OUTLOOK ’16: US chem stocks finish a mixed year

The petrochemical industry faced several challenges in 2015, including crude’s decline, a stronger dollar and China’s economic slowdown. (Sipa Press/REX Shutterstock)

HOUSTON (ICIS)–US petrochemical producers and refiners will start 2016 following a mixed 2015, when some company approached all-time highs while others fell sharply.

US chemical producers had to contend with several challenges.

Oil prices declined, causing US producers to lose a portion of their cost advantage against much of the world, which relies on oil-based naphtha as a feedstock. US producers maintained their margins, but they were not near the levels reached in previous years.

In addition, the stronger dollar hurt companies by both lowering the value of foreign earnings and by making exports less competitive.

The slowdown in China caused several problems for chemical companies.

It lowered demand outright for US exports. In addition, domestic producers in China cut their prices to make their exports more competitive. The result pressured chemical prices around the world, including in the US.

The slowdown in China also hurt several emerging markets, which supply commodities to fuel the nation’s years-long boom. Once Chinese demand for commodities fell, growth in several emerging economies also declined – particularly in Latin America.

These challenges all played out in the stock markets later in 2015, when the US had a correction. All three major indices fell by at least 10%. Meanwhile, the Dow Jones US Chemicals Index still has not recovered after reaching an all-time high of nearly 566 near the beginning of the year. It closed on 28 December at 495.37.

Among chemical producers, some sectors suffered more than others.

Stocks for the three US-based titanium dioxide (TiO2) producers are all trading below $10 as the sector continues to struggle through a multi-year supply glut.

Tronox closed on 28 December at $4.42, down from a 52-week high of $24.44. Kronos closed at $5.68, down from its 52-week high of $13.85. Chemours was $5.39, down from $22.25.

A farmer plows a field in California. (Global Warming Images /REX Shutterstock)

Fertilizer producers were also laggards, reflecting worsening farm economics in the US.

Season-average farm prices for corn should be $3.35-3.95/bushel, according to the US Department of Agriculture (USDA) World Agricultural Supply and Demand Estimates (WASDE) in November 2015. In the November 2013 report, corn prices were estimated to be $4.10-4.90/bushel for the corresponding season.

Season-average farm prices for soybeans should be $8.15-9.65/bushel for 2015. In the November 2013 report, they were $11.15-13.15/bushel.

Farmers respond to lower prices by planting fewer crops and cutting back on purchases.

Agrium closed on 28 December at $91.47, down from its 52-week high of $116.81. CF closed at $42.18, down from $70.32. Mosaic was $28.97, down from $53.83. PotashCorp was $17.80, down from $37.60

Other sectors performed relatively well, although they were still down from their 52-week highs.

Stock for Dow Chemical and DuPont approached all-time highs following reports of “” www.icis.com=”” subscriber=”” news=”” us-dow-chemical-dupont-in-advanced-merger-talks-report= “”>their proposed merger. Dow reached a high of $57.10. DuPont broke $75.30, near its 52-week high of $80.65.

A worker cleans automotive parts in a paint and coatings factory (Cultura/REX Shutterstock)

Companies that make paints and coatings benefitted from the continual recovery in the US residential markets and automobile production.

PPG Industries closed on 28 December at $99.85, versus its 52-week high of $118.95. Sherwin-Williams closed at $264.16, down from its 52-week high of $294.35. Valspar closed at $83.78, down from $90.91.

US refiners also had a relatively good year.

Under some measures, it was among their best years ever, said John Auers, executive vice president of Turner, Mason & Co, a consulting firm for the petroleum and petrochemical industries. 

Product prices usually lag behind crude prices, providing a temporary boost in margins, he said.

When fuel prices began following oil, US motorists took advantage of the decline by driving the most ever, Auers said. In terms of absolute volume, demand growth for gasoline was at record highs.

This is significant because in previous years, demand had actually been falling, the result of stricter fuel efficiency standards and sluggish economic growth. Low prices proved to be a powerful stimulus for gasoline demand.

In regards to exports, the US still maintained its cost advantage against refiners in much of the world. US prices remained low for natural gas, which refiners use as both a fuel and a feedstock for producing hydrogen gas.

US crude prices also maintained their discount against Brent, the global benchmark.

These cost advantages helped turn the US from a net importer of oil products to the world’s largest exporter, Auers said.

US refiners ran at incredibly high levels – exceeding 95%. As a result, the US has never processed as much crude or produced as much product.

Growing demand, high utilisation rates and cost advantages all contributed to a relatively good year for US refiner stocks.

Valero Energy closed on 28 December at $70.66, versus its 52-week high of $73.88. Phillips 66 closed at $82.45, versus its 52-week high of $94.12.

In 2016, Auers said products demand should still increase, but not to the extent of 2015. Diesel could also face challenges because of the Volkswagen scandal and because of capacity additions.

The gap between US and international prices for oil and natural gas has also narrowed, eroding the nation’s cost advantage, Auers said.

All of this could pressure profit margins in 2016, but they will likely remain strong, he said.

Inset image: Traders work the NYMEX floor in London. (CITY AM/REX Shutterstock)