Commodity hedges to be headwind for US Eastman in ’15 – execs

HOUSTON (ICIS)–Eastman Chemical’s olefins cost structure is improving with lower feedstock prices but commodity hedges, especially for propane, are a challenge for the company this year, executives for the US-based chemicals firm said on Friday.

The hedges could come to an earnings per share headwind of 40 to 60 cents in 2015, relative to 2014, CEO Mark Costa and chief financial officer Curt Espeland told analysts during Eastman’s fourth-quarter results call.

“Our hedging strategy that we have taken to reduce volatility in our propane and other input costs has become a significant headwind, given the unprecedented recent drop in the price of propane,” Espeland said.

“Obviously, we and the rest of the world did not foresee this dramatic drop in oil or propane prices,” he said.

At the time Eastman decided on its multi-year hedging strategy, indications were that propane prices would remain volatile and rise because of planned propane dehydrogenation (PDH) projects and export terminals, Espeland said.

There are six planned PDH projects in the US which could increase propane demand by an additional 190,000 bbl/day by the end of 2018, according to a report this week by the US Energy Information Administration.

CEO Costa added that the hedging was “an important short-term issue” for Eastman, but it was not likely to be a headwind in 2016 as oil prices were unlikely to fall further.

“I think most people have a view that [oil prices will be] stable to up,” he said. “This whole oil scenario is really just a 2015-type issue for us,” he said.

Overall, the oil price decline should ultimately be a stimulus to global GDP, which will be “great for Eastman’s specialty strategy of selling high-value differentiated products that are leveraged to an economic recovery”, Costa said.

“Of course, if we are headed into a global economic slowdown, with declining demand and a further reduction in oil prices, we will face a challenge,” he added.