The economic reports this week were mostly positive. Business inventories continued to pile up towards the end of the year and it remains to be seen how much of the stock was worked down during the holiday shopping season. U.S. industrial production experienced its fifth consecutive increase in December and the 4th quarter ended on a very strong note. Moreover, both regional manufacturing surveys were positive, suggesting the gains continued into January.
Turning to chemistry, production of chemicals excluding pharmaceuticals closed 2013 on a very strong note, with solid (and widespread) gains in both basic chemicals and specialties. Based on the railcar loadings data, activity continued to improve into January.
CHLORINE
The Chlorine Institute (CI) reported that production of chlo-rine fell from 31,426 tons per day in November to 31,189 tons per day in December. Production was down 3.7% Y/Y and off 0.7% on a YTD basis. Chlorine is widely used to manufacture PVC (polyvinyl chloride) resins, organic chemicals (e.g., pro-pylene oxide, epichlorohydrin, solvents), and titanium diox-ide, as well as for water treatment, disinfection and other applications. The output of co-produced of caustic soda fell from 32,795 tons per day in November to 32,146 tons per day in December. Production was down 2.0% Y/Y and off 1.0% on a YTD basis. Caustic soda is used in the production and bleaching of wood pulp as well as other organic (e.g., propyl-ene oxide and polycarbonates) chemicals, inorganic chemi-cals, cleaners, water treatment, oil refining, alumina produc-tion, and textiles.
CHEMICAL RAILCAR LOADINGS
According to the Association of American Railroads (AAR), for the week ending 11 January (week 2), railcar loadings of polymers and basic chemicals (blue line) fell by 838 to 28,433
railcars. Compared to the same week last year, loadings were down 4.3% Y/Y and were up 3.8% YTD. Loadings have been on the rise for 7 of the last 13 weeks. The railcar loadings data are the best ‘real time’ indicator of industry activity. This is especially the case for polymers and other basic chemicals. But the data are fairly erratic. This is one reason why we employ a 13-week moving average to smooth out many of the seasonal irregularities. The 13-week moving average of railcar loadings (orange line) indicates improving activity and is up 2.3% Y/Y.
ENERGY
The Energy Information Administration (EIA) reported a 287 billion cubic feet (BCF) withdrawal in natural gas inventories during the week ending 10 January, well above the typical 168 BCF build for this week. The extreme cold weather is to blame. Stocks were 20.7% (659 BCF) lower than last year at this time and 14.9% (443 BCF) below the five-year average. At 2,530 BCF, total gas inventories are below the five-year his-torical range.
In wake of last week’s extreme cold weather and large inven-tory drawdown, natural gas prices (the benchmark Henry Hub), closed at $4.53 per million BTUs on Thursday, up from $4.14 last Thursday. A year ago, the price was $3.45 per million BTUs. Thus, recent prices represent a 31.1% Y/Y gain. On the other hand, oil prices (Brent) slipped to $106.01 per barrel yesterday (Thursday). A year ago, oil was $110.97 per barrel. Thus, recent prices represent a 4.5% Y/Y decline.
At 23.4:1, the ratio of oil prices to natural gas deteriorated from 25.8:1 a week ago. One year ago, the ratio was 32.4:1. As a rough rule of thumb, when the ratio is above 7, the competitiveness of Gulf Coast-based petrochemicals and derivatives vis-à-vis other major producing regions is enhanced. As the following chart shows, we’ve been above 7 for several years. In the US, nearly 90% of ethylene, for example, is derived from natural gas liquids while in Western Europe, over 85% is derived from naphtha, gas oil and other light distillate oil-based products. Historically, other factors (co-product prices, exchange rates, capacity utilization, etc.) have played a role in competitiveness as well. The current ratio is favorable for US competitiveness and exports of petrochemicals, plastics and other derivatives.
According to Baker-Hughes, for the week ending 10 January the North American natural gas rig count fell by 15 to 357 rigs. One year ago the rig count was 434 rigs. During the same week, the oil rig count rose by 15 to 1,393 rigs. One year ago the rig count was 1,323 rigs.