00:00Everything in the synthetic world comes from the barrel of oil.
00:03So the Persian Gulf is a big producer of chemicals.
00:06Their refineries produce feedstocks for the other chemical plants around the world.
00:11And they sell oil to other refineries that make feedstocks for other chemical plants.
00:16So there's multi-layer shortages here.
00:19And almost everything in the Persian Gulf is shut down right now because they ran out of places to store
00:24things.
00:24So whether facilities were damaged or not, there's just no place to start up those plants until we move that
00:30inventory out of the Gulf that's kind of backed up there.
00:33I call it we've bricked up the production cycle there in the Persian Gulf.
00:38Hey, John.
00:38So, you know, the big million, billion, trillion dollar question, of course, is when this war is officially over and
00:44things start to get back to, quote, unquote, normal.
00:47But let's say that this, what feels like progress and talks between the United States and Iran and things calming
00:55down, it feels like it's happening.
00:58But, you know, things can turn on in a moment's notice.
01:02But having said that, if that's indeed the case, how quickly do these facilities, as you said, multi-level shortages,
01:08how quickly do these shortages, these facilities get up and running?
01:11I keep going back to this one stat that's just stuck in my mind about Qatar and LNG, that, you
01:17know, responsible for 30 percent of global capacity and that it's going to take like three to five years to
01:22fix the damage that's been done.
01:24But you're the expert.
01:26Tell us about how quickly things kind of get back to normal.
01:29Well, even if there's been no damage there, you may remember winter storm Yuri that we had in the U
01:35.S. Gulf Coast a few years ago.
01:37And we shut down most of the U.S. Gulf Coast capacity.
01:40It took us a few months to get everything restarted here in the U.S. with everything going fine.
01:47These plants just don't turn back on by throwing a switch here.
01:51You have to inert all the pipelines and vessels with nitrogen gas because when you turn on the motors and
01:57pumps, you might get a spark.
01:59We don't store any nitrogen gas.
02:01It's made daily by the gas company.
02:03So there isn't enough nitrogen gas to restart all the capacity all at once, the same way there wasn't here
02:09in the U.S.
02:09And again, we have to move the inventory that's in the Gulf out of the Gulf.
02:14And we have to bring new ships into the Gulf before we can start those plants up because we have
02:19no place to put the product right now.
02:21So I mentioned that it's going to take.
02:22Yeah, go ahead.
02:23I would say through the third quarter, maybe into year end.
02:27You know, I don't think anybody really knows, but it's months.
02:30That's why Dow is going to be raising prices again, May 1, maybe June 1, maybe July 1.
02:36Yeah.
02:36Okay.
02:37Carol, were you going to say something?
02:38Well, the only thing I was going to say is once prices go up, do they really ever go down?
02:42I mean, the market dictates what happens, right?
02:44Certainly in the face of competition.
02:45But give us, you know, we keep talking about energy prices kind of maybe leveling off at a certain point
02:50because of some global dynamics maybe going forward.
02:53But what about for the chemical industry?
02:56Well, again, I would say oil sets the cost curve for most of these basic petrochemicals.
03:01And the futures market at least is predicting that oil doesn't go all the way back down to 60 or
03:0565.
03:06So when we do come back down, we probably don't go all the way back down to where we were
03:10pre-conflict here.
03:13But I would say on average it takes about four months for pricing to peak, and then it will stay
03:18plateaued until we actually start to get things restarted.
03:22So we haven't peaked yet, and we may stay at a plateau, you know, towards the latter part of this
03:28year.
03:29I mentioned just a handful of the companies that you cover.
03:31Those include PPG and Sherwin-Williams.
03:34And we like to look at those companies just in a different way, I imagine, than you do just for
03:39demand for paint, for example,
03:41and the way that consumers are thinking about projects and as a measure of how consumers are thinking about the
03:48economy.
03:49How are those specific companies affected by these higher input costs?
03:53Well, it will mostly be there, and it's not Sherwin-Williams because they're primarily domestic.
03:58But PPG is one of the larger architectural paint companies in Australia, for example.
04:03And I think Asia is expected—anywhere that you hear about jet fuel shortages or gasoline shortages,
04:09it's the same place you're probably going to hear about chemical and plastic material shortages.
