Chemicals 
Houston We Have Unbridled Optimism
• What does perpetual prosperity in petrochemicals have in common with Santa Claus and the Easter Bunny? You guessed it; these are three things that don’t actually exist. We are attending IHS Markit’s 33rd annual World Petrochemical Conference (WPC) in Houston, the largest event of its kind with ~1,300 attendees from 40+ countries. Overall, we would describe the tone on day one of the event as one of the most optimistic that we can recall over the years. The words of the day were “extended upcycle”. IHS’ bull argument is built upon recent acceleration of GDP in the US and Europe, US capacity delays and hurricane-related constraints, steady demand growth and environmental-related supply constraints in China, and a steady stream of US capital investment that is expected to result in healthy global operating rates as well as steady, attractive margins, supported by a favorable energy backdrop. It all seems logical enough, does it not? Yet executives with gray hair (or no hair) are quick to point out in sidebar conversations that if it seems too good to be true, it just means that we don’t know yet what will go wrong…something always does you see. Two candidates being discussed are interest rate increases and potential for a trade war.
• Key takeaways from day one: The WPC program on day one is mainly macro in nature with focus on energy, economics and regional industry themes. Speakers included numerous IHS consultants along with senior executives from DowDuPont, ExxonMobil, CNOOC, Reliance Industries, Shell Chemicals, Chevron Phillips Chemical, Huntsman Corporation and Berry Plastics. While in Houston, we also caught up with senior management of LyondellBasell and attended a seminar hosted by PetroChem Wire…
• Energy trends – meet the future of refining: petrochemicals. Energy markets are in a state of flux as several structural changes are afoot. Over the near term, market participants must scramble to meet new, more stringent regulations related to the permissible sulfur content in bunker (marine) fuel. Perhaps more importantly... 
• Economic outlook is more robust, yet more uncertain: First the good news: (1) IHS pegs global 2018 GDP growth at 3.4%, the strongest in a decade, and projects a repeat performance at +3.4% in 2019; (2) US consumer confidence is at a 17-year high; (3) PMI is at a multi-year high as well – an important point in our view in that PMI correlates quite positively with trading multiples for chemical stocks; (4)... 
• Chemical industry nuggets: (1) spot ethylene prices have weakened considerably to as low as $0.1625 this week and were last bid at $0.16; (2) weakness in spot ethylene monomer stands in contrast to healthy prices for PE resin in both the US and Asia; (3) the March propylene contract settled...
• We prefer HUN, DWDP, OLN and TiO2 producers for commodity chemical exposure. Overall, we remain Market Weight on the Chemicals sector. In terms of sector positioning, we remain more constructive on commodity-linked chemical stocks (mainly of the non-ethylene variety) vs. specialty chemical stocks as our analysis suggests the former group is approximately one standard deviation inexpensive vs. the latter cohort. Overall, our top pick is Buy-rated Huntsman (HUN). Elsewhere, we prefer Buy-rated DowDuPont (DWDP) and PPG Industries (PPG) for large-cap exposure. We note that DWDP and PPG enjoy under-leveraged balance sheets, as does HUN pro forma for the intended monetization of the company’s 53% stake in Venator (VNTR) by year-end 2018.
(Please see full report for details)