News From Inside The Fridge – Beware Commodity Chemicals

gcopley

Following up from our research piece earlier in the week, we have some further data appoints to support our view that natural gas prices are likely to be stronger for longer – negatively impacting the US chemical industry, as well as other large industrial consumers.

  1. The first data point is that its FREEZING – those of us in the North East are getting really tired of waking up every morning to temperatures well below normal, snow and ice and on the ground, salt all over our cars and – in my case having to force the dog to go more than 6 inches from the front door to use the bathroom!
  2. More empirically; degree day data shows that the winter across the US has actually got worse since we last published the chart and the last two weeks have been 14% colder than a 14 year average versus the winter to date prior to the last two weeks being 9% colder – Chart 1.
  3. The last week of data in the chart is the week ending February 8th – if this data can be used as a proxy for natural gas inventories, we should expect a drawdown reported this coming Thursday greater than we saw last week, suggesting that inventories at the end of last week were as much as 35% lower than the same time last year.  Note that the week we are in now – data to be reported on Thursday of next week, appears to be no warmer than last week.
  4. Natural gas prices outside the US Gulf continue to strengthen – even though US Gulf prices have fallen from their high of last week.  Chart 2.
  5. US propane prices are at a 5 year high – this makes propane prohibitively expensive for ethylene producers who are pulling in even more ethane usual as a consequence – adding incremental upward pressure on both ethane and natural gas – Chart 3.

We believe there is real risk that natural gas prices move higher and directly impact chemical margins in Q1 2014 and possibly through the first half of the year and beyond if inventories fall even further and there is a need to replenish – keeping apparent demand high through the summer.

Even if gas prices simply sit in the $4.50-5.00 per MMBTU for much of the year while inventories are rebuilt, US ethylene margins could be 20% lower in 2013 than in 2014 – this is not reflected in estimates for the ethylene exposed names (DOW, LYB and WLK) – all of which are very expensive stocks today in our view.

Chart 1

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 Chart 2

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 Chart 3

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