How to understand this round of chemical price increases?

The bottom replenishment may be the most important driver of this round of price increases. After the sharp rise, the prices of most chemical products are still below the center, and there is still room for subsequent increases.

1. Chaotic clouds flying: chemical prices continue to rise

 

The recent price increase of chemical products: many varieties & large ranges

 

Recently, the price of chemical products has risen: There are many varieties and large ranges. In August, the prices of chemical products have begun to rise. Among the 248 chemical product prices we tracked, 165 products increased in price with an average increase of 29.0%, while only 51 products fell in price with an average decrease of 9.2%. Among them, the prices of pure MDI, butadiene, PC, DMF, styrene and other products have risen sharply.

 

Looking back in history, the current price increase of chemical products is not abnormal

 

The demand for chemical products usually has two peak seasons, namely March-April after the Spring Festival and September-October in the second half of the year. The historical data of the China Chemical Product Price Index (CCPI) from 2012 to 2020 also verifies the law of operation of this industry. And like this year, product prices have continued to rise since August, and entered a year of unabated enthusiasm in November, only 2016 and 2017 driven by supply-side reforms.

 

The price of chemical products deviates from the price of crude oil

 

Crude oil prices play a pivotal role in the pricing of chemical products. Generally, the prices of chemical products generally rise and fall in line with the fluctuations in crude oil prices. However, in the process of the price increase of chemical products, crude oil prices have basically remained volatile, and the current crude oil prices are still lower than the prices in early August. Looking back over the past 9 years, the price of chemical products and crude oil prices deviated significantly only 5 times, most often in the peak or bottom shock period, and the price of crude oil was up while the price of chemical products was flat or down. Only this year is the price of chemical products rising sharply, while the price of crude oil fluctuates. Under such circumstances, the rise in the price of chemical products has mostly increased the profits of related companies.

 

Product prices have been smoothly transmitted along the industry chain

 

Chemical companies are usually one of the links in the industrial chain, and most of their upstream or customers are also chemical companies. Therefore, when the product price of enterprise A rises, the cost of enterprise B, which is a downstream enterprise, will also increase. Faced with this situation, company B either cuts production or suspends production to reduce purchases, or raises the price of its own products to shift the pressure of rising costs. Therefore, whether the price of downstream products can rise is an important basis for judging the sustainability of the price rise of chemical products. At present, in multiple industrial chains, the price of chemical products has begun to spread smoothly.

 

For example, the price of bisphenol A drives up the price of PC, silicon metal drives the price of organic silicon, which drives the price of rubber compounds and other products, the price of adipic acid drives the price of slurry and PA66, and the price of pure MDI and PTMEG drives the price of spandex.

 

After the big increase, most chemical prices are still below the center

 

Among the 248 chemical product prices we tracked, 116 product prices are still lower than the price before the epidemic; compared with the same period last year, 125 product prices are lower than the same period last year. We use the average price of products in 2016-2019 as the central price, and 140 product prices are still lower than the central price. At the same time, among the 54 chemical product spreads we tracked, 21 spreads were still lower than the spreads before the epidemic; if compared with the same period last year, there were 22 product spreads lower than the same period last year. We use the 2016-2019 average product spread as the central spread, and 27 product spreads are still lower than the central spread. This is consistent with PPI's year-on-year and ring-on-quarter data results.

 

2. Start from a few interesting phenomena

 

Phenomenon 1: The closer to crude oil, the less elastic the product price

 

As mentioned earlier, the price of crude oil is in a shock range during the price increase of chemical products. Therefore, in the same industry chain, the closer to the upstream, the less obvious changes in product prices, and the closer to the end, the more obvious product prices increase.

 

Phenomenon 2: The more dispersed the downstream, the greater the price elasticity of products

 

In the process of this product price increase, we found that the more diversified downstream product prices, the greater the probability and elasticity of price increases, and if it is a single downstream demand, the performance is more average. For example, the price of organic silicon has risen sharply. Initial feedback from the industry was due to the warming up of the textile and clothing industry chain and increased demand for silicone oil. However, the price of disperse dyes, which also belong to the textile and clothing industry chain, has been sluggish, and the price of polyester filaments is only at the price of crude oil. Driven by fluctuations.

