Listen: What can producers expect from the rest of 2024?

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Mujidah Yahaya:
From a European perspective, we're definitely seeing that producers seem to want to be focusing on more potential rationalizations. There seems to be a lot more discussion about who is the next player to announce?

Vincent Valk:
Hi, I'm Vincent Valk, and welcome to the latest edition of the Chemical Week podcast. Today, we've got a panel discussion lined up to talk a little bit about what we saw in second quarter earnings and what it could tell us about the outlook for the remainder of 2024. Joining us are Rob Westervelt, editor-in-chief of Chemical Week, Neirin Gray Desai, Benzene Editor at S&P Global Commodity Insight, and Mujidah Yahaya, [inaudible 00:00:50] Ethylene Editor at S&P Global Commodity Insight. Hi, Neirin, Mujidah, and Rob.

Mujidah Yahaya:
Hi.

Rob Westervelt:
Good to be here.

Neirin Gray Desai:
Hi Vincent. Yep, great to be here.

Vincent Valk:
Great, and thanks for coming onto the podcast. Certainly a lot to cover so let's get to it. Let's start with a broad question here, and Neirin, Mujidah, I'll kick this to you to kick things off. What do you see as the key takeaways from second-quarter earnings?

Neirin Gray Desai:
So across the board, the common theme was definitely that consumer spending stall, and that weighed on the earnings of pretty much all North American chemical producers. So high interest rates and inflation continued into the second quarter, meaning a lot of Americans avoided spending where they could, and less discretionary spending usually hurts the sales of things like durable goods, so that's washing machines, toys, cars, building materials, and this idea that the consumer was under pressure was well-supported by housing data which showed single-family housing stocks remained low over the quarter.
Executives at companies like Dow and Alpet, the Mexican chemical producer, specifically pointed to low demand from the construction industry hurting their earnings, and that's really because construction generally leads to higher demand polymers like PVC, which is used for piping and window frames and things like polycarbonate, which goes into roofing. And similarly on housing, people spent less doing up their own homes, so that's existing homes. Companies like Home Depot, PPG and Sherwin Williams, so paint and coatings manufacturers, said DIY related spending was down and that impacted everything from solvents chemicals markets to polymers like polypropylene.
But all that said, it wasn't entirely gloom. Relatively speaking, markets like polyethylene performed better than others. That's because polyethylene is used a lot for single use plastic. It's generally more demand resilient, so Alpet, Procter & Gamble, Unilever all flagged an uptick in sales in the home and personal care sector. That includes things like household cleaning product, personal care product. People need to buy things like grocery bags and shampoo that comes in bottles.
And on top of all that, with the second quarter running from April through to June, spring into early summer, a lot of people are getting out of the house more, going to events, so there tends to be more consumption of things like bottled drink and takeaway food as served in single-use plastics.
Another area where companies reported decent growth and recovery was electronic good. Bassef and DuPont both said that was driven by increased demand for advanced materials and electronics, so that's basically semiconductors. And then less discretionary spending can also impact driving, so Marathon, Valero, among others said the slower driving season here in North America hit gas sales. That negatively impacted the refining margins, which had a knock-on effect for chemical feedstocks as well as for aromatics that are used as gasoline blending component.

Mujidah Yahaya:
And I guess what on the comparative perspective from Europe, I can definitely agree with you, Neirin, that consumer spending was also very much declining in Europe, definitely in terms of construction and mostly all the end-user industries. We saw that most results were just reflecting very low needs or end-user demand for any sort of extra products.
I guess diving down deeper into polyethylene, in comparison to the US, polyethylene did not particularly perform better than any other sort of polymers. What we did see in polyethylene for instance, was that maybe it was just the end-user packaging industry that had slightly better signals in comparison to other end-user industries like automotives.
But then when speaking to most people after the Q2 end-use results came out, most of the focus seemed to be if there would be any announcements about rationalization in Europe, which I think a lot of micro-participants have decided that this seems to be the kind of season we're in. Take for example on the Olefin side, we have SABIC that announced in I think April or May, I can't really remember, that they would be shutting down their steam cracker in Geleen in the Netherlands. Exxon also came out with an announcement saying they'll also be shutting out their assets located in Gravensham France, which is mostly going to be affecting the steam cracker and derivative units that produce a lot of polymers as well, such as your LRDP. This was such a surprise to the market because a lot of micro-participants had not anticipated that Exxon would be taking off the plants. And this may really just kind of reflected the fact that the demand in Europe was very weak and there seemed to be very weak expectations of a recovery going forward.
So a lot of the attention for Q2 end-use result in Europe was to see if any major player or any player would be a announcing any rationalisation on the global scale or maybe particularly in Europe. I think we know for a fact that Europe remains the most high-cost region on a global scale. So this seems to be where any global player would seem to want to take off any plans or assets out of the market if they have to at all.

