31 December 2010 16:00 [Source: ICIS news]
By Joseph Chang
NEW YORK (ICIS)--A growing number of Wall Street analysts are forecasting a “supercycle” for commodity chemical producers, with profit gains in 2011 building to a peak in 2013-2014.
“We are at an inflection point in the global plastics market, driven by ?xml:namespace>
“In the next five years, incremental annual [ethylene] consumption in
The American Chemistry Council (ACC) expects emerging markets to lead overall chemical demand and production growth.
“We are now in an expansion, driven by emerging markets strength, while the
While global chemical demand growth will continue in 2011, supply constraints will emerge as capital investment has not kept pace with the rebound in demand.
The global financial and economic crisis of 2008-2009 squashed capital spending, and the
Mann forecasts average annual global ethylene capacity growth of just 2.3% from 2011-2014 and sees utilisation rates climbing from around 85% currently to 92% by 2014.
Hassan Ahmed, head of research at US-based Alembic Global Advisors, also sees a supercycle emerging, partly because of the lack of new capacity.
“Stemming from the evolving capacity addition vacuum, we would expect the peak to be a long drawn-out one similar to the 1988–1989 peak, rather than the short amplitude and duration 1995 one,” said Ahmed.
The analyst, who expects a peak as early as 2013, sees a worldwide capacity vacuum post-2011 as “two of the main culprits behind the recent capacity addition flood -
In addition, the Western trade sanctions against
“Despite a strong rally in shares of commodity chemical names in the US, we believe the market may still not be fully appreciating what we consider to be an imminent ‘stronger for longer’ supercycle, provided the current disconnect between crude oil and natural gas prices persists,” said Ahmed.
Globally-set crude oil prices have been on an uptrend, rising to nearly $90/bbl in mid-December, while US natural gas prices have fallen to around $4.20/MMBtu, largely because of new shale gas production.
“Our analysis shows that despite strong cash margins and earnings logged by US commodity chemical producers thus far in 2010, peak earnings could be over double the levels we saw in 2010 with a peak in the cycle as early as 2013,” said Ahmed.
Wall Street consensus forecasts for 2011 profits are bullish with expected earnings per share (EPS) gains almost across the board.
However, Buckingham Research analyst John Roberts pointed out that commodity chemical companies face elevated risks in 2011 after strong performances in 2010.
“The macro environment is unusually uncertain with commodity price and foreign exchange volatility. Margins are unusually high this soon after the recession. It feels like a bubble,” said Roberts.
High oil prices could hit economic growth while US natural gas may not stay cheap forever, he noted.
“At some point, high oil prices will cause overall demand to decline. Plus, with natural gas prices this low, someone could take advantage and cause gas demand and prices to go up,” said Roberts.
This could include a company building a gas-to-diesel facility in the
Roberts said the best time to buy cyclical commodity chemical stocks is when things are falling apart.
“Buy when there’s trouble. Right now, everything is looking pretty good,” he said.
($1 = €0.76)
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