11.13.17
Chemicals
Gulf Coast Host Notes
• We hosted our US Gulf Coast field trip last week. Our journey to Texas and Louisiana was an eventful one. We packed in six meetings and four plant tours in two states in 48 hours. Herein we summarize key themes from our discussions with six companies: LyondellBasell, Westlake Chemical, Olin Corporation, Huntsman Corporation, CF Industries and Chemical Data, Inc. Our conclusion: volumes have generally accelerated and margins have improved across the board in 2H17, but supply-side dynamics suggest that strength in chlor-alkali and vinyls (CAV) and MDI is more sustainable relative to ethylene and polyethylene (PE) resin.
• Ethane feedstock cost inflation will be manageable. At least that is the clear consensus view on the Gulf. We expect US demand for ethane to increase 31% as “wave one” ethylene crackers come online through 2020. Based on current ethane rejection levels of ~500 thousand barrels per day (kbpd), the risk would be that ethane moves to...
• The calm after the storm? Polyethylene (PE) resin producers are feeling much better after hurricane Harvey as prices have increased a total of $0.10/lb due to supply constraints. With input costs under control for the most part, this surge in selling prices has created fat margins, happy producers, and a sense that all is right with the world...until December anyway. That is when the customers...
• PE producers’ prisoners dilemma: will the prisoners confess and ruin the domestic market? With only one exception (Sasol), companies that have added or plan to add ethylene capacity in “wave one” are not newcomers but rather incumbent players in the US market. So, the wishful thinking goes, these producers have no self-interest in wrecking US margins by chasing domestic market share with price cuts. Instead...
• China comes clean. Enforcement of environmental standards has become a more important theme across many commodity chemical markets over the last 18 months. Our conversations suggest that China is serious and supply constraints are real. One producer told us that their JV plant in China…
• CAV cycle still looks good. Unlike the ethylene chain, producers of chlor-alkali and PVC resin stand to benefit from a dearth of new supply in coming years. Chemical Data estimated that a new world-scale PVC plant would cost $0.75-$1.00/lb to build. However, Westlake reminded us that for green field development one would need five new plants: PVC, VCM, ethylene, chlor-alkali and electric power. At this stage we are aware of only one new project in North America. Shintech is in the early stages of planning...
• MDI: how about a little respect? Demand for urethane intermediate MDI continues to grow at a pace of 6% per annum as it has for decades. Huntsman believes this rate of growth could actually accelerate as the largest market segment — spray foam insulation— continues to grow at a double-digit pace. Global capacity utilization is now 98% on an...
• We had the pleasure of visiting four chemical facilities along the Gulf Coast over the two-day trip. We began our tour with meetings and a site visit at Lyondell’s Channelview, TX facility. The core of Channelview is the two olefins crackers, which combined account for 35% of the company’s North American ethylene capacity. Supplementing this capacity is an integrated complex with assets spanning the C2 to C4 and Intermediates & Derivatives product chains. At the visit we learned of a 100KTPA brownfield expansion of Channelview’s OP-2 unit expected 2018, with an additional 275KTPA expansion at OP-1 in 2020 and a similar 275KTPA at OP-2 at some point after that. Among other product lines...
• Nitrogen fertilizer: operational excellence in focus. We concluded the tour with a visit to CF Industries’ Donaldsonville, LA nitrogen complex, the largest nitrogen operation in the world. The Donaldsonville complex brought on significant new ammonia, urea, and UAN capacity in 2015 and 2016 and continues to report stellar operating rates of 115+% of nameplate capacity. While we question the sustainability of this performance, the facility...
"Our conclusion: volumes have generally accelerated and margins have improved across the board in 2H17, but supply-side dynamics suggest that strength in chlor-alkali and vinyls (CAV) and MDI is more sustainable relative to ethylene and polyethylene (PE) resin," said Vertical Research Partners Chemicals Analyst Kevin McCarthy.