Vincent Valk:
Sure, yeah, Europe definitely continues to be competitiveness challenged, but Mujidah, you talked a little bit about the forward-looking outlook there, so turn our attention to that. I mean demand as both Neirin and Mujidah said there was pretty soft in the second quarter and expectations for a meaningful improvement in the second half of 24, which I think were widely circulated earlier in the year, have largely faded. So what are producers looking at in the second half and Mujidah or Rob, if you want to chime in on this one to get started, feel free.

Mujidah Yahaya:
Yeah, definitely. I think from a European perspective, we're definitely seeing that producers seem to want to be focusing on more potential rationalizations. There seems to be a lot more discussion about who's the next player to announce that there might be any asset shutdown in Europe. That seems to be what the major attention and discussion in Europe is right now.
But aside from a rationalization standpoint, a lot of producers seem to be wanting to focus on maintaining margins through the rest of the year because there seems to have been a stability that we saw in Q2 that has slipped into Q3 now and a lot of producers are looking to want to continue to hold onto those margins.
Looking on the Olefin side, we know for a fact that with the high horse competitiveness, this is something that a lot of producers try to pass on down the value chain, which might be a little bit difficult considering the very weak macroeconomic factors and just the very weak end user demand overall, which is counteracting any high costs in Europe. So we know for a fact that this is something that producers are looking to maintain throughout the rest of the second quarter.
But then speaking to the analytics team here at SAP Global Commodity Insights, the [inaudible 00:07:51] forward outlook is that the margins are expected to continue to decrease going forward because there doesn't seem to be any strong point or pseudo expectation that there will be any significant or positive improvement before the year runs out.
Another point that we know that producers here in Europe might be looking at is trying to have much more flexibility to be able to absorb whatever volatile dynamic damage occurs. On a geopolitical scale we have had very sudden or unexpected incidents that have happened that the European market might not have been very much prepared for to absorb. Take for instance the Red Sea situation earlier in February, March, the European market was running at low run rates on overall perspective, I would say in terms of steam crackers for example. A lot of producers were not very much ready for the local demand that had picked up suddenly. I was suddenly trying to ramp up cracker run rates to kind of accommodate this demand. But I think now going into the rest of the 2024 year, a lot of producers will be trying to be much more flexible in order to absorb the kind of volatile dynamics that nobody ever seems to be able to predict because it's very tough times.

Rob Westervelt:
And I would echo that. I mean I think Vincent, as you stated in your question, I think that the hope for, certainly in I think in Europe as well, but certainly in the US was that there would be gradual and accelerating improvement in demand as the year progressed. And I think now looking forward now that second quarter earnings are behind us, that's not going to be the case. Demand is growing but it's slower than expected.
There are some exceptions in the semi-con base and the electronics base, as Neirin mentioned, the consumer is flattening out and the consumer segment non-durables, that was doing the heavy lifting over the last two years as other segments lagged on the demand side. But I think the hope for acceleration improvement isn't happening and that's leading companies to look to particularly in Europe to self-help. So they're looking at cost controls like the delaying CapEx against where possible. You see some of this in the battery space. So I think as you look to the second half we just said that focuses on maintaining margins on a year-over-year basis that we're heading against some very weak comparisons. So companies can probably maintain margins, but things you'll see some slight sequential improvement, but the hope for acceleration probably doesn't happen in the second half. It's more of a '25 event.

Vincent Valk:
Yeah, that definitely seems to be the theme and I do think it'll be interesting to see what happens later this year and early into '25 as we start to see interest rate cuts at least in the US.
But want to turn our attention now to a persistent issue for the petrochemical sector and that is this capacity overhang, which has meant that supply or at least capacity is likely to significantly outstrip demand for quite some time. It's already been happening and looks set to continue with a lot of capacity coming online in China in particular right now and over the next couple of years. So Neirin, what are companies saying about the capacity overhang and the impact that they expect that to have over the next say six to 12 months?

