Chemical Industry Summary

After trading in a stable range of US$5/Bbl. for several months, the last week has seen global crude oil prices soften roughly 10% with WTI prices now trading belowUS$48/Bbl. The current weakness of pricing is related to recent inventory and production data that have cast doubt on the potential for global crude oil rebalancing in 2017. It is increasingly unlikely that WTI prices will achieve the US$60/Bbl. target by the end of the year as some forecasters have called for. The key issue is not demand, but supply as US shale oil producers have shown an ability to quickly ramp up production and achieve profitability at low oil prices. Compliance with OPEC production targets has been good thus far, but as time goes on, the agreement becomes more likely to unravel. In the US, efficiency improvements have driven down well costs significantly as companies have repeated cited in their Q2 financial conference calls.

The first US grass-roots cracker, the Oxy/Mexichem unit has started up and will be followed by three others in 2017. Ethane requirements for these crackers, in addition to requirements for recent and planned debottlenecks, will increase ethane demand by about 300,000 Bbl./d. Along with an anticipated 200,000 Bbl./d of exports to Europe and Asia, ethane supply/demand will significantly tighten in the next 12 months setting the stage for price increases.

Macroeconomics and Geopolitics

Americas 

The recent flow of positive economic news from the US took a bit of a pause in March. Auto sales, consumer spending, and manufacturing activity all eased this month from February levels. Economists have recently trimmed estimates for full-year US GDP growth in 2017/2018. The Conference Board’s forecast of US growth in 2017 is 2.1% compared to 1.6% in 2016. The shape of economic growth once again calls for growth to be back-end loaded in 2017. On April 7th, the Atlanta Fed slashed its first estimate if Q1 GDP to 0.6% from earlier estimates if 1.8% and 1.2%. Another weak start to the year is anticipated.

In March, the US jobs report came in at only 98,000 jobs added, down 54% from last year and about half of the average seen in the last six months. In addition, the January and February job addition numbers were revised downwards by a cumulative 38,000. Although a one-month number doesn’t constitute a trend, weakness was seen in several sectors.  March construction may have been weather-impacted as February’s weather was abnormally good for an early start to the US construction season. The unemployment rate dipped down 0.2% to 4.5%, the lowest level in several years. However, this is not ‘full employment’ with the low current labor participation rate that hovers near 63%, relatively low by historical standards.

In March, US sales of light cars and trucks were 16.53 million units, down 5.4% from February and flat with last year. This result is also down 6% from the average of the last six months. In the US manufacturing activity slowed, but was still in mild expansion territory. Markit’s US manufacturing PMI index slowed to 53.3, down from 54.2 seen in January. The result was due in part to lower export volumes resulting from the strong dollar and lower orders.

US housing starts in February were firm at 1,288 thousand on a seasonally-adjusted basis, up 6.2% from last year. March numbers, expected to be published next week, are expected to remain firm. In its April forecast, the NAR (National Association of Realtors) is projecting 2017 starts at 1.267 million, up 8% from 2016. The 2018 forecast calls for an additional increase of 8.7%. Average housing prices for existing home sales in January was US$228,400, up 8.3% from last year. Per Freddie Mac, the average interest rate is still low at only 4.17%.

According to Markit, Mexico’s PMI in March improved to 51.5, up from 50.6 seen in February. The growth was the fasted seen in six months driven by new orders. With manufacturing activity barely in expansion territory, US President Trump’s trade policies could prove to be significant for Mexico, the largest trading partner of the US. Canada’s March PMI of 55.7 was the highest in three and one-half years and well ahead of the 54.7 level recorded in February.

Brazil’s manufacturing sector recorded a PMI of 49.6 in March, the best result in 25 months, and just below the neural 50.0 level. This was an improvement from the 46.9 seen in February showing the first increases in orders in 26 months. The Brazilian manufacturing sector has been in contraction territory since the end of 2014. In its Q4 forecast, the IMF expects Brazil’s GPD to fall 3.2% in 2016, following a 3.8% drop last year. The IMF does not expect a return to 2% growth until 2019.

Europe 

In total, the European economy continues to improve in part due to continued economic stimulus from the ECB. As a region, the Eurozone recorded a strong PMI result of 56.2 in March, up from 55.4 seen in February. Manufacturing activity in German has been especially strong with a March PMI of 58.3 recorded, a 71-month high. The European Central Bank extended its €2.3 trillion stimulus program in December, through the end of 2017. For 2017/2018 the IMF expects the EC’s GDP growth at 1.6% and 1.8%.  

For March, Eastern Europe and Russia’s PMIs continued to be in expansion territory. Russia’s manufacturing PMI was recorded at 52.4 in March, flat with February.  This expansion comes after registering a 70-month high at 54.7 in January. Poland’s manufacturing sector showed similar results to Russia, with relatively flat month over month result of 53.5. Poland has been in expansion for nearly two years.  

