BofA Downgrades LyondellBasell, Dow, Says Polyethylene Producers Face Margin Pressure

The rebound in polyethylene is likely to be more challenging and companies like LyondellBasell Industries NV LYB and The Dow Chemical Company DOW could generate only modest earnings gains through 2021, according to BofA Securities.

The LyondellBasell, Dow Analyst

Steve Byrne downgraded LyondellBasell from Neutral to Underperform and raised the price target from $53 to $57.

The analyst downgraded Dow Chemical from Buy to Underperform with an unchanged $37 price target. 

The LyondellBasell, Dow Thesis

The chemicals sector is facing demand shocks due to the coronavirus-induced decline in auto production, construction, gasoline consumption and industry operating rates, Byrne said in the Monday downgrade note. (See his track record here.)

While polyethylene producers have witnessed healthy demand, driven by increased packaging needs, they are headed for significant supply-driven margin pressure, he said. 

Byrne said he expects supplies to expand at a compounded annual growth rate of more than 6% in China from 2020 to 2022.

Lyondell To Face Severe Margin Pressure

While oxyfuels and gasoline crack spreads will likely rebound in the back half of 2020, with demand for transportation fuels stabilizing, olefin margins could remain under pressure beyond 2020, the analyst said. 

Dow Chemical’s Return Profile Takes A Hit

The company reported disappointing first-quarter results driven by weakness in the Packaging & Plastics division, Byrne said.

This could continue, as polyethylene pricing pressure builds in the second quarter and continues through the third, the analyst said. 

DOW, LYB Price Action

LyondellBasell shares were down 3.94% at $52.94 at the time of publication Monday, while Dow shares were down 4.54% at $32.37.

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