Chems growth momentum flattening as inventories remain high – Credit Suisse

LONDON (ICIS)–Global chemicals sector growth momentum is relatively flat at present, with the restocking that helped to drive second-quarter demand leading to high inventory levels, according to analysts at investment bank Credit Suisse.

– Growth flat, as inventory levels rise above average

– Expectations of oil-driven higher chems pricing drove restocking

– Outage schedule lighter in Q3

Restocking was a key driver of demand earlier in the year as players moved to snap up product in anticipation of further hikes to prices on the back of firming oil costs. Customer chemicals inventory levels are 2% above the 10-year average at present, the bank said in a report.

Outages have continued to support pricing in parts of the market, which has been of particular benefit to BASF out of the listed European majors, Credit Suisse said, which may push the producer’s performance ahead of market expectations in its thirds-quarter financials.

The number of outages during the quarter has declined significantly compared to the April to June period of 2018, the bank noted, indicating that shutdown-inflated utilisation rates are like to soften through the second half of the year.

Recent analyst downgrades of prospects for the automotive sector could also stand to have an increasingly negative impact on chemicals volumes during the closing six month of 2018, the bank added.

Monthly sector weighted average commodity profit margin/tonne (Source: Credit Suisse)

Demand and pricing trends for hydrogen peroxide are the strongest third-quarter tailwind for listed chemicals firms in Europe, driving projected double-digit commodity product spread improvements for all players active in that space. Spot prices have now started to fall, the bank added.

Arkema, Evonik and Solvay have all benefited from stronger hydrogen peroxide spreads, while the company most exposed to a margin squeeze is Covestro, with weaker methyl di-p-phenylene isocyanate (MDI) and polycarbonates (PC) spreads expected to weigh on third-quarter profits.

Early September MDI prices have are flat to down by as much as €130/tonne in negotiations so far amid a lengthening market and lower consumption, as late-2017 pricing rose high enough to force users away from downstream polyurethane products, reducing consumption.

Covestro has guided that polyurethanes margins were likely to normalise through the second half of 2018, particularly as BASF brings its 300,000 tonne/year Ludwigshafen, Germany, toluene diisocyanate (TDI) plant online and the market rebalances.

MDI length is also the strongest third-quarter headwind for BASF in commodity profitability terms, while strong cracking spreads are expected to buoy profitability, Credit Suisse added.

Overall average chemicals pricing improved in the first half of the year, with average price growth during the period the highest since the first six months of 2011 on the back of delays in high oil and commodity chemicals pricing moving down the value chain.

“For commodity chemicals, while prices have been sustained through continued tight markets in H1 2018, product spreads should normalise as capacity outages restart – we believe underlying supply demand improves from late 2019,” Credit Suisse said.

Focus article by Tom Brown

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