Asia 

February’s PMI index for China accelerated to 51.7, ahead of January’s 51.0 result. Higher exports and production activity drove early 2017 improvement. Chinese imports in February were quite high with an unusual deficit of US$9.15 billion recorded. This reflects stronger commodity pricing and good demand. Surveys of business optimism are positive in the near-term as the country restructures its economy and executes its anti-corruption policies.

China’s auto production in February was 2.16 million vehicles, up 6.2% from the same month in 2016. On a year-to-date basis, auto production is up 11.3% and auto sales are up 9.1%. For the full year of 2016, auto sales of near 28 million are up 14% from last year, a significant rebound from 2015 that saw 24.5 million vehicles produced.

Polyolefin prices in Asia remain stable reflecting stable oil-based feedstock pricing and firm demand. Thus, far in April, Far East Asian HDPE blow modeling prices have remained flat with March, to a range of US$1,150 to 1,200/MT. Spot ethylene prices for March and April in SEA have traded down from February, but have recently traded in a relatively tight range.

In the last month, spot propylene and butadiene pricing in SEA have come off peak levels that were see in mid-March. Propylene spot prices are currently near US$825/MT, down US$125/MT from peak. Current injection molding PP in SEA remains in the range of US$1,050/ MT to US$1,100/MT providing a spread for PP of near US$225/MT. In April. SEA butadiene prices have continued to come down from peak levels of near US$3,000/MT seen in late February. Current prices are closer to US$1,350/MT.

Feedstock – Crude Oil

OPEC’s March crude oil production numbers have been released and the reported production at an average of 31.93 million barrels per day, a reduction of 153,000 barrels per day from February. Additional production cuts by Saudi Arabia plus operational issues in other member countries.  Production at this level represents an 86% adherence level to the total target (1.2 million barrels per day) agreed to at the November 30 meeting in Vienna. The cuts were agreed to for a six-month period ending in May, at which point they could be renewed or modified.

OPEC reported that Russia’s production in March was 10.8 million barrels per day. This result was approximately 130,000 barrels per day lower that December, and 43% of the pledged cut target of 300 barrels per day. The total non-OPEC cuts were targeted at 558,000 barrels per day is not likely to be achieved. Production from US shale oil formations was 9.2MM barrels per day in early April, an increase of 500,000 barrels per day from early December in response to higher prices. Higher US production blunts the impact of the OPEC production cuts.

As of April 13th, WTI spot prices in the US were US$53.18 per barrel, up about US$5/bbl. in recent trading. CMR believes that this is likely due in large part to global geo-political events rather that changing fundamentals. As mentioned above, both oil and gas pricing have been relatively stable, and some analysts suspect that oil prices may be range-bound to below US$60 per barrel. For the week of April 7th, US crude inventories not in the SPR (Strategic Petroleum Reserve) were 533 million barrels, an increase of 50 million barrels, or 10% since the first of this year. US crude inventories and distillate products have remained stubbornly high despite high demand.

For the week ending April 13, Baker Hughes reported that the US total rig count (oil and gas directed) was 847, up substantially from last November’s count of near 570. Recently, US rig count has gone up an average of about 10 per week. Current rig count is over double the low mark of 404 seen as recently as May of 2016. The higher oil pricing and improved drilling efficiencies including expanding lateral distances, increase number of wells per platform, more concentrated well spacing have led to the boom in production activity.

Feedstock – Natural Gas & NGLs

In the last month, US natural gas prices have stabilized to a level near US$3.00/MM BTU. This appears to reflect the relative balance for supply and demand in a ‘shoulder season’ and inventories that are well within seasonal norms. The week ending April 7th saw total US inventories of 2.06 trillion SCF, down 17% from last year. While this level was 24% above the 5-year average of 1.6T SCF, it was lower than recent trends that have seen gas inventories at or above maximum seasonal levels. Current Injection/withdrawals have been near zero.

Ethane spot prices for March averaged near US$0.25 per gallon, flat with February. The EIA reported ethane/ethylene inventories of 52.1 million barrels at the end of January, 57% higher than a year ago and near the record levels that were seen late in 2016. Ahead of new cracker capacity start-up, ethane rejection remains near 500k Bbl/d. With the current excess of ethane, prices tend to track natural gas on an energy-equivalent basis. With the start-up of Enterprise’s new ethane export terminal, export volumes are headed up and are expected to be 200,000 to 250,000 Bbl/d by the end of 2017. For all of 2016, ethane exports averaged 95,000 barrels per day. The new Oxy/Mexichem cracker is in commissioning/start-up phase, and three more crackers are expected to follow by the end of this year. By the end of 2017, incremental ethane demand of 200,000 Bbls/d is anticipated for domestic crackers.

US propane inventories have dropped sharply as new export facilities have been commissioned and seasonal global demand for exports has been seen. For the week ending April 7, the EIA reports that US propane/propylene inventories were 40.1 million barrels, down 40.7% from a year ago. US prices for propane are near US$0.69/gallon, up 44% from a year ago, but are still below international prices.

