Alembic Global Advisors

Chemical Industry Reports

Global Chemicals: Supply/demand update affirms tightness

03/30/15 -

Global Chemicals – Supply/demand update affirms tightness

  • Consensus overestimating 2014-2018 ethylene supply by as much as 35%
  • Forecasting a 2016 peak which quite possibly could be a multi-year one
  • We rate US ethylene exposed names – DOW, LYB and WLK - Overweight

Summary

Our detailed plant by plant ethylene supply analysis leads us to believe the consensus may be overestimating 2014-2018 supply growth by as much as 18.9m tons with the main source of divergence arising in the Middle East, North America, Asia ex-China, Europe and Latin America.

A combination of reduced operating rates in Iran and project delays/cancellations in Iran, Kuwait, and the UAE reduces our 2014-2018 Middle Eastern supply growth estimates by 7.2m tons relative to the consensus. Our forecast for capacity addition delays in North America further shaves off 1.8m tons of capacity for the forecast period. While we are broadly in-line with the consensus on Chinese capacity growth we believe Asia ex-China capacity may be overstated by 3.8m tons. Finally we are forecasting Braskem’s Mexico plant being the only one to come on-line in Latin America in the 2014-2018 time period suggesting Latin American capacity may be overstated by 2.4m tons. 

Using our supply growth estimates and IMF’s global GDP growth forecast we contend a peak in the cycle could arrive as early as 2016. Additionally the peak could be a multi-year one buoyed by increased outages in the US and asset closures in Europe on the back of an ageing asset base. We also believe the US ethane advantage could continue as our forecast points to ethane oversupply despite incremental ethylene capacity. In such a peak scenario earnings and valuation could virtually double at US ethylene exposed names – DOW, LYB and WLK, all three rated Overweight.

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