 

Moreover, the price of polymeric MDI rebounded from the bottom and doubled, which was related to the increase in exports of home appliances and refrigerators. However, the price of refrigerants used in refrigerators was hovering at the bottom, rising only slightly. In addition to silicone oil and white electricity, the downstream applications of silicone and polymeric MDI include silicone rubber, silane coupling agents, furniture, adhesives, etc. The end applications also include automobiles, construction, and thermal insulation construction. The use of disperse dyes and refrigerants is relatively single, and basically depends on the demand for textiles and white electricity.

 

We suspect that this may be due to the fact that downstream demand is still in the initial stage of rebound. On the one hand, the cumulative effect of multiple terminals is needed to drive the demand for upstream raw materials. On the other hand, it may also have a wider channel for intermediaries with multiple downstream demand products. The whip effect is more significant.

 

Phenomenon 3: The terminal off-season, product prices rise?

 

Regarding the price increase, most people think it is related to overseas export demand and the advantages of Chinese manufacturing under the excellent recovery of the epidemic. There is some truth to this view. However, we have also observed that the prices of some products that basically depend on domestic demand and downstream are in the traditional off-season are also rising. Elemental fertilizer is a typical example. Entering mid-November, there was basically no demand for downstream farming, and my country's nitrogen, phosphorus, and potassium fertilizers, except for a little export of urea, are basically domestically digested, and potassium fertilizers have to be imported in large quantities. However, we have observed that the price of elemental fertilizer is also rising significantly.

 

This may indicate that this price increase was not entirely driven by exports.

 

Phenomenon 4: Products that have been "increased" are outstanding in this price increase

 

The upstream and downstream of the chemical product industry have a trading relationship in the short-term and a fish-water relationship in the long-term. Usually, when the price of a product rises sharply, the product price will remain low in the next few years. This is because the new production capacity will be released under the stimulus of the price boom. However, in this price increase, we found that MDI, silicone intermediates, and nylon 66 among the star varieties from 2017 to 2018 have all made a comeback, and even reacted weakly to the upcoming new production capacity.

 

Regarding this phenomenon, we believe that on the one hand, it is indeed related to the tight downstream demand, and on the other hand, it may be related to the low price expectations of these products in the future under the previous industry price rules, and the general low inventory in the channel. Finally, the loss or decline in profits brought about by the sharp drop in chemical product prices in the first half of the year also gave manufacturers a strong incentive to increase prices.

 

Summary: The range of crude oil price fluctuations negates the promotion of cost to the price increase; the abnormal increase in elemental fertilizer prices in the off-season is weakening the logic of pulling export demand; while the more diversified downstream products have more obvious price increases, and products with huge price increases in the previous period "Coming back" all hint at the importance of inventory.

 

We believe that the bottom replenishment may be the most important driver of this round of price increases.

 

3. The first turning point of "strong reality and weak expectations"

 

Since April, the chemical industry's prosperity has improved quarter by quarter. The price of chemical products is a high-frequency reflection of the relationship between supply and demand, and directly characterizes the prosperity of the industry. Starting from mid-April, domestic chemical product prices have bottomed out as a whole, and the industry's prosperity has improved quarter by quarter.

 

Entering October, chemical product prices ushered in a jump. The chemical industry has a "golden nine silver ten" convention. This year, the industry has experienced a dull September and ushered in a more than expected October. Among the 245 varieties we tracked, the proportion of varieties that rose from the previous month increased significantly to 45%, while those that fell only 7%.

 

Recently, chemical product prices and crude oil prices have become significantly decoupled. During this period, the price of crude oil, which is the basis for chemical product pricing, remained stable.

 

"Strong reality and weak expectations" situation ushered in the first turning point.

 

Event: On November 18, the new crown vaccine showed positive progress. Pfizer and BioNTech announced the end of their Phase III clinical studies of the new crown pneumonia vaccine candidate, and met all the main efficacy endpoints. Starting 28 days after the first vaccination, BNT162b2 is effective against the new crown The preventive effect of pneumonia is 95%. This result has reached the safety data milestone required by the FDA's Emergency Use Authorization (EUA), and the two companies are preparing to submit EUA application materials to the FDA within a few days. Driven by this, international crude oil prices rose sharply, and Brent crude oil prices rose 9%.

 

Based on the judgment of the chemical industry cycle, especially the combination of the “internal and external dual cycle” and low crude oil price fluctuations, we believe that the first turning point in “strong reality and weak expectations” has come.