Neirin Gray Desai:

So this has certainly been an ongoing issue in the US, but of course also globally. It was addressed during some of these earnings calls with Dow, Marathon, Exxon, Indorama, all explicitly discussing it.
Like you say, obviously a lot of the new capacity is coming from China, but there was some talk of additional capacity here in the US too. I mean Shell mentioned it was bringing online it's third five-hundred-and-fifty-thousand metric ton a year polyethylene unit at its Monica plant in Pennsylvania that had been riddled with problems for some time. Methanex was another big one in August. It added a 1.8 million metric ton a years worth of methanol production at its Gaze Marl III facility in Louisiana. Methanex did say that to avoid oversupply it was taking down capacities at other units specifically in Trinidad and in New Zealand. Lionel Bissell also discussed this past year overhang issue. They said in North America that very little new polyethylene and polypropylene capacity will be coming online in the next couple of years, and that's after around a decade of fairly consistently adding new polyethylene polypropylene production. The company seemed optimistic that demand was going to essentially grow into its current capacities as they stand now. Other companies also tried to address over capacity. Some of them just suggested that storms and other unpredictable disruptions could hit supply down the line.

Vincent Valk:
Sure, yeah, I mean obviously we're coming into hurricane season so that could be an issue and it's always a bit difficult to predict. And interesting there Neirin, that you mentioned some US projects that companies have talked about probably from one area of the world where you could still see some capacity additions, although we've also seen some companies pull back on capital investment. We'll talk about that a little bit in a few minutes. But the reason why obviously companies may still be interested in investing in the US is the ethane advantage and the ethane advantage is a long-standing plus for investment in North America, but it has widened in recent months. So is that widening expected to continue?

Neirin Gray Desai:
Yeah, I think, I'm not sure if widening is expected to continue, but it's expected to remain wide in the US here. Ethane outages have caused an oversupply of ethane and very recently ethane prices have dropped to a four-year low. So ethane cracker margins have increased and the US ethylene market is very much at an advantage compared with Asia and Europe.
In terms of that advantage lasting Lionel Bessel did indicate during their earnings call that they were expecting ethane prices to remain cheap for the foreseeable future and they were banking on that to some degree. I mean they were slightly cautious. Like you mentioned, they did discuss the hurricane season here on the Gulf coast. It is still relatively young and there is the potential for additional disruption over the coming months.
Dow also talked about the ethane advantage. They similarly indicated it wasn't complacent, but there was clearly the potential for volatility in the coming months, but they didn't see any imminent narrowing of that spread.

Rob Westervelt:
Yeah, I would just say, I think Neirin summed it up well there on the ethane advantage that it's, I don't think it'll necessarily widen, but it will stay very healthy through at least the third quarter and there isn't much capacity coming on in the US on Olefin side. There's CP Chem in two years. Shintech has recently filed permits for a new plant that this Dow's plant's up in Canada. So I mean people are still thinking about US, broader North America additions, but there's not much coming on capacity-wise in the US in part because of the bill that's continuing in China.

Vincent Valk:
Yeah, certainly it's flowed considerably from what it was say five, 10 years ago.

Rob Westervelt:
The US, I mean Canada as well, it's an older fleet so to speak. It would not surprise me, Shintech's aside, that CP Chem's Dow is looking at Canada at any US investment, that part of that, at least part of that will replace older capacity, A, because it's starting to reach the end of life. But also because of the concern around emissions, the new capacity in the next cycle that comes on will certainly displace some older capacity that is less efficient. So I think U.S. capacity that comes on going forward, some of that will replace older capacity. Not all of it, but some of it will.

Vincent Valk:
And Mujidah, You talked a little bit about some of the challenges in Europe. So one thing I wanted to ask you about, does it seem like Europe is past the bottom of its cycle? I mean obviously there's the lingering competitiveness issues, there are various questions around demand growth in the macro environment, which I think are at this point global, but Europe might have it a little worse. But if you just kind of look at the way that the cycle has played out in Europe, did you at least see it as past the bottom?

