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Chemical Cycles and the Outlook for 2006 ISM Chemical Group Mid-Winter Conference, Las Vegas February 24, 2006. Joseph Chang Editor. Cycle upturn will continue in full swing. Mostly true. Further profit gains for commodity group, but easy money’s been made in stocks. On the money!. - PowerPoint PPT Presentation
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Chemical Cycles and the Outlook for 2006
ISM Chemical GroupMid-Winter Conference, Las Vegas
February 24, 2006
Chemical Cycles and the Outlook for 2006
ISM Chemical GroupMid-Winter Conference, Las Vegas
February 24, 2006
Joseph ChangEditor
Forecasts from February 2005Forecasts from February 2005
Verdict:Forecasts:
Cycle upturn will continue in full swing Mostly true
Further profit gains for commodity group, but easy money’s been made in stocks
On the money!
Specialty chemicals are next to advance—both in profitability and stock prices
20-to-life!
Bullish CaseThe Best is Yet to Come!
Bullish CaseThe Best is Yet to Come!
Supply/demand to stay tight after years of underinvestment
Steady demand growth with consensus US GDP forecasts of 3.4% for 2006
Gulf Coast rebuilding
Fed rate hikes to halt
Energy prices to stabilize or fall
Low inventories
Middle East capacity delays
Large number of planned maintenance outages
Bearish CaseThe Party’s Over!
Bearish CaseThe Party’s Over!
New global capacity coming on in 2006 in China and Iran
Capacity creep to take advantage of high prices
Large price gap between US and Asian spot prices
Shifting global trade balance to topple upcycle
Declining US exports, increasing imports
US supply/demand to normalize after Hurricane-related disruptions
Wall Street Crystal BallWall Street Crystal Ball
E2006 % Change Stock price* P/E**
Dow ChemicalDow Chemical $5.38 $5.38 22%22% $43.36 $43.36 8.1x8.1x
Lyondell $4.03 40% $24.66 6.1x
HuntsmanHuntsman $2.92 $2.92 33%33% $19.49 $19.49 6.7x6.7x
Nova $4.53 421% $33.59 7.4x
EastmanEastman $5.76 $5.76 -7%-7% $51.82 $51.82 9.0x9.0x
Celanese $2.68 24% $19.02 7.1x
Georgia GulfGeorgia Gulf $4.00 $4.00 40%40% $32.43 $32.43 8.1x8.1x
DuPont $2.89 19% $40.24 13.9x
Rohm and HaasRohm and Haas $3.08 $3.08 7%7% $47.12 $47.12 15.3x15.3x
Hercules $1.04 22% $11.17 10.7x
ChemturaChemtura $0.97 $0.97 52%52% $12.94 $12.94 13.3x13.3x
Albemarle $2.54 19% $39.61 15.6x
Source: First Call*Prices as of close of Jan 12, 2006**Based on estimated 2006 EPS
Psychology is Key to Predicting CyclesPsychology is Key to Predicting Cycles
Cycles derived from human nature
(FEAR vs. GREED)
Contrarian approach needed
Prior Projections in 2000Why the Peak Never CamePrior Projections in 2000Why the Peak Never Came
peak to occur in 2002 or 2003, and be predominantly monomer driver. By this time NOVA
Chemicals will have approximately 2.5 times the polymer production capacity we had in1995.
construction and acquisition, has been timed to take full advantage of the expected
Many analysts expect the next
Our growth, through
peak in the earnings cycle.
Source: Nova Chemicals
Psychological Profile 2003Harbinger of the peak to come!
Psychological Profile 2003Harbinger of the peak to come!
Much less talk about the coming peak
WALL STREET CUTS PEAK FORECASTS
High oil and natural gas costs
Companies struggling financially
Lack of North American projects in the works, low level of capital expenditures
(Slide from CMR Speech 9/3/03)
Contrasting 2003 with 2000
Capital Spending as % of DepreciationMajor/Commodity Chemicals
Capital Spending as % of DepreciationMajor/Commodity Chemicals
Source: CMR
-100%
-50%
0%
50%
100%
150%
200%
250%
300%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Dow Chemical DuPont Eastman Solutia Nova Lyondell Georgia Gulf
Steel Industry CAPX as % of DepreciationSteel Industry CAPX as % of Depreciation
-100%
-50%
0%
50%
100%
150%
200%
250%
300%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
AK Steel US Steel Nucor Oregon Steel
US Steel (X)US Steel (X)
$0
$10
$20
$30
$40
$50
$60
$70
Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05
Source: Yahoo! Finance
Dour Mood in Mid-2003Dour Mood in Mid-2003
“In the previous ethylene trough of 1991 to 1992 and the
peak of 1995 to 1996, US chemicals have been fortunate enough to enjoy a favorable oil
to natural gas price ratio. Those lucky days seem to
have gone. Higher ethylene feedstocks could mean that
cash margins at the next cyclical peak are lower than in
previous peaks.”
June 2003
“In the previous ethylene trough of 1991 to 1992 and the
peak of 1995 to 1996, US chemicals have been fortunate enough to enjoy a favorable oil
to natural gas price ratio. Those lucky days seem to
have gone. Higher ethylene feedstocks could mean that
cash margins at the next cyclical peak are lower than in
previous peaks.”
June 2003
“The US is the highest cost ethylene producing region
in the world at current natural gas price levels.
Directionally, we expect the North American
petrochemicals industry to become a high-cost
globally uncompetitive producer serving a large
local market.”
June 2003Source: CMR
Nova Chemicals (NCX)Nova Chemicals (NCX)
0
10
20
30
40
50
60
Source: Yahoo! Finance
Bearish Forecasts
Jun 2003
Bearish Forecasts
Jun 2003
Early 2005: LONGER AND STRONGER
Early 2005: LONGER AND STRONGER
“We continue to believe that staggered
ethylene/chlor-alkali/styrenic
cycles will create a LONGER,
STRONGER peak.”
January 28, 2005
“We expect the coming peak to be
LONGER and STRONGER,
reminiscent of the 1988-89 peak.”
January 6, 2005
“We expect the coming peak to be
LONGER and STRONGER,
reminiscent of the 1988-89 peak.”
January 6, 2005
“We see a LONGER,
STRONGER ethylene peak extending into
2007.”
December 10, 2004
Source: CMR
Nova Chemicals (NCX)Nova Chemicals (NCX)
0
10
20
30
40
50
60
Jan-0
3
Mar
-03
May
-03
Jul-0
3
Sep-0
3
Nov-0
3
Jan-0
4
Mar
-04
May
-04
Jul-0
4
Sep-0
4
Nov-0
4
Jan-0
5
Mar
-05
May
-05
Jul-0
5
Sep-0
5
Source: Yahoo! Finance
Bullish ForecastsDec-Jan 2005
Bullish ForecastsDec-Jan 2005
Conclusion: Upcycle Intact!Conclusion: Upcycle Intact!
Wall Street bulls and bears battle it out
Investors skeptical
Valuations appear low
Companies positive, BUT CAPX REMAINS LOW
Healthy amount of fear
Specialty chemical prices and stocks to move higher along with commodities
Thank You!Thank You!
Joseph ChangJoseph ChangEditor
ICIS – Chemical Market Reporter360 Park Avenue South, 12th Floor
New York, NY 10010
T: 212-791-4224E: [email protected]