04:13So we have to bring demand down to balance with the reduced supply.
04:18So we're going to rationing pricing.
04:21So industries that can pay a high price will get product, and industries that can use substitutes are going to
04:29move into other materials.
04:30So we're going to package more paint in metal pails, for example.
04:33We're going to use more paper instead of plastic packaging.
04:37We're going to blend more natural fibers into clothing instead of synthetic fibers.
04:42So that's how we're going to bring—high prices will cause people to use other materials,
04:46and we'll bring the demand for the chemicals down.
04:49I can read Carol's mind.
04:51I know she's looking at a Lululemon story.
04:53It's like there's lights that go off in my head, or maybe it's because I'm wearing yoga pants.
04:56Don't tell anybody at this moment.
04:57But, you know, John, one of the stories that really caught our attention was Lululemon,
05:02this Texas investigation into their clothing for the presence of basically PFAS, these forever chemicals.
05:09I mean, increasingly, will we see this pushback and more and more chemicals being taken out of the system,
05:17especially when it comes to plastics?
05:18I know in my own house, whether it's microwaving and not doing, you know, putting plastic going to glass increasingly,
05:24I mean, are we really seeing this pushback and the momentum growing?
05:29Well, that's a whole separate issue.
05:32PFAS is not a Persian Gulf issue.
05:34And there really have only been two PFAS molecules that have been banned.
05:38PFAS is a generic term for lots of fluorine-based chemistry that's there.
05:42And if we had cheaper substitutes, we'd be using them.
05:46And Lululemon and others have found some cheaper or competitive substitutes for certain applications.
05:53But the vast majority of PFAS molecules don't have replacement products here.
05:58So we're going to have PFAS chemistry around for a long time here.
06:02Everybody would like everything to be all natural and to have zero chemicals in any detection that's there.
06:09But zero is not possible.
06:11And there's not enough natural materials in the world to satisfy all our basic needs.
06:16Unless we cut back on consumption, right?
06:18Or you're not even saying that.
06:20I mean, it would be just we're so dependent on it.
06:23Well, as I said, we're going to go back to some steel pails for paint.
06:26We're going to go back to paper.
06:28You know, everybody remembers the ham in your refrigerator didn't last as long when it was wrapped in paper from
06:33the deli.
06:33We have it in plastic because it improves the shelf life of food.
06:36So we can temporarily substitute backwards that's there.
06:41But I don't think the world wants to go backwards.
06:43I think we want to go forward.
06:44Any of the companies in your portfolio that just aren't affected by this or are immune to this?
06:49Yeah, actually, and one of the biggest specialty chemical areas is electronic chemicals.
06:54So we cover Corning as a specialty glass company.
06:56We cover Integris, semiconductor chemicals.
07:00CUNITY Electronics was spun off from DuPont recently.
07:02That's printed circuit board and semiconductor chemicals.
07:06And Element Solutions.
07:07So these companies are doing great right now.
07:10Do you have a favorite in the space?
07:12Yeah, our top pick right now is Element Solutions, which is an electronic chemicals company, printed circuit board, and semiconductor
07:21chemicals.
07:22And the CEO is about to receive an award here in New York in April.
07:27They'll actually be at the Mizuho Tech Conference coming up in June that's there.
07:31So chemistry crosses over with all of the end markets that are served.
07:35So we have a lot of crossover stocks.
07:37You mentioned Sherwin before.
07:38There are housing analysts, building materials analysts, and retail analysts that would look like that.
07:42So chemicals invades all the end markets.
07:45I'll ask the other question, a least favorite.
07:48But, you know, you have three underperforms, Huntsman, Orion, and Tronox Holdings.
07:53Talk about those.
07:54Well, actually, we recently added that.
07:56So CF Industries, which is an ammonia chemical producer.
08:00Ammonia is one of the big Middle East chemicals.
08:03It's made from natural gas that's there.
08:06Iran was a big producer.
08:08Prices have soared.
08:10But the U.S. planting season is already well underway.
08:12We're going to pretty soon come out of the seasonal peak.
08:15The U.S. actually becomes a net exporter of ammonia after about May.
08:19And so we think those prices for ammonia are going to come down pretty hard.
08:22And we have a sell on CF Industries right now.
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