- Diverging chemical prices: US and Asian chemical prices are diverging, and US prices are around $600/t higher than Asian prices, the highest since the start of our data series in the early 2000s.
- Margins are also diverging: Higher oil and naphtha prices have driven Asian cracking margins sharply lower but US margins remain close to previous peaks due to the higher prices and low ethane feedstock costs.
- US domestic prices even higher: US domestic prices for polyethylene usually trade at a premium to export prices as marketing, admin and delivery costs are included. We believe most of Sasol’s product are currently sold in domestic US markets.
- Steeper cost curve: The increases in oil (and naphtha) prices have steepened the cost curve and the US holds a $180/t advantage over Asian crackers. Asian cracker cash costs should set the floor for global polymer prices. We generally assume that the higher cost region will set global prices, which determines our outlook for prices.
- Logistics and supply chain: Global supply chain issue and elevated freight costs are hindering the movement of product from other regions to the US. We believe Asian inventories have been building but US inventories are at multi year lows. Prices should only converge as supply chain bottlenecks are lifted.
- Earnings upside: The current divergence between US and Asian petrochemical prices provides for upside of more than 10% to our current FY22E earnings estimates as well as our estimates of spot earnings, if price trends persist for an entire year. There is a material economic incentive to move product from Asia to the US and normalisation of the global supply chain over the remainder of this year should see US and Asian prices converge.
- Share price: Our forecasts call for moderation in chemical prices and margins in all regions in the next two years which should be a drag on earnings growth. This coupled with the requirements to reduce emissions informs our Neutral rating. Our target price remains at R250/share.
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