Mujidah Yahaya:
That is a really good question and I would say a hard one to answer to be honest, because it's a lot uncertainty in Europe in a lot of the discussions that happen in the market. A lot of players now are very hesitant to have any long-term views and they keep it very, very short-term maybe as much as a one-month outlook is what you receive now if you're talking to any market players. So it is kind of hard to say if Europe is past a cycle, if it's getting any better.
I think on a general scale there's a very low expectation that there'll be any recovery before this year runs out or even well into the second quarter of next year. So I mean, like I said earlier, talking to analytics expectations of margins continue to decrease into 2025. Rationalization is still very much a big topic here. A lot of producers or a lot of market players are having internal reviews now looking at their assets, looking at what they need to do to kind of stay or keep afloat during this kind of tough times. There's no indication that the demand would significantly improve or pick up anytime soon because like we have mentioned multiple times already the macroeconomic picture, there doesn't seem to be any positive signals in that regard.
In Europe we have the same where Germany tends to be a kind of leading point or signal if Europe would be doing well and considering Germany does not really look to be doing great at the moment it's kind of also dampening sentiments I would say on a overall scale.
I mean if you look at the Olefins market now we're going into heavy turnaround season where we're seeing that some producers have had to pull forward their turnarounds to have it happen earlier because the market right now is not in the best situation and why not just use this opportunity to have maintenance on your crackers if you can ahead of time.
So yeah, it is a bit difficult to say if Europe is doing any better or if it's getting out the cycle anytime soon. It's been a consistent loss for a while now as well into early last year into going into 2025 as well. Very low, optimistic comments, a lot of conversations are always just laced with questions about the stock levels, about how imports will continue to possibly dampen domestic margins and numbers as well. But yeah, there's just a lot of uncertainty and it's very hard to say what exactly Europe is right now.

Rob Westervelt:
Yeah, I would agree from the comments that I've seen, I would fully agree there. I think the sentiment in Europe remains very weak and I don't think anyone's going to put their hands up and say, oh, we're at the bottom. We're starting to come out and companies won't do that. I think part of it is just because of how severe the last two or three years have been. This is not a typical down cycle, this is a historically bad one. I think the margins are the weakest they've been in 30 or 40 years. So the attention turns to self-help. Part of that is rationalization, which has kind of slowly started, SABIC and Exxon have announced some closures, but I think it's roughly what million tons of Olefin. So probably some more capacity needs to come out on the European side.
So I think companies maybe take some comfort that things aren't getting any worse, but given how weak demand is, how the state of competitiveness, there's been no... I don't think there's optimism for a quick turnaround here. The focus is on self-help, the focus is on reducing costs. Hopefully there's a demand tailwind at some point. But just given the oversupply situation, competitiveness situation, I don't think anyone's expecting a quick or significant rebound in Europe. But Vincent, one thing I'm curious about is specialties and what we've seen there. I mean is there as you look is the market significantly different than what we're seeing on the petrochemical side?

Vincent Valk:
I would say not really. One thing that's worth noting, and this was widely signaled in the first quarter, but I think we can really say it with full confidence now, is that de-stocking is over, I mean well behind us outside of certain ag markets. So the focus has really turned to end market demand and there the picture is mixed. I think Neirin had kind of hinted at this in his comments earlier in the podcast. I mean it really very much depends on the end market. You look at personal care, home care, food ingredients, kind of consumer non-durables end of things is that's generally okay. IFF actually raised it's full year estimate for volume growth to three to 5% from zero to 3%, just as an indicator, one of the major producers that sells into that market. Coatings is pretty variable. I mean it's looking like there's a slow-down in auto which had been improving for a while after some supply chain issues in '21, but it does look like that's starting to slow down. And overall manufacturing weakness is really hitting industrial coatings.
Architectural is kind of an interesting story. DIY as Neirin said, has not been doing great, but if you look at the coatings makers called this the pro side of architectural, that's generally been okay. Sherwin Williams's paint stores business saw I think decent demand from the pro side in the second quarter. So that's generally been okay despite high interest rates and despite the slow-down in kind of DIY coatings. And there is some expectation that pent-up demand for housing could be a tailwind at least in the US when rates come down.
And Rob, you mentioned this as well in terms of electronics, that industry does seem to be seeing some improving demand as we see some more fads come online. The semiconductor industry does seem to be in the process of turning a corner.
Also probably worth noting that there's some increase in demand from other electronics or industrial related end uses around things like data centers. That's been a big growth driver in the water treatment business. I know Ecolab flagged that on their earnings call and it's something that they're really investing in.
So generally I would say the closer you are to the manufacturing economy or durable goods like appliances, the weaker the outlook is. But let's not overstate this. Some sectors are doing okay and looking at the big picture demand wise, you're not really seeing massive growth anywhere, but at least in North America, you're not really seeing the bottom falling out either. Across the board, it's pretty soft, but with some variation I would say.
And finally want to talk a little bit about investment. This has been, as we've been having this conversation here, it's come up several times about the potential for capacity rationalizations in Europe and PET Chems. But I think we've seen some comments from producers about their thoughts on investment and CapEx plans and not just in the basic chemicals petrochemical sectors, but across the industry. So are companies backing off from investment given the soft demand environment? And I've been following this a little bit in the battery space, but before I get to that Rob, I want to kick it to you to see what's going on in commodities. And I know also there has been some questions around hydrogen, which has been a subject of a lot of hype in recent years.

