Given that natural gas can be assumed to be in short supply in Europe this winter, I suspect that there will be a shift from domestically produced to imported ethylene. https://www.globenewswire.com/en/ne...s-Insights-and-Forecast-to-2030-IndexBox.html Natural gas is major component of ethylene production. http://www-personal.umich.edu/~ajyshih/pdf/130422_Shih_Arthur_Ethylene_from_Natural_Gas.pdf Thoughts on WLKP or other similar companies over the next year?
On the assertion of this Winter's crisis; some people have argued that the Winter of next year is going to be tougher than this year, since Germany & co have managed to fill their stores by now - they could use Russian gas for some time, after all. I don't pretend to be entirely up-to-date but my point is to not lightly take that as a fact without more extensive research.
I'm seeing reports that the Germans have 2.5 to 3 months of storage. I would not expect them to seriously consider running that down to zero. Imagine what kind of domestic unrest and weakness on the international stage that would create. I would expect the Europeans to shut down some industries that require natural gas as a feedstock as a proactive measure. It seems to me that ordering things like ethylene from overseas instead of producing it locally and idling the plant is going to be better than risking running out of electricity or heat. Pages 5 and 11 of this document are pretty interesting. There are already multiple ethlene pipelines running to the ocean and throughout Germany. https://www.gtai.de/resource/blob/6...eff9224e2d1141/TheChemicalIndustryGermany.pdf Page 12 is also worth reading for it's references to Nord Stream I and II and its importance to this industry. It may not be as simple as this, but anyway, that's my thesis, we'll see if I'm right.
Are you planning to short WLKP? it looks bearish. anyway, WLKP tends to have rather low volatility. So not that great for trading.
Actually I was long WLKP before all this happened, and I'm thinking about adding more. With an 8% dividend I could be fine if nothing happens, but I'm thinking the price may go up. I suppose it would be an interesting trade to short a few German chemical companies while going long US equivalents, but I like to keep things simple.
This idea doesn't work because of the details of the supply contract between WLKP and westlake chemical.
I read your original post last night and I (for real) read quite a bit about using natural gas in the making of ethylene. As far as I got, or as best as I got, was that the utilization of natty in ethylene production was still in its infancy. Now I could be wrong on that, but either way... good thinking on your part. Right or wrong... original. That's what matters. I didn't comment because I didn't see a big catalyst. But I did look. (Insert classic quote.)
Page 9 is the key here: https://s25.q4cdn.com/892202310/files/doc_downloads/WLKP-IR-presentation-3Q2022-v1.pdf "Ethylene Sales Agreement between Westlake Corporation and Westlake Partners provides stable 10 cents per pound margin on 95% of processed NGL’s, with remaining 5% sold to third parties" My reading is: Because of this agreement, the market price of ethylene could double, but WLKP will keep selling 95% of it's output to to Westlake chemical at a fixed margin. So far I haven't found an equivalent pure play in just ethylene. Something like Philips 66 has exposure to a lot more markets than just ethylene.
Thanks for the feedback. As I understand it, there's a multi-stage process. This page suggests natural gas a a feedstock is common: https://extension.psu.edu/how-plastic-is-made-from-natural-gas Per sheet 8 here, all 3 of WLKP facilities can run on ethane: https://d18rn0p25nwr6d.cloudfront.net/CIK-0001604665/b31b0410-ba5a-4cd9-904e-e2304ee9473b.pdf (some also list other inputs like naptha or butane) I believe the ethane can be sourced from natural gas or an oil refinery. This page shows a breakdown of "natural gas" composition. https://www.croftsystems.net/oil-gas-blog/natural-gas-composition/ Plus, there's also the issue of fuel gas to provide the heat for the steam cracker, which I expect is just natural gas, passed along from the same plant that is splitting off the ethane. As mentioned in the other posts the sticking point right now is the sales agreement that WLKP has. I need to identify another similar company that could benefit directly from a rise in ethane costs. Oh.... and two great comedians in a good scene