 

4. Look at this price increase from a longer perspective

 

Cycle investment: look at location first, then trend

 

We believe that this increase in chemical product prices should be given great attention, not only because of the abnormal reaction in the off-season, and the many interesting phenomena mentioned above, or the product prices are still deviating from the normal center, and there is still room for subsequent price increases. Because of the current position of the chemical cycle, changes and rebounds at the bottom often indicate the opening of a new cycle. In addition, considering the wide range of downstream chemical products, we believe that this price increase may be a footnote to an important cycle, and its significance will only be fully understood in the next few years.

 

In the past 20 years, my country's chemical industry has experienced 5 cycles of fluctuations. At present, my country's chemical industry is in the transitional period between the fifth and sixth rounds of the business cycle. From the demand side, the global economy will start to rise from the bottom; on the cost side, crude oil prices are still at a relatively low level; on the supply side, the peak of fixed asset investment that started in the last cycle of prosperity has passed. After a round of cyclical fighting, my country's chemical industry has emerged a number of global competitiveness leaders, such as Wanhua Chemical, Hualu Hengsheng, Yangnong Chemical, Xinhecheng, Lomon Baili, etc. With the improvement of long-term economic expectations, the industry leaders in this category are expected to rise in the valuation center on the basis of increasing competitiveness.

Currently, multiple factors in the industry are at the bottom, and improvement is expected to be obvious

 

1) Demand: The global economy is at the bottom and is expected to improve quarter by quarter in the future.

 

2) Cost: Crude oil prices are at the bottom, and there is significant support downward.

 

3) Supply: The industry's fixed asset investment peak has passed, and there is a two-year misalignment period with PPI.

 

For investment, we suggest the following directions

 

First of all, pay attention to the continuous improvement of the industry's prosperity and the increase in the valuation of the leading center;

 

In the past 20 years, my country's chemical industry has experienced 5 cycles of fluctuations. At present, my country's chemical industry is in the transitional period between the fifth and sixth rounds of the business cycle.

 

From the demand side, the global economy will start to rise from the bottom; on the cost side, crude oil prices are still at a relatively low level; on the supply side, the peak of fixed asset investment that started in the last cycle of prosperity has passed. After a round of cyclical battles, a number of outstanding players with global competitiveness have emerged in my country's chemical industry. With the improvement of long-term economic expectations, the industry leaders in this category are expected to rise in the valuation center on the basis of increasing competitiveness. Recommended to pay attention to Wanhua Chemical, Hualu Hengsheng, Yangnong Chemical, Xinhecheng, Lomon Baili, etc.

 

Secondly, pay attention to the flexibility of comprehensive chemical industry leaders exceeding expectations;

 

The price increase of chemical products in this round is not a product or a few products, but the whole industry has entered a new business cycle. According to previous experience, there will be dark horses coming out every time, and these dark horses are characterized by strong downstream products, high capital expenditures in the early stage, and the industry boom during the production capacity release period, so there will be an excess benefit of alpha superimposed beta. It is recommended to pay attention to comprehensive chemical industry leaders such as Xingfa Group and Sanyou Chemical.

 

Next is the crude oil industry chain;

 

Affected by the epidemic this year, crude oil prices have appeared incredibly low. The so-called unbreakable and unreliable prices. As the epidemic eases and subsides, as the king of global commodities, crude oil is expected to resume its upward trend. Then refining and chemical companies, including private refining and traditional refining, which have a high degree of market attention, have great flexibility. At the same time, it is also good for the aforementioned coal chemical companies such as Hualu Hengsheng.

Finally, it is to grasp the prosperity of the sub-molecular industry;

 

Recently, with the strong recovery of the export industry chain, the polyurethane, silicone, and nylon industry chains are booming. It is recommended to pay attention to Xin'an, Xingfa Group, and Shenma shares in the nylon industry in the silicone industry.

 

In addition to the current boom, we believe that the boom in the textile and apparel industry chain next year will be one of the biggest industries. 

 

As an important component of my country's exports, the textile and apparel industry chain will usher in greater pressure in 2020. On the one hand, consumption as optional is suppressed, on the other hand, overseas demand is affected by the epidemic, and the operations of chemical companies in the industrial chain are greatly affected. With the improvement of vaccine expectations for the global economy, the textile and apparel industry chain will obviously benefit. As an upstream raw material provider, the chemical fiber industry will benefit from the promotion of upstream raw material prices on the one hand, and the recovery of downstream demand and channel inventory replenishment on the other. The oxtail effect exhibits high flexibility. It is recommended to pay attention to the leaders in the chemical fiber industry-Tongkun Co., Ltd., Huafeng Spandex, Sanyou Chemical, etc.