Chemicals 
Commodity Chemical Calculus; February Flux
• Petrochemical markets remain snug in February for five reasons. 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 February could be a “last hurrah” of sorts in petrochemical markets, at least for a while. With the equity and crude oil markets in a tailspin, denizens of the asphalt canyons of Wall Street may assume that commodity petrochemical prices will behave likewise. Not so fast. While we expect crude oil-related pressures to weigh on the market eventually (key word), near-term supply-demand conditions on the US Gulf Coast remain tight for five reasons: (1) Hurricane Harvey-related hangovers; (2) “growing pains” as several new plants struggle to operate reliably; (3) year-end drawdown of inventory that is being replenished; (4) a cold snap in January that has wreaked havoc with both operations and logistics; and (5) other idiosyncratic outages, such as a fire at Formosa Plastics’ Point Comfort, Texas plant in late December. Meanwhile, as we unglue our eyes from the red on the screen, demand looks healthy out there in the real world. So, despite the capital markets rollercoaster, producers could have the upper hand in efforts to raise prices for products such as polyethylene (PE) and polyvinylchloride (PVC) resins in February (see Figure 1).
 
• Looking beyond February, we are more cautious. Notwithstanding support for contract prices in February, we think momentum will be far more difficult to sustain into March (flatter) and April (down) as a deteriorating backdrop exposes areas where recent inflation has been more a function of transitory supply constraints and less a case of structural supply imbalance. As operations normalize and inventories are replenished, we suspect that purchasing managers will step back from the market with the expectation that prices will ebb in the spring…
• PVC prices to rise in February following a flat January. US PVC producers have nominated a price increase of $0.03/lb for February on the back of an improved global supply–demand balance. The outstanding initiative will be… 
• We expect caustic soda selling prices to trend higher as producers implement ongoing initiatives. As noted in our prior research, caustic soda producers have proposed price increases of $70-115 per dry short ton (DST) for 1Q18… 
• PE producers push for a price hike in February. As we highlighted in last month’s CCC (click here) we cited five market forces which could help stabilize PE prices by February. Among these…
• US and Asia TiO2 price traction looks promising with China stabilizing. Reports indicate that confidence is growing for 1Q price traction in the North American market effective 1 February…
• Force majeure declarations hit the US MDI market. Cold weather conditions in the US Gulf continue to cause headaches among chemical producers, with problems now spreading to MDI…
• We remain Market Weight on the Chemicals sector. In terms of sector positioning, we remain more constructive on commodity-linked chemical stocks (preferably 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 picks are 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. We note that DWDP and PPG enjoy under-leveraged balance sheets, as does HUN pro forma for the intended monetization of the company’s 55% stake in Venator (VNTR) by year-end 2018. For a more comprehensive analysis of risk-reward and key themes for 2018, please see our 2018 Outlook report (here), published on 2 January.
(Please see full report for details)