These Two Petrochemical Companies Have Exactly What The Global Recovery Needs
by Tony Daltorio, Investment U Research
Thursday, February 11, 2010
While investors in the West continue to vacillate between hope and despair over the possibility of an economic recovery, Asia has some much more definitive signs to go off of.
Take the price surge in petrochemicals, an oil product used in everything from toys to mobile phones prices. The benchmark Platts Global Petrochemical Index, which tracks the cost of major petrochemicals including ethylene, benzene and propylene, recently rose to about $1,200 per ton. That's the highest price since October 2008, and marks almost a 150% increase since the December 2008 low.
Considering all the products made with petrochemicals, that rise in value could actually mark more than just an Asian ascendancy; it could mean a full-out global rebound.
Promising Signs In The Petrochemical Market In The West
Dow Chemical especially took advantage of the oversupply in North American natural gas to export all sorts of chemicals to Asia. In doing so, it generated exceptional free cash flow and brought in pre-recession level earnings during the last quarter.
Those profitable opportunities should continue, according to Dow Chemical CEO Andrew Liveris, who sees "demand in emerging geographies continuing to show sustained growth, which bodes well for global growth." And the head of commodities research at Bank of America-Merrill Lynch in London, Francisco Blanch, agrees with Mr. Liveris, noting that "Asian petrochemical demand has increased at a phenomenal rate."
They both have good reason to think that way too, considering how those markets gave Dow Chemical a 33% boost in volume. China contributed the most at 60%, while India and Russia each supplied 30%.
Both Dow and DuPont sounded very upbeat about demand in emerging economies, especially in Asia. And while they did warn about continued lackluster demand in Europe and the U.S., there are still some signs of recovery:
- Thomas Swift, chief economist at the American Chemistry Council sees U.S. petrochemical production "coming back very sharply."
- Capacity usage in the larger chemical industry finally hit its one and a half year high of 76% after bottoming out at 68.1% last January.
- Chemical railcar loading - a strong indicator of real demand - rose 11% year-on-year, the highest increase since at least 1999.
So there's hope, even here.
Global Petrochemical Consumption Drives Prices Higher
The jump in global petrochemical consumption has driven prices higher, reversing the damage done in late 2008 and early 2009. For instance, the cost of naphtha - a chemical industry cornerstone that both ethylene and benzene are made from - jumped from a five-year low of $245 a ton in 2008, to $775 more recently. That bodes well for the entire industrial process, even if diesel demand continues to make slow progress.
Meanwhile, the petrochemical business is one of the few bright spots in the oil industry. The International Energy Agency reports that while total oil demand fell by 1.3 million barrels a day, naphtha consumption rose by 100,000 barrels per twenty-four hours. Unsurprisingly, that uptick was led by China, where demand rose nearly 75% year-on-year in late 2009. But Japan, South Korea, India and Singapore all purchased more as well.
Naturally, the price of naphta-based products also moved up sharply on that increase. Ethylene - the substance used to make shampoo and ketchup bottles - doubled in price since January '09. Likewise, polyvinyl chloride (PVC) rose 75%, benzene surged 220% and propylene gained 200%.
Those very compelling numbers might fall somewhat over the short-term, as Chinese demand falters under the government's fiscal tightening, along with a potential decrease in spending after their New Year in February. But even so, the growth in China and other emerging economies won't slow down for long.
And when it picks up again, Dow Chemical, DuPont and their more impressive competitors should profit greatly.