(Please see full report for details)
Gulf Coast Host Notes
• We hosted our US Gulf Coast field trip last week. Our journey to Texas and Louisiana was an eventful one. We packed in six meetings and four plant tours in two states in 48 hours. Herein we summarize key themes from our discussions with six companies: LyondellBasell, Westlake Chemical, Olin Corporation, Huntsman Corporation, CF Industries and Chemical Data, Inc. Our conclusion: volumes have generally accelerated and margins have improved across the board in 2H17, but supply-side dynamics suggest that strength in chlor-alkali and vinyls (CAV) and MDI is more sustainable relative to ethylene and polyethylene (PE) resin.
• Ethane feedstock cost inflation will be manageable. At least that is the clear consensus view on the Gulf. We expect US demand for ethane to increase 31% as “wave one” ethylene crackers come online through 2020. Based on current ethane rejection levels of ~500 thousand barrels per day (kbpd), the risk would be that ethane moves to...
• The calm after the storm? Polyethylene (PE) resin producers are feeling much better after hurricane Harvey as prices have increased a total of $0.10/lb due to supply constraints. With input costs under control for the most part, this surge in selling prices has created fat margins, happy producers, and a sense that all is right with the world...until December anyway. That is when the customers...
• PE producers’ prisoners dilemma: will the prisoners confess and ruin the domestic market? With only one exception (Sasol), companies that have added or plan to add ethylene capacity in “wave one” are not newcomers but rather incumbent players in the US market. So, the wishful thinking goes, these producers have no self-interest in wrecking US margins by chasing domestic market share with price cuts. Instead...
• China comes clean. Enforcement of environmental standards has become a more important theme across many commodity chemical markets over the last 18 months. Our conversations suggest that China is serious and supply constraints are real. One producer told us that their JV plant in China…
• CAV cycle still looks good. Unlike the ethylene chain, producers of chlor-alkali and PVC resin stand to benefit from a dearth of new supply in coming years. Chemical Data estimated that a new world-scale PVC plant would cost $0.75-$1.00/lb to build. However, Westlake reminded us that for green field development one would need five new plants: PVC, VCM, ethylene, chlor-alkali and electric power. At this stage we are aware of only one new project in North America. Shintech is in the early stages of planning...
• MDI: how about a little respect? Demand for urethane intermediate MDI continues to grow at a pace of 6% per annum as it has for decades. Huntsman believes this rate of growth could actually accelerate as the largest market segment — spray foam insulation— continues to grow at a double-digit pace. Global capacity utilization is now 98% on an...
• We had the pleasure of visiting four chemical facilities along the Gulf Coast over the two-day trip. We began our tour with meetings and a site visit at Lyondell’s Channelview, TX facility. The core of Channelview is the two olefins crackers, which combined account for 35% of the company’s North American ethylene capacity. Supplementing this capacity is an integrated complex with assets spanning the C2 to C4 and Intermediates & Derivatives product chains. At the visit we learned of a 100KTPA brownfield expansion of Channelview’s OP-2 unit expected 2018, with an additional 275KTPA expansion at OP-1 in 2020 and a similar 275KTPA at OP-2 at some point after that. Among other product lines...
• Nitrogen fertilizer: operational excellence in focus. We concluded the tour with a visit to CF Industries’ Donaldsonville, LA nitrogen complex, the largest nitrogen operation in the world. The Donaldsonville complex brought on significant new ammonia, urea, and UAN capacity in 2015 and 2016 and continues to report stellar operating rates of 115+% of nameplate capacity. While we question the sustainability of this performance, the facility...
"Our conclusion: volumes have generally accelerated and margins have improved across the board in 2H17, but supply-side dynamics suggest that strength in chlor-alkali and vinyls (CAV) and MDI is more sustainable relative to ethylene and polyethylene (PE) resin," said Vertical Research Partners Chemicals Analyst Kevin McCarthy.
(Please see full report for details)
