Morgan Stanley sees chemical spreads normalizing sooner than expected

Investing.com -- Morgan Stanley revised its outlook for upstream chemical spreads during a Global Chemicals Webcast on Tuesday, with analysts now expecting normalization by the end of 2026 rather than mid-to-late 2027.

The investment bank said consensus views have shifted toward earlier spread normalization, though recent developments in the Iran conflict could affect flows through the Strait of Hormuz. Morgan Stanley anticipates spreads will narrow, particularly given the risk of demand moderation in the second half of 2026.

The firm said chemical companies will likely provide conservative guidance for the third and fourth quarters of 2026 due to the mixed demand environment and ongoing spread reversal. This approach may help companies secure better price settlements for July.

China's chemical exports declined month-over-month in June but remained higher year-over-year, according to Kaylee Xu, Morgan Stanley's China Chemicals Analyst. The Middle Eastern conflict has not affected Chinese export levels year-to-date. Chemical plant utilization rates have stayed stable since April, with ethylene cracker operating rates at approximately 78-79%.

Product spreads for April and May remained above January-February levels as feedstock prices decreased. Demand in Asia remains weak, with downstream companies not restocking despite likely low inventory levels.

Morgan Stanley said El Niño conditions could have a neutral to positive effect on crop inputs. The weather pattern typically has a stronger negative impact on the Southern Hemisphere, potentially delaying soy planting and affecting the second corn crop in Brazil. This could push soy and corn prices higher, positively affecting the Northern Hemisphere crop season and potentially increasing planted acres during the 2027 U.S. spring planting season.

The bank upgraded Air Liquide to Overweight, viewing the company as relatively attractive within the chemicals sector. Morgan Stanley projects Air Liquide's Electronics segment will grow at approximately 9% from fiscal 2026 to 2028, above the consensus estimate of 7%, supported by a strong backlog growing six times faster than its closest competitors Linde and Nippon Sanso.

Morgan Stanley also added Shenzhen Capchem to its Overweight list. The company supplies cooling and cleaning chemicals to semiconductor facilities in Asia. Xu expects electronic chemicals to represent 24% of sales by 2028 from 15% in 2025, and 40% of gross profit by 2028 from 30% in 2025.

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