Rob Westervelt:
Yeah, yeah, I mean certainly you mentioned the battery space and that's certainly the last few weeks you're starting to see some significant announcements about slowdowns there. But elsewhere, for most of outside of China, there's not much investment going on beyond maintenance investment. And the focus is on, most companies use the phrase self-help or something similar. So they're keeping a very sharp focus on cost and projects given the slow demand.
There weren't that many on the commodity side, on the petrochemical side, but like you mentioned, hydrogen is one of the areas where there is very heavy investment. The top three guys in gas is Air Liquide, Linde and Air Products were all spending in the four to 5 billion dollar range. So kind of at the top of their typical annual spending. I think that is one area to watch. It was interesting on the second quarter calls, they got some questions about the direction of capital spending and whether the new projects were going to meet the return on capitals targets that the companies had set.
And I think for now there the gas guys are maintaining their CapEx budgets, but they say that they're close to looking at what's going on in hydrogen and whether investment there will slow given the amount of money that's going on there. Given what's happening in the battery space. I think the next area to look at is what's going on in the hydrogen. I think Air Products they're spending year over year is actually down slightly. Now Linde is up slightly, but they're getting a lot of questions about the return on capital and the returns for green and blue hydrogen. And the companies are careful to say we're not going to invest ahead of demand commitments. So I think you could see the sharp growth that you've seen in the last four or five years in the gases space, probably moderates.

Vincent Valk:
Yeah, sure. And you've mentioned batteries and I think there we've really seen some big cutbacks, lithium chemicals particularly coming under pressure due to low prices and slower than expected growth in electric vehicle demand as of August 21st, and we're recording this on August 22nd, S&P Global Commodity Insights assessed lithium carbonate prices as being down by about 30% so far this year. And that's after an even bigger tumble in 2023.
Albemarle and Arcadium have announced that they'll delay projects in Australia, Canada, and Argentina. And Albemarle has hinted that more could be coming. If you look at kind of the big Western lithium chemical producers, SQM interestingly hasn't announced any major cuts and executives said during their company's earnings call that they don't think current prices reflect the long-term state of the market. Beyond lithium we also have seen some cutbacks in other parts of the battery supply chain Orbia and Cienco said they'll pause plans for a PVDF JV that was planned to serve the battery market. And interestingly, that is a project that had already broken ground, so that really tells you something about where they see things going in that market. And Umicore said it's battery materials business will see sales to plan this year, and I think they've also been taking a look at investments. So I think that was about it. Any closing thoughts before we wrap up here?

Neirin Gray Desai:
The rate cuts later in the year. I mean, like you say, the outlook is not great. I don't think any companies are really banking on those cuts for saving them in Q3 and Q4, and I think that there are now forecast one or two cuts by September, maybe a third by November, which would bring rates to between four and 5%. But yeah, the consensus was that these cuts are... No one's banking on them and any effects that they do have will probably be pretty delayed.

Vincent Valk:
And that tends to be how it goes with the rate cuts anyway. It takes several quarters for it to kind of cycle through. So certainly for '24, not a relevant factor. So in any event, thanks very much to Neirin and Rob and Mujidah and this is Vincent Valk signing off for Chemical Week.