Chemical Industry Summary
The 6-month anniversary of OPEC’s decision to limit crude oil production will occur at the end of May, and the decision to re-authorize production cut targets is pending. The current news flow prompts many analysts to anticipate that the production cut targets will remain in place in 2017, perhaps extended to 9 months and tweaked a bit. Despite roughly a 90% compliance by OPEC, the effectiveness of the November targeted cuts to re-balance global supply and demand has been modest. The main issues have been increased crude oil production from the US and limited compliance to targets by non-OPEC producers. However, ahead of the May reauthorization meeting, OPEC and Russia issued a rare joint statement calling for continued production cuts. In the recent days, global crude oil pieces have strengthened somewhat, primarily on news concerning the impending reauthorization mixed with geopolitical concerns including the North Korean missile tests. However, it is generally conceded that global crude oil inventories remain elevated and global supply/demand will not rebalance in 2017.
Macroeconomics and Geopolitics
Americas
The balance of US economic news in April was positive following a weak showing in March. The US Bureau of Economic Analysis has come out with an initial estimate of US GDP growth at only 0.7%. However, a significantly stronger Q2 is in progress with the consensus forecast at around 2.9% GDP growth. This week, the Atlanta Fed is forecasting a strong 4.1% growth in Q2, up from 3.6% previously. For the full year, current GDP growth estimates are ion the 2.1% to 2.3% area. The shape of economic growth once again calls for growth to be back-end loaded in 2017.
For April, the US jobs report bounced back from a very poor March by recording 211,000 jobs added. The US unemployment rate edged down to 4.4%, at a level that has been historically seen as full employment. However, the labor participation rate remained low at 62.9% and many of the new jobs were in the lower-paying service sector.
In April, US sales of light cars and trucks were 16.8 million units, up 1.7% from March and flat with last year. US auto sales in the first quarter have cooled from last year’s pace. The year-to-date average sales is near 17.1 million vehicles, down 0.6% from last year. This is in-line with recent consumer spending trends in the US for Q1 that recorded only a 0.3% improvement from last year. However, April did see US consumer spending up 0.5% from March. The forward-looking consumer sentiment indexes are reasonably positive and the Conference Board anticipates a 2.3% overall growth in consumer spending in 2017.
In the US manufacturing activity slowed, but was still in mild expansion territory. Markit’s April US manufacturing PMI index slowed to 52.8, down from 53.3 seen in March. This result indicated the slowest improvement since last September and was partially due to a pull-down of inventory by producers.
US housing starts in March were again firm at 1,215 thousand on a seasonally-adjusted basis, very near the January/February level. Construction-leveraged companies including paint suppliers and builders have seen improved stock prices and healthier outlooks. For Q1, housing starts were up 6.6% over 2016. In its May forecast, the NAR (National Association of Realtors) is projecting 2017 starts at 1.273 million, up 8% from 2016. The 2018 forecast calls for an additional increase of 8.7%.
Sales of existing houses in March were the strongest in 10 years at 5.71 million units, up 6.5% from last year. Housing inventory is now only 1.8 months. Average housing prices for existing home sales in March was US$236,000, up 6.5% from last year. Per Freddie Mac, the average interest rate in March was remained relatively low by historic standards at 4.2%. Sherwin-Williams reported same-store paint sales growth in Q1 of 7.5%, a relatively strong result. Architectural paint sales in the past have been a strong function of existing home sales.
The manufacturing sector in Mexico slowed in April, reversing a recent trend of improvement. According to Markit, Mexico’s PMI in April improved to 50.7, up from 51.5 seen in March. 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.
Manufacturing activity in Canada continues to accelerate on improved domestic demand and a strong outlook. Canada’s April PMI of 55.9 was the highest in three and one-half years and well ahead of the 55.5 level recorded in March.
Brazil’s manufacturing sector recorded a PMI of 50.1 in April, the first time it has been above the neutral level of 50 since January 2015. In its April 2017 forecast, the IMF expects Brazil’s GPD to be nearly flat after falling 3.6% in 2016. GDP growth could return to modestly positive territory in 2018/2019, in the 1.5% to 2.0% area.
Europe
In France, the recent election of pro-EU centrist Emmanuel Macron scored a decisive victory in the presidential election over far-right National Front Candidate Marine Le Pen. In Germany, Angel Merkel’s re-election bid is gaining momentum and Europe’s swing to populism and anti-immigration, isolationist policies appear to be losing momentum.
