Long runway for acetyls chain

Global acetyls chain operating rates are expected to continue rising through 2020, boosted by China capacity shutdowns from its environmental push, along with consistent demand growth.

“Consistent demand growth and business fundamentals through the acetyls chain should support earnings growth through 2019 and 2020,” said Mark Rohr, chairman and CEO of US-based producer Celanese, on the company’s Q1 earnings conference call.

A blockbuster performance in Celanese’s acetyl chain segment helped propel the company’s Q1 2018 adjusted earnings/share of $2.79 far beyond Wall Street consensus estimates of $2.33. Earnings/share jumped 54% year on year.

The acetyls chain segment posted earnings before interest and tax (EBIT) of $253m in the quarter – up from an adjusted $108m in the year-ago period. Operating margins surged to 24.1% versus 13.6% from a year earlier. This segment accounted for 53% of Celanese’s total adjusted operating earnings in the quarter. Celanese’s other segments are engineered materials and acetate tow.

CHINA IMPACT

The acetyls market, which includes acetic acid and derivatives, saw a huge increase in capacity from 2008-2011, especially in China where “money 
was free and everybody wanted to build a plant, and wanted to convert coal which was also free in China”, said Rohr.

Since then, capacity has been relatively flat, while capacity utilisation has creeped up to around the 80% plus range, and bumping up to 83-85% in the past two quarters on some supply constraints, he added.

“When we look at China, per se, and the host of regulations and all the regions that are impacted, we believe there is going to be 5% capacity reduction as that runs its course over the next three or four years,” said Rohr.

“So we think we have got 5% coming off the top of that. At the same time… from the bottom you are taking away another 5-6% [from demand growth], so there should be about a 10% uptick net-net [to operating rates] over the next three to four years,” he added.

Celanese is making incremental capacity additions in acetyls, and Rohr sees more capacity overall coming in sometime in the 2020s.

Downstream, the company’s 150,000 tonne/year vinyl acetate monomer (VAM) expansion project in Clear Lake, Texas, is slated to start up in the fourth quarter of 2018, noted Laurence Alexander, chemicals analyst at Jefferies.

In the meantime, Rohr sees consistent acetyls chain tightness over the next few years. Demand growth had historically been in the 2-3%/year range, and is now ticking up to about 3-4%, he noted.

BOOSTING ESTIMATES

“With acetyl chain global operating rates at around 85%, Chinese regulatory restrictions expected to clip 5% from supply, and demand trends healthy, margin expansion could add $2.00-$2.50 (16-21%) to our 2021 estimated earnings per share forecast,” said Alexander from Jefferies.

The analyst boosted his earnings/share estimates on Celanese from 2018 onwards, now expecting $9.25 in 2018 (+23% year on year), $10.20 in 2019 (+10%), $11.05 in 2020 (+8%) and $11.95 in 2021 (+8%).

Shares of Celanese surged 3.7% on the day of the earnings announcement on 17 April to $110.38, near an all-time high. Shares are up around 24% year on year.

MODERATION AHEAD

The huge earnings boost in the first quarter from Celanese’s acetyl chain is likely to moderate in the coming quarters, noted Frank Mitsch, chemicals analyst at Wells Fargo.

“Acetic acid prices continued to rise in Q1 owing to Chinese environmental shutdowns and various outages [from Eastman Chemical and LyondellBasell]. We anticipate acetyl chain EBIT to begin to moderate in Q2 and the balance of the year as supply normalises,” said Mitsch.

“While the record profitability in acetyls was very impressive, the main driver was a temporary fly-up in pricing… Acetyls intermediates adjusted EBIT has increased from $83m in Q1 2017 to $162m in Q4 2017 and $230m in Q1 2018.”

“This corresponds to a price increase year over year of +7% in Q1 2017 to +30% in the most recent quarter. Although Celanese expects to see higher acetyls intermediates results in 2019, we wonder about the order of magnitude given the difficult Q1 comp,” he added.

Within Celanese’s acetyl chain segment, the acetyl intermediates sub-segment generated the majority of the operating earnings ($230m) in Q1 2018 with the other sub-segment industrial specialties contributing $23m in earnings. While acetyls chain earnings could moderate in the coming quarters, looking to the years ahead, Celanese CEO Rohr sees a long runway for higher profitability.

“A lot of people look at this business as being cyclical, but if you look at it from a capacity point of view, it has only gone through one cycle in the last 18 years… and demand has been pretty consistent,” said Rohr.

“So I think wea re moving back to a high capacity utilisation scenario. In that timeframe in the past, you would routinely see prices of [acetic] acid at $1,000/tonne. We are nowhere close to that level today,” he added.

US acetic acid prices on a spot FOB export basis are at $800/tonne, up 32% from a year ago and at their highest level in 10 years.

CHINA Q2 OUTLOOK

In the near term, China’s acetic acid availability is expected to drop with a number of scheduled turnarounds, which ICIS estimates will cause an estimated output loss of about 150,000 tonnes in the second quarter.

In China, purified terephthalic acid (PTA) accounts for around 21% of acetic acid consumption with VAM accounting for 20%.

Additional reporting by Anna Xiang and Lane Kelley