Ethylene – Giving With One Hand – Taking Away With Another

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SEE LAST PAGE OF THIS REPORT Graham Copley / Anthony Salzillo

FOR IMPORTANT DISCLOSURES 203.901.1629 / 203.901.1627

gcopley@ / asalzillo@ssrllc.com

October 15th 2018

Ethylene – Giving With One Hand – Taking Away With Another

  • US ethane prices have finally cracked and dropped below 40 cents per gallon briefly last week, ending the week at 41.75 cents per gallon (Bloomberg, Mont Belview). This brings cost relief to the US ethylene producers and reopens a slight production cost advantage with most of the rest of the word that was lost in Q3.
    • US ethylene margins on a contract price basis are positive (assuming September contract prices are repeated in October), but spot margins remain negative.
  • But, working against US producers and perhaps the heavier side of the scale, international ethylene pricing has accelerated its decline – lowering the pricing umbrella that offered a degree of security to those in the US with significant and growing export volumes.
    • The gap between US and international ethylene prices is still high – the peak caused by US prices falling below cash costs and the decline is international prices falling – Exhibit 1
    • Note that it costs around $220 per metric ton to move ethylene to Asia and $125-150 per metric ton to move polyethylene – excluding tariffs.
  • Despite the cost decline in the US, ethylene spot margins from ethane remain below break-even, suggesting that the US continues to push product into international markets that do not necessarily need the product – i.e. US producers are displacing, or trying to displace higher cost suppliers.
    • In our most recent piece on ethylene, we pointed towards the price umbrella being key for US exporters as costs increased – US costs have declined, but ethane remains very volatile.
    • As the price umbrella comes down, not only do margins decline for producers in Asia and Europe, but in addition, further pressure is placed on incremental US exports – whether ethylene or derivatives – to find a market
  • None of this bodes well for Q4 guidance – which will be the larger driver of stock performance over the next few weeks in our view. We like WLK and DWDP but expect better entry points for both.

Exhibit 1

Source: Bloomberg and SSR Analysis

Further data

  • Exhibit 2 shows Europe and Asia pricing
  • Exhibit 3 shows pricing against crude oil – crude oil has been a support until very recently. It is likely that abundant surpluses from the US and concerns about demand in Asia and Europe are precipitating the price drop – see our weekly from yesterday

Exhibit 2

Source: Bloomberg and SSR Analysis

Exhibit 3

Source: Bloomberg and SSR Analysis

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