial gas stocks to be on equal footing in terms of risk-reward for the first time in nearly six years, as the former group has struggled to defend margins in an environment of rising raw material costs and ongoing supply-chain consolidation.

(See full report for details)