The European economy continues to improve in part due to continued economic stimulus from the European Central Bank (ECB). As a region, the Eurozone recorded a strong manufacturing PMI result of 56.2 in April, up again from 56.2 seen in March. Manufacturing activity in the major European economies continued to be in strong expansion territory, with Italy and France recording 6-year highs. The ECB extended its €2.3 trillion stimulus program in December, through the end of 2017. In its April 2017 forecast, the IMF expects the EU’s GDP growth at 1.6% and 1.8% in 2017 and 2018.
For April, recently improved growth trends for Eastern Europe and Russia’s have moderated but continue to be positive. Russia’s manufacturing PMI was recorded at 50.8 in April, down from a 50.8 reading seen in March. Poland’s manufacturing sector continues to show expansion, registering a manufacturing PMI of 54.1, up from 53.5 in March. Poland’s April number was the highest in 31 months.
Asia
After a positive start to 2017, Chinese growth appears to have moderated. Slower orders and rising costs have trimmed activity the manufacturing sector. The Chinese government is restructuring the economy to focus on consumer demand and growth without excessive debt, and away from exports and capital expansion-driven growth. China’s housing market is at a fast pace, but tightening short-term credit will likely cool activity later this year. April’s PMI index for China accelerated to 50.3, down from 51.2 in March. Chinese imports in February were quite high with an unusual deficit of US$9.15 billion recorded.
China’s auto production in the first quarter was 7.133 million vehicles, up 8.2% from 2016 on an YTD basis. Full-year auto sales were at a record in 2016, up 13.6% from 2015, but are expected to be near 5% growth this year per the China Automotive Association, like 2013/2014. In April, China’s passenger car sales fell 3.7% to 1.72 million. The strong growth in Q1 is due in part to a sales-tax incentive that pulled sales forward. This incentive was curtailed in April, helping to explain April’s shortfall.
Polyolefin prices in Asia are tracking down reflecting weaker oil-based feedstock pricing and soft demand. Thus in April, Far East Asian HDPE blow modeling prices dropped by US$100 from previous month, to a range of US$1,050 to 1,100/MT. Spot ethylene prices for March and April in SEA traded down from February.
In the last month, spot propylene and butadiene pricing in SEA have continued to come off peak levels that were seen in mid-March. Propylene spot prices are currently near US$735/MT, down US$215/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$315/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$1,055/MT.
Feedstock – Crude Oil
Since the November 2016 crude oil production cuts were announced, global stocks of crude increased 31 million barrels to over 3 billion barrels, 275 million barrels above the 5-year average at the end of the first quarter. OPEC’s April crude oil production numbers have been released and the reported production was 31.73 million barrels per day, a reduction of 18,000 barrels per day from February. Additional production cuts were seen by UAE, Libya and Iraq. Production at this level represents an 88% adherence to the total target (1.2 million barrels per day) agreed to at the November 30 meeting in Vienna. The 6-month review of this initiative is due at the end of May where re-authorization with modestly changed targets is expected. Early reports are that producers are proposing a 9-month extension of the cuts.
OPEC reported that Russia’s production in April was 11.18 million barrels per day. This result was approximately 100,000 barrels per day lower that the average of the first quarter. OPEC reported that production from non-OPEC countries declined 440,000 Bpd in April, a substantial part of the pledged 558,000 barrels per day target. However, higher US production blunts the impact of the OPEC production cuts.
As of May11th, WTI spot prices in the US were US$47.33 per barrel, down about US$5/bbl. in the last month. In recent weeks, WTI oil prices have eased and natural gas prices have firmed. The oil-to-gas price ratio has edged below 15:1 for the first time in several years. For the week of May 5th, US crude inventories not in the SPR (Strategic Petroleum Reserve) were 522 million barrels, down about 10 million barrels, or 2% in the last month. US production keeps creeping upwards reflecting improving rig count as prices remain above the break-even point for many formations. Current US production for the 48 States is now near 9.3MM Bpd, up 6% from the beginning of the year.
For the week ending May 12, Baker Hughes reported that the US total rig count (oil and gas directed) was 885, up 38 rigs from a month ago and up substantially from last November’s count of near 570. Oil-directed rigs are bear 80% of the total. 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 begun to firm as inventories have approached typical seasonal levels, and are near US$3.25/MM BTU at Henry Hub. This appears to reflect a relative balance for supply and demand in a ‘shoulder season’ and inventories that are near seasonal norms. The week ending May 5th saw total US inventories of 2.3 trillion SCF, down 14% from last year. While this level was 22% above the 5-year average of 1.89T SCF, it was well below last year’s storage level that was 43% higher than the prior 5-year average for this time of the year. This week’s injection to underground inventory was a modest 45B SCF.
