US chemical stock prices surge on Harvey, even amid project start-ups

Source: ECN

2017/09/29

US chemical stock prices are surging amid the start-up of two worldscale projects by DowDuPont and Chevron Phillips Chemical, as markets shrug off fears of new supply amid product tightness in the aftermath of Hurricane Harvey.

As chemical companies geared up to start-up massive new ethane crackers and polyethylene (PE) projects in the US through 2017 and 2018, a supply driven downturn in the cycle was (and still is) widely expected – it was just a question of how severe it would be.

Hurricane Harvey has tilted the balance in favour of producers. From a market perspective, the historic storm did two things – it took chunks of US petrochemical capacity off line for several weeks (some plants have yet to fully start up) and delayed the start-up of new projects.

While a number of companies will take hits to Q3 earnings from the disruptions, equity markets are looking ahead. And what they’re seeing is a prolonged period of elevated pricing, thus profits for most chemical companies.

Since Hurricane Harvey made landfall in Texas on 25 August, stock prices have shot up for several major chemical companies.

Stock table

Those with chlor-alkali/vinyls exposure – Westlake Chemical and Olin – are up the most, both over 13%, while even olefins and polyolefins producer LyondellBasell, the hardest hit by the storm, was up over 10%.

In comparison, the broader US stock market as measured by the S&P 500 index, is up 2.2% in the same period.

“With Q3 coming to an end and the impacts of Hurricane Harvey coming into focus, we expect Westlake to be among the top beneficiaries of exacerbated market tightness, primarily within Vinyls, though Olefins pricing is a positive as well,” said Wells Fargo analyst Frank Mitch.

PE CAPACITY RAMPING UP

In the ethylene chain, major new capacity is set to ramp up. In September, DowDuPont started up its 1.5m tonne/year ethane cracker in Freeport, Texas, along with its 400,000 tonne/year ELITE PE unit. Its 350,000 tonne/year low density PE (LDPE) unit in Plaquemine, Louisiana is scheduled to start up in Q4 2017.

Also in September, Chevron Phillips Chemical started up two new PE units in Old Ocean, Texas – one a 500,000 tonne/year bimodal high density PE (HDPE) line, and the other a 500,000 tonne/year metallocene linear low density PE (MLLDPE) unit.

Yet because of Harvey and the resulting disruptions, PE prices are on the rise. US producers have announced increases of 4 cents/lb for September, and another 3 cents/lb for October. This follows a hike of 3 cents/lb implemented in August.

STRONGER FOR LONGER?

While most chemical plants on the US Gulf Coast are back up and running, there is good reason to speculate that price strength will last far longer than many expect.

James Ray, senior consultant with ICIS, analysed the impact on US chemical prices after the last major Hurricane to hit the US Gulf Coast – Rita back in September 2005 (see page 10).

Following the initial spike in the US ICIS Petrochemical Index (IPEX), prices moderated until around early 2007, before rising again on other factors. Yet, through that period and even longer through about mid-2007, prices were much higher than they normally would have been, using a Brent crude oil normalised index for comparison.

That Brent normalised index indicates what chemical prices in theory should have been, given changes in Brent crude oil prices.

While chemical prices would expectedly decline after an initial supply shock, producers obviously attempt to hang on to as much margin as they can. So you could expect prices to eventually decline, but decline much slower than they “should”, even as plants fully start up.

After Rita, it took about two years before prices finally closed the gap versus the Brent normalised index.

The stock market is clearly signalling more than short-term earnings gains for chemical companies because of supply tightness in the aftermath of Harvey. US petrochemical producers bringing on massive amounts of ethylene and PE capacity through 2017 and 2018 are doing so in an auspicious time where the price lift from Harvey could last for months, if not a couple years.

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