Chemicals: We Expect Near-Term Prices to Remain Above Pre-Conflict Levels Despite Ceasefire
We did not update our outlook for higher near-term prices when the conflict began, so we still see some near-term upside.
The United States and Iran agreed to a two-week ceasefire as part of a broader negotiation to end the conflict, which included Iran reopening the Strait of Hormuz to shipping traffic. US chemicals stocks Celanese, Dow, Eastman, and LyondellBasell were down 1%-12% at the time of writing.
Why it matters: Commodity chemical spot prices have been up roughly 40% to $80 since the Iran conflict began. The Middle East is the largest exporter of commodity chemicals globally. For example, the region accounts for roughly one-third of global ethylene exports.
- The reopening of the Strait should partially alleviate the supply shock, as port inventories in the Persian Gulf should be able to leave.
- Yet we think a lot of production capacity in the Middle East will remain offline over the near term as liquid natural gas production (the feedstock for the building blocks ethylene and propylene) remains down. This should leave the global market undersupplied and near-term prices higher.
The bottom line: We maintain our fair value estimates for the four narrow-moat US chemicals producers under our coverage. At current prices, we view Eastman and Celanese as undervalued, trading in 4-star territory, while Dow and Lyondell are fairly valued in 3-star territory.
- We did not update our outlook for higher near-term prices when the conflict began, so we still see some near-term upside. If the ceasefire remains and plants restart in the coming weeks, we estimate we would still raise our fair value estimates 5% to 10% on higher near-term profits.
Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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