Plastic from Emissions, a Changing Energy Landscape, and Layoffs at Exxon

We are living in a future that was being built in 2008

Energy Matters

The New York Times recently published an excellent article and maps detailing how each state in the United States generates their energy over the last decade. An amazing figure is how Iowa has changed their energy consumption from 81% coal in 2001 to 35% coal and 42% wind in 2019. Installation of wind energy in the United States not only means more clean energy, but it increases the demand and need for epoxy resin and glass fibers. Companies like Hexion (epoxy resin producer) and Owens-Corning (glass fiber producer) supply raw materials to make the composite wind turbine blades. Wind turbine blades are massive and they are not something that can made and shipped a long distance (as opposed to solar cells) and thus require more local production and domestic sourcing of raw materials and ultimately generation of jobs. Renewable Energy Focus has a good article on how wind turbine blade size influences the logistics of installation and is the source of the picture below.

Growth in wind turbine installations will directly influence epoxy resin and glass fiber demand and will eventually influence pricing once production capacities are filled. One issue with increased wind turbine installation is that high demand will result in epoxy and glass fiber production hitting their limits and either prices go up and there is less incentive to install more wind turbines or new capacity has to be installed to keep up with demand. The problem with installation of new manufacturing capacity is that when the demand slows or falls there is an overabundance of manufacturing capacity, which can cause prices to plummet.

Ultimately, I believe the switch to renewable energy is necessary, but it will create stress in smaller local economies that are dependent on a few large employers for jobs such as coal power plants, mining operations, or manufacturing. The switch to renewables can also create problems up the supply chain, but as long as the demand trends up these are good problems to have, especially when those supply chains are localized or domestic.

Innovation

LanzaTech, Total, and L’Oreal announced production of a cosmetic bottle made from emissions. LanzaTech is the real amazing part in this story because they have a microbe that can ferment carbon monoxide (CO), the main emission from steel production, into larger carbon structures such as ethanol. LanzaTech to the best of my knowledge has not reported fermentation yields or how efficient their process is, but this is definitely a start to being able to utilize waste emissions from industrial processes as the carbon source of the future. LanzaTech then supplies the ethanol to Total, who turns that ethanol into ethylene and then polymerizes it to polyethylene. L’Oreal can then use the polyethylene to make packaging for their personal care products.

Making Polyethylene from Ethanol is old news

Braskem started a demonstration plant for turning ethanol into ethylene back in 2010 and Braskem has already made biobased polyethylene for packaging available. L’Oreal and Total are banking on LanzaTech to be able to turn emissions into ethanol to differentiate their polyethylene. The next hurdle for LanzaTech, Total and L’Oreal is to make their polyethylene cost competitive with Braskem’s and ideally polyethylene from oil.

The key takeaway here is where does ethanol for making ethylene and polyethylene come from? Braskem uses sugar and could be competitive for food production while LanzaTech uses waste emissions. Both processes make a material that needs to eventually be recycled back into a new polyethylene or depolymerized back to some sort of raw oil that can be repurposed.

Why doesn’t L’Oreal use a biodegradable plastic like PLA?

Readers of this newsletter might be aware of how polylactide is a compostable polymer that can be used in place of polystyrene. The problem with biodegradable polymers holding personal care products is that it might take someone a year or two to finish using the product. The main ingredient in personal care products is often water, which is a key component of degrading biodegradable plastic and having a bottle that degrades as it holds a cream that might go on your face just isn’t very appealing to me at least.

The next step LanzaTech, Total, and L’Oreal could work on besides pricing should be the end of life solution for their plastic bottles.

More Money More Innovation? Not Exactly.

Strategyzer published this in 2019, but I saw it recently so its news to me. They took some data from PwC and and Simon Kutcher Partners on how R&D spends generate return on investment and the perception of being an innovative company. They concluded that despite high R&D spending as a percentage of sales does not always translate to being perceived as being innovative. I would point out that the high R&D spenders with lower innovation ranks are pharmaceutical based companies while those with higher innovation ranks tend towards technology.

Does this mean Merck, Johnson & Johnson, and Roche are actually less innovative? No. Remember, this is an arbitrary ranking of innovation of companies that do completely different things. Is Amazon trying to figure out how to make cars, make computers faster, developing drugs or are they figuring out how to sell us more stuff?

It is not that I don’t think that innovations driven by computers and data are not innovations it is an unfair comparison to companies that build tangible things.

Additionally Strategyzer article they reference Simon Kutcher Partners as interviewed by Harvard Business School and go into depth on how thinking about pricing, positioning, and working with R&D functions early in the product development stage is critical for a successful product. Consumers might want X, Y, and Z, but they may not be willing to pay 20–30% more for those features.

This all seems like common sense, but if you have ever worked in a product development role you probably have a story about pricing mismatches or developing a product that the company is unwilling to invest capital to actually produce due to a predicted lack of return.

Product development is hard in technology and its even harder in the chemical industry where profitability typically requires production at scale, large investments, and compliance with local regulations.

Business Distillate

Perstorp released their interim Q3 earnings this week with significant declines in revenue due to the Covid-19 pandemic

Ineos also saw their Q3 EBITDA contract by 83 million Euros compared to Q3 2019 and was partially driven by Covid-19 lack of demand and they have a significant amount of debt on their balance sheet of 5.9 billion Euros, which is about 4x historical EBITDA. Ineoes has seen declines in revenue from 2018’s 16 billion Euros.

Sherwin-Williams announced they had an excellent Q3 with strong growth, likely driven by millions of people quarantined to their homes looking for projects to accomplish around the house.

Reuters has reported that Covestro’s Q3 is strong and represents consumer demand coming back in things like furniture. Covestro saw growth in their polyurethanes and polycarbonates business, but overall declines in their coatings, adhesives, and specialties segment. The growth from Covestro mirrors the results from Sherwin-Williams’ growth.

3M had a great quarter with sales being up year over year and reducing their debt by about $1.2 billion.

Eastman Chemical Company released their Q3 results and had one of the best quarters they have ever had from cash perspective and had demand come back from Q2.

ExxonMobil is cutting 1900 jobs on additional Corona virus fears, low oil prices, and lack of demand. The transition to electric cars, the massive reduction in air travel, and reduced gasoline consumption is tough on an oil company.

It seems that a diverse set of end markets for companies like Sherwin-Williams, Covestro, 3M, and Eastman have been beneficial to their shareholders. It will be interesting to see if companies look to take on more diversity in the next few years to in the event of another recession after we recover from this one.

The Polymerist

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The views here do not represent the views of my employers either past or present nor should they be considered investment advice or advice on how to handle or use chemicals.