Chemical companies see rosier results on low crude oil prices

By Devika Krishna Kumar and Jessica Resnick-Ault

NEW YORK, April 28 (Reuters) -- Expectations for chemical company earnings have been boosted by a combination of lower crude oil costs during the commodity's slump along with strong demand for plastics that are used to make everything from shampoo bottles to grocery bags.

The worst oil rout in a generation has cut production costs for plastics that require oil-derived components. The price of plastics followed oil's rapid climb from 2009 to mid-2014, but on the way back down, plastic prices have not fully followed crude, keeping margins robust for petrochemical companies.

Analysts say that should help chemical names when they report results in the coming days. Last week, LyondellBasell Industries beat consensus estimates, and estimates for Westlake Chemical and, to a lesser extent, the more diversified Dow Chemical, have been lifted. Dow reports on Thursday and Westlake posts results next Tuesday.

"Lower oil prices led to more demand in the markets and for the person who's making plastics, their costs went down but their demand went up and they made money," said Joel Morales, director of polyolephins Americas for IHS. "It's a perfect world on the petrochemical side."

Dow is expected to report earnings of 83 cents/share on Thursday, and in the last 30 days, six estimates have been raised by an average of 3.7%. In 2015, the company reported a pre-tax profit margin of 20.4%, its strongest since 1989.

Westlake is expected to report earnings of 92 cents/share. In the last 30 days, estimates have seen an average increase of 6%. The company's pre-tax margin was 21.6% in 2015, though that was down slightly from the previous two years.

Even when the price of certain plastics declined slightly, the decline was partially self-correcting because corporations no longer needed to recycle waste plastic for economic reasons and demand for new plastics rose even more.

Globally, the spot prices of certain plastics components like polyethylene and polypropylene are often influenced by pricing of an oil derivative called naphtha. As a result, they are strongly correlated to crude prices, according to Platts analysts.

But while US markets generally follow trends set by pricing in Asia, there is often a cost advantage for chemical companies because they are able to use natural gas liquids as feedstocks.

As a result, domestic contract pricing for one particular resin, known as HDPE, was down only 26% from June 2014, while crude declined more than 65% during the same timeframe.

"We do see periods of an increased premium for resins over crude oil during the past two years, but primarily in the US domestic market," said Jim Foster, Platts' director of analysis for petrochemicals.

In addition, supply this year was particularly short in the US as planned maintenance at petrochemical plants reduced the supply of certain plastics. While seasonal maintenance is the norm, this year's work schedule was heavier than usual, according to Charles Neivert, managing director at Cowen in New York.

Speaking to analysts on Friday, LyondellBasell CFO Thomas Aebischer said he expects the conditions to persist due to heavy maintenance schedules in both the US and Asia. 

(Reporting by Jessica Resnick-Ault, editing by G Crosse)

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