Ethane spot prices for April averaged near US$0.246 per gallon, up 1.5cents/gal from March. The EIA reported ethane/ethylene inventories of 52.5 million barrels at the end of February, 60% higher than a year ago and near the record levels that were seen late in 2016. In January and February, US ethane exports averaged 135,000 barrels per day, up 42% from the 2016 average, facilitated by the start-up of Enterprise’s new ethane export terminal in Houston. Ethane export volumes are expected to be in the range 200,000 to 250,000 Bpd by the end of 2017. By the end of 2017, incremental ethane demand of 200,000 Bpd is anticipated for domestic crackers. The net result is additional demand of 335,000 to 385,000 barrels per day. This is substantial portion of the currently rejected 500-600,000 Bpd of US ethane.
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 May 5, the EIA reports that US propane/propylene inventories were 41.6 million barrels, down 43.1% from a year ago. US prices for propane are currently near US$0.62/gallon, up 24% from a year ago, but are still below international prices.
US Olefins & Polyolefins
US contract ethylene prices for April settled up by 2.0cents/lb., resulting in a net transaction price of 28.0cents/lb. for the month. Since November of 2016, US ethylene has traded in a relatively tight range, reflecting the low volatility of feedstock pricing and the relative balance of supply and demand. Good export opportunities for ethylene derivatives have kept operating rates high. Pushed by limited availability due to Q1 turnarounds, US ethylene spot prices were in the mid-30’s in early February. More recently, spot prices have cooled to an April average of 29cents/lb., very near current contract pricing.
The strong turnaround activity for US crackers seen in Q1 has ended with 5.2% of US capacity idled during this period. For Q2, 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 settled at down 6.0cents/lb. with chemical grade benchmark price at 44.5cents/lb. May prices have settled down by 16% to 37cents/lb. due to improved supply. Current spot prices for propylene are in the high US$0.30/lb. area, down approximately 0.20/lb. from March.
US contract butadiene continues to be extremely volatile. Contract prices settled down 29cents/lb. in May to a level of 64cents/lb. This comes only two months after hitting a peak level of US$1.10/lb.
For April, US PE producers have delayed implementation of the second half of the proposed 6cents/lb. price increase announced in March until May. The April ethylene settlement of up 2cents/lb. will help support this increase as well as improving seasonal demand.
US exports of PE in March of 453 thousand MT remained flat with February, and were down 6.7% from last year. However, imports of PE of 229 thousand MT were down 17% from a year ago. On a net export basis, PE exports were down 4% from March of 2016.
US polypropylene exports in March were flat from at 115,000 MT, up 54% from last year. March imports of PP were up to near 15,000 MT, roughly one-third the level seen last March.
Following a 1cents/lb. increase in March, US PVC prices in April stayed flat. Since ethylene was up 2cents/lb. in April, PVC margins improved slightly. Export pricing for both EDC and VCM have increased in the last month.
European Olefins & Polyolefins
In May, the European contract ethylene price rolled over, settling for the third consecutive month at €1,050/MT. Since the first month of the year, spot prices for ethylene in NWE have firmed over €200/MT to the area of €1,100/MT. This level has been seen in the last three months.
Contract European propylene prices rolled over in May, and remain elevated at €880/MT. This the is highest contract price since August of 2015. European prices for PP homopolymer are down €20/MT since the beginning of April.
European contact butadiene prices for May dropped €225/MT for the month to a level of €1,525/MT. However, spot prices in May 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$1,630/MT.
After dropping €192/MT in April, the European benzene contract price for May is up €9/MT to a level €754/MT. This price is up 26% from a year ago, primarily reflecting a 27% increase in the price of Brent crude.
Since March, European high-density polyethylene, blow molding grade prices in Europe remain elevated have traded in a €100/MT range. Prices for HDPE blow molding grade for Northwest Europe are near €1,375/MT, in a range of up €100/MT to €200/MT from the beginning of year.
Global Chlor-alkali
The US Chlorine Institute reported that US chlorine production in March was 1.14 million short tons, up 7.4% from last year. The reported operating rate of 93% was the highest since 2008 and reflects export opportunities provided by operating issues in Europe and in Asia. 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$45/ST increase announced for caustic since the beginning of 2017. For Q2, an additional US$70/ST increase was announced for May. US export prices for caustic averaged US$450/ST in April due to tight supply, up about US$80/ST from January.
Eurochlor reported chlorine production for March 2017 at 791,833 MT, down 1.5% from last year. Operating rates were reported at 78.8%. Caustic stocks of 198 thousand metric tons were 15% below a year ago and were lower than any reported inventory in the last 10 years. 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.