Chemicals 
Commodity Chemical Calculus; Winter Melt Up
• Commodity markets ring in 2018 with sustained momentum. In this month’s edition of Commodity Chemical Calculus (CCC), our updated analysis of price and margin trends across major commodity chemicals markets suggests that there are reasons to be incrementally bullish. A combination of higher Brent crude oil prices, frigid US weather, and various global supply constraints have conspired to sustain positive momentum in early 2018. As shown in Figure 1, we expect prices and margins to trend flat to up in January for a wide variety of commodity chemicals, including caustic soda, TiO2 pigment, propylene, MDI, MTBE, and acetic acid. One possible exception is polyethylene (PE) resin, where integrated producers must contend with a combination of higher ethane feedstock costs, albeit from a depressed level in December, and increases to US supply.
 
• Cold weather creates numerous logistics challenges in the US caustic soda market. Market sources reported… 
• We expect caustic soda selling prices to rise in January despite mixed trends among export markets...
• Ethane feedstock costs have resurged in recent weeks. US ethane feedstock prices have rallied from a recent low of $0.19375 per gallon on 8 December to $0.27 per gallon as of 10 January, cresting above the 4Q17 average level of $0.25…
• Propylene price hits a 3-year high with inventory at a 5-year low. Whereas ethylene prices are trending flat-to-down and feedstock costs are rising, there are two pieces of really good news for the ethylene chain…
• We see five market forces that could help to stabilize PE prices by February. First, we suspect that downstream inventories are not elevated dating back to Hurricane Harvey-related supply constraints and a general expectation among purchasing managers that prices could ease as new supply comes online. Second…
• 1Q18 price talk continues in TiO2. While activity has remained subdued around the holiday season conversations regarding TiO2 price for 1Q in Europe continue. It appears that price increases of €100/mt and slightly above have largely been agreed for…
• MDI price bifurcation continues; China spot prices regress with upward tension in US. Global MDI markets remain tight, although spot prices continue to erode in China. Domestic MDI margins step up as benzene rolls over…  
• Acetic prices continue rally. Acetic acid continues to rally with the 4Q17 average price in China finishing 35% higher vs. 3Q17. The price momentum is continuing into the New Year, with January spot prices up an additional $10/MT to $630/MT, which is up…
• We continue to favor commodity-linked chemical stocks. In terms of sector positioning, we remain more constructive on commodity-linked chemical stocks vs. specialty chemical stocks as our analysis suggests the former group is approximately one standard deviation inexpensive vs. the latter cohort. Overall, our top picks remain Buy-rated Huntsman (HUN) and WR Grace (GRA). Elsewhere, we prefer Buy-rated DowDuPont (DWDP), Eastman Chemical (EMN), and PPG Industries (PPG) for large-cap exposure. For a more comprehensive analysis of risk-reward and key themes for 2018, we encourage investors to have a look at our 2018 Outlook report (here), published on 2 January.
(Please see full report for details)