The oil-to-gas price ratio has remained near 16:1 since early April, reflecting the fact that both crude oil and natural gas prices have trended sideways. The economic equivalent price for cracker feedstock is near 8:1. US ethane crackers currently remain advantaged, but not by a large margin as in the near past.

US Olefins & Polyolefins

US contract ethylene prices for March settled down 5.75cents/lb., resulting in a net transaction price of 26cents/lb. for the month. This result reflected better availability, lower spot prices, and softer feedstock prices. This price is like that seen a year ago, and is down after three months of increases that totaled 5.5cents/lb.  US ethylene spot prices were in the mid-30’s in early February, but cooled to an average of 27cents/lb. in March and have currently recovered to near US$0.30/lb.

The strong turnaround activity for US crackers seen in Q1 has ended with 5.2% of US capacity idled during this period. In April, only 2% of US ethylene capacity will be off-line for planned outages, although unplanned outages are always a possibility. Improved availability has softened the market and has contributed to lower spot pricing. Planned US cracker outages are relatively light until the fall turnaround season.

US contract propylene prices for April have not yet settled, but are expected to be down reflecting global price trends. In March, us chemical grade contract propylene was up 4cents/lb. to 50.5cents/lb. This was the highest level since early 2015. Current spot prices for propylene are in the low US$0.50/lb. area, up approximately 0.25/lb. from December.

After hitting a peak of US$1.10/lb. in March, the US contract butadiene price settlement for April settled down 17cents/lb. to 93cents/lb. (US$2,050/MT).

For March, the consensus view is that US contract PE prices settled up US$0.03/lb. This is half of the proposed industry increase of US$0.06/lb. The lower ethylene pricing seen in March proved to be a headwind to getting the full increase. However, with lower costs, integrated PE margins improved as if the entire increase had been successful.  

US exports of PE in February of 453 thousand MT were up 9% from January, and flat with last year. However, imports of PE of 203 thousand MT were down 21% from a year ago. On a net export basis, PE exports were up 30% from February of 2016. Gross PE exports in 2016 represented from the US represented 27% of industry capacity February.

US polypropylene exports in February cooled significantly from January’s record pace and were at 116,000 MT, up 21% from last month. February imports of PP were flat from January at 12,000 MT, roughly one-third the level seen last February.

Contract prices for US PVC in March were up 1cents/lb., despite a proposed 3cents/lb. increase by the industry. Since ethylene was down 4cents/lb. and half of this value rolls through to lower cost, PVC producers essentially got all the increase on a cost-adjusted basis. Export pricing for both EDC and VCM have increased in the last month, with EDC up 22% in one month.

European Olefins & Polyolefins

In April, the European contract ethylene price rolled over settling again at €1,050/MT. Since the first of the year, spot prices for ethylene in NWE have firmed about €200/MT to the area of €1,120/MT. This level has been seen in the last two months. Contract European propylene prices for April were down €15/MT, but remain elevated at €850/MT.

European contact butadiene prices for April remain at elevated levels, with a rollover of March pricing of €1,750/MT. However, spot prices in April appear to have come down from peak levels see in February that were near US$2,400/MT. Current spot pricing is now closer to US$1,850/MT.  

The European benzene contract price for April is down €192/MT to a level €745/MT. However, this is still 21% higher than a year ago, and spot prices in the last two weeks have moved up US$100/MT reflecting recent strengthening of oil.

Since February, European high-density polyethylene prices in Europe remain elevated and stable. Prices for HDPE blow molding grade for Northwest Europe have stabilized at levels of near €1,250/MT, in a range of up €75/MT to €100/MT from the beginning of year.

Global Chlor-alkali

The US Chlorine Institute reported that US chlorine production in February was 0.89 million short tons, down 7.6% from last year. The reported operating rate of 83% was relatively low and reflected shutdowns and operating issues. For the entire year 2016, US chlorine production averaged 84% of effective capacity. Recent movements of export prices for caustic and the chlorine-containing PVC intermediates VCM and EDC have been positive. Producers were successful in implementation of most of the US$40/ST increase announced for Q1 caustic, For Q2, an additional US$60/ST increase was announced for May. US export prices for caustic averaged US$369/ST in January, up about US$100/ST from last year.

Eurochlor reported chlorine production for Feb 2017 at 774,212 MT, down 4% from last year. Operating rates were reported at 85.3%. Implied capacity from the reported operating rate was 907,000 MT for the month, down 8% from December on reduced capacity associated with mercury cell shutdowns. Caustic stocks rebounded from a low level seen at year’s end. Reported stocks of 224,700 MT were up 12% from the year-ending levels. CMR believes that during 2016 and 2017, 31% percent of European mercury cell capacity will be shut down, representing 8% of total European capacity. This will push operating rates up and likely will necessitate caustic imports.