Thank goodness for Janet Yellen, and China’s provincial governments. That was clearly investors’ thoughts, when they bid up chemical company share prices during Q1. For as the chart above shows, there was nothing in the fundamentals of supply and demand to suggest economic recovery was finally underway. Instead, the latest American Chemistry Council data shows that global capacity utilisation fell to 80.1% in March – a new low for the current cycle.
However, the US Federal Reserve’s sudden “discovery” in early Q1 that the US economy wasn’t recovering as expected – Q1 GDP was just 0.5% and inflation only 0.1% – led investors to assume interest rates were unlikely to rise during 2016 as the Fed had promised:
- Instead, they sold the US dollar and bought commodities such as oil
- This repeated the “store of value” trade that proved so profitable until mid-2014
- And China’s panicking provincial governments stoked the rally even further
- Their lending soared to otherwise-bankrupt companies, as they battled Beijing’s efforts to restructure the economy
Oil prices thus repeated the 50%+ rally seen this time last year, causing downstream companies to panic and restock heavily. This was very good news for chemical company profits, and for investors’ share/debt portfolios. But as my quarterly summary of company results shows below, company managements were more realistic about the outlook.
Some product areas, such as polyolefins, did very well. And US company earnings were boosted by the temporary rise in the cost advantage of their gas-based feedstock. But many companies reported customer resistance to rising prices, suggesting volume was being driven by the restocking phenomenon rather than underlying demand growth.
Those companies such as Arkema who have embarked on long-term portfolio transformation efforts may well prove to be the real Winners over time, once markets recover from their excitement over the dollar’s weakness.
Arkema. “Internal momentum sustained by transforming investments which continue to ramp up”
Asahi Kasei. “Decreased prices of petrochemical products”
Air Products. “Economic conditions in the quarter “challenging”, weak manufacturing environment”
Axiall. “Worsening conditions for chlorvinyls operations”
BASF. “Lower selling prices to customers as the decline in raw material prices filtered through”
Borealis. “Very strong margins in the polyolefins business”
Braskem. “Resin consumption in Brazil during the quarter declined 18% compared with the same period last year”
Chemours. “We realized over $40m of transformation plan savings”
Clariant. “Increasingly challenging economic environment”
Covestro. “Positive effect of lower raw material prices, which outweighed the impact of lower selling prices and volumes”
Dow. “Record Q1 for polyethylene sales, driven by demand from North America and Asia Pacific”
Eastman. “Drop in chemical intermediates”
Evonik. “All divisions posted falling revenue apart from Resource Efficiency”
ExxonMobil. “Capturing increased specialty and commodity product demand along with significant cost benefits from both gas and liquids cracking advantages at our integrated sites.”
Hexion. “Selling prices were lower because of declines in prices for oil-based feedstocks”
Honeywell. “We will be be cautious in our sales planning, plan costs and spending conservatively”
Huntsman. “Lower cost of goods sold”
Kronos. “Average Q1 sales prices for TiO2 declined by 14% year on year”
LG Chem. “Improved margins at its petrochemicals business”
Lanxess. “Improved margins offset the decline in sales”
LyondellBasell. “A challenging environment for the rest of the year on the back of further maintenances as well as repairs”
Mexichem. “Difficult industry conditions”
Mitsui. “Prospects for demand growth in the chemical industry remains unclear due to the volatility of naphtha prices and exchange rates”
MOL. “Strong petrochemical margins”
OMV. “Strong polyolefin margins and an improved contribution from the base chemicals business”
PKN Orlen. “Expects downstream margins to weaken due to lower cracks on diesel and petrochemical products”
Phillips 66. “Weaker margins impacted our financial results in the first quarter”
PPG. “Higher volumes and cost control measures”
PTT. “Shutdown of a cracker and lower refining spreads”
Petronas. “Moving forward, the outlook for 2016 remains soft”
Praxair. “Volume headwinds primarily in the energy, metals and manufacturing end-markets”
Reliance. “Strong polymers demand and higher volumes in the polyester chain”
Shell. “Lower base chemicals margins in the US and sales volumes”
Repsol. “Higher petrochemical sales volumes”
Sherwin Williams.”Higher volumes driven by agricultural coatings demand”
Solvay. “Growth in 2016 will be “back-ended” compared to the “strong” first half of 2015”
Trinseo. “Lower raw material costs, unfavourable exchange rates and lower European sales in polystyrene”
Tronox. “Believe Q1 marked the turning point in the long decline in TiO2 pigment selling prices”
Unipetrol. “Petrochemical business was significantly affected by the shutdown of the cracker unit”
Univar. “Lower demand from the oil and gas market”
Vopak. “Sound market fundamentals for storage demand and infrastructure services”
Wacker. ““Low price levels for semiconductor wafers and solar silicon”
Westlake. “Lower selling prices for most key product lines”