LYB, WLK: A Risk To The Upside – Albeit Remote – Qatar

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SEE LAST PAGE OF THIS REPORT Graham Copley / Nick Lipinski

FOR IMPORTANT DISCLOSURES 203.901.1629/203.989.0412

gcopley@/nlipinski@ssrllc.com

June 7th , 2017

LYB, WLK: A Risk To The Upside – Albeit Remote – Qatar

  • We have no idea whether the issues between the Gulf States and Qatar will escalate. But, Qatar has no means of retaliation to the pressure and; relies on imported food, has an 85% immigrant population and needs the export hard currency from natural gas etc.
    • It is more than likely that this will blow over quickly and that Qatar will acquiesce to the demands of its neighbors, allowing normal relations to recover quickly.
  • However, if relations are not restored quickly, especially if Iran comes to Qatar’s aid, then we have a couple of significant possible outcomes – both important for US ethylene and polyethylene producers.
    • Qatar is a major exporter of LNG – if the country is prevented from exporting this would tighten the LNG markets – likely raising prices for importing countries and lowering their competitiveness relative to the US.
      • The US is currently export capacity constrained and it is unlikely that domestic US natural gas pricing would rise in tandem with higher LNG prices today
    • Qatar is a major player in the traded polyethylene market accounting for as much as 12% of international trade in Low Density Polyethylene and more than 7% of High Density Polyethylene, Qatar also produces Linear Low Density, but is less relevant.
  • None of the polyethylene markets is oversupplied today – although consensus is that they will become oversupplied by year end because of US start-ups. This is not a view we share and the improved global economic forecast by the OECD this morning helps support our view that polyethylene is growing fast enough to absorb the new capacity quickly.
    • An outage from Qatar could have more of an emotional than physical impact on the market initially, resulting in a greater physical impact. Concern over supply in major importing countries like China could lead to pre-buying to increase inventories – pushing up both apparent demand a possibly pricing.
    • Today there does not appear to be as supply disruption, but the increased level of uncertainty may be enough on its own cause some strategic inventory additions.
  • LYB and WLK are the most levered to the HDPE and LDPE markets – both stocks look extremely cheap to us, even assuming some sort of earnings trough in 2018.

Exhibit 1

Source: Capital IQ and SSR Analysis

Exhibit 2

Source: Capital IQ and SSR Analysis

Exhibit 3

Source: Capital IQ and SSR Analysis

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