INSIGHT: Huntsman sees ‘green shoots’, end of worst inventory destocking cycle ever

NEW YORK (ICIS)–Could we finally be at the end of the relentless destocking cycle in chemicals? It has been a rolling and prolonged cycle thus far, with weakness spreading from commodities to consumer-related specialties over the course of the last year.

Huntsman on Tuesday offered a glimmer of optimism on its Q2 earnings call that the bottom is near, echoing Dow’s comments last week that the industry is in the late stages of the downcycle. Likewise, RPM International sees “red lights… turning into yellow lights and, in a few places, even green lights”.

Peter Huntsman, CEO of Huntsman Corp, sees ‘green shoots’ in housing and construction demand in North America and China, with the end of the worst inventory destocking period for related chemicals and materials ever, even exceeding that of the Great Financial Crisis of 2008-2009.

“In our North America markets, particularly around MDI [methylene diphenyl diisocyanate] and construction demand, I believe we are seeing the end of prolonged inventory destocking,” said Huntsman on the company’s Q2 earnings call.

While there are fewer homes and commercial real estate projects being built today compared with 12-18 months ago, “order patterns would tell us that much of this destocking has ended and we are in the early recovery of building starts as we move into next year”, he added, while also pointing out that commercial construction may take longer to recover.

While US housing starts saw a 15.7% spike in May, the latest June starts fell 8.0% to 1.43m.

Growth in Asia and China markets is characterised as “modest”, and short of major China stimulus, growth is expected to remain modest in H2 2023.

Huntsman products exposed to housing and construction include polyurethanes, amines, adhesives and sealants, and maleic anhydride (MA) – for unsaturated polyester resins (UPR) in countertops.

EUROPE DE-INDUSTRIALISATION RISK
Europe continues to add pressure with aggressive pricing as companies fight for whatever demand is available. Meanwhile, policies are not addressing the growing uncompetitiveness and de-industrialisation taking place, the CEO said.

“Europe is losing its ability to export while also seeing more raw materials imported from abroad, particularly in products where new capacity has been added and demand in domestic markets is unable to absorb new production,” said Huntsman.

The company will continue to be vigilant on the evolving situation in Europe, and the flight of original equipment manufacturers (OEMs) is of particular concern.

“My bigger concern is that you start to see the customers – the OEMs – start to leave Europe, and go to China, North America or the Middle East. And if you continue to see this de-industrialisation, we may well have to reassess that market and the cost structure,” said Huntsman.

“I don’t want to survive in Europe. We’ve got to prosper in Europe. We’ve got to have a good return in Europe and a supply chain that makes sense, and I think there’s more work to be done,” he added.

The ‘green shoots’ in housing and construction do not apply to Europe thus far.

“Our biggest problem today is simply demand. While we do not expect any sudden improvements in H2, we do see green shoots in many areas in North America and China, but less so in Europe,” said Huntsman.

“I believe the worst of the de-inventorying, particularly in North America, is behind us, and we’re obviously closer to a more fulsome recovery,” he added.

WORST DESTOCKING CYCLE EVER
This prolonged destocking cycle could be the worst in history, exceeding that during the Great Financial Crisis of 2008-2009, the CEO pointed out.

“As we look at past cycles, I think we’ve been hit doubly hard this time because we’ve seen a fall-off in economic activity… coupled with what I think has been one of the most aggressive de-inventorying phases… What we’re seeing today globally is more severe than what we saw during the [2008-2009] recession, and the crash of crude oil,” said Huntsman.

This has been evidenced by US housing starts falling around 15% from its recent peak, but volumes for the products going into housing plunging 30-40%, he added.

“That’s unsustainable on a long-term basis,” said Huntsman.

The recovery off the bottom will be more about volumes than pricing, he noted.

Early positive signs include double-digit quarter-on-quarter growth in composite wood and insulation, single-digit growth in polyurethane spray foam (PSF) and flat volumes in adhesives and sealants (ASE) materials, the CEO pointed out.

Around two-thirds of Huntsman’s Polyurethanes Americas portfolio goes into construction end-markets, approximately 40% of which is commercial and 60% residential, the latter of which nearly 75% is directly related to new construction.

However, the overall earnings outlook for Huntsman in Q3 is challenged with adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) projected to be flat-to-down among its three segments – Polyurethanes, Performance Products and Advanced Materials.

As the historic housing and construction destocking goes into its last throes and green shoots emerge, this is setting the stage for a meaningful recovery in 2024, barring a major recession.

“When I think of a recovery and the steps we need to get there, I can’t help but think of Churchill’s quote in 1942. ‘Perhaps we are at the end of the beginning’,” said Huntsman.

To put former UK prime minister Winston Churchill’s quote into context in a business perspective, the end of destocking may be the first sign of ‘victory’ in the long road to recovery. In other words, let the real recovery begin!

Insight article by Joseph Chang

Thumbnail shows Peter Huntsman, CEO of Huntsman.