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Citi Downgrades Dow and LyondellBasell to Neutral, Citing Weak Polyethylene Demand
Summary
The bank lowered its price targets for both chemical companies, arguing that weak end-market demand is overriding support from high oil prices and will cap gains for polyethylene.
Citi downgraded chemical giants Dow and LyondellBasell to Neutral from Buy on Wednesday, concluding that persistent demand weakness will limit any significant upside for polyethylene (PE) prices, even with crude oil trading above $100 per barrel.
Price Targets and Estimates Cut
In its note to clients, the bank reduced its price target on Dow to $30 from a previous $35 and on LyondellBasell to $63 from $72. Citi stated that both targets are based on a valuation of 7.3 times its 2027 EBITDA estimates for the companies.
"We no longer have conviction on asymmetric upside for PE prices, even at $100 crude," Citi analysts wrote. The bank's long-term forecast for Brent crude at approximately $66 a barrel in 2027 suggests potential downside risk to its earnings estimates for both firms.
Demand Destruction Overrides Oil Strength
While a 5-cent-per-pound price increase for polyethylene is anticipated in October, Citi expects weak demand to prevent further gains. The bank noted that the third quarter demonstrated that "demand destruction overrules geopolitical feedstock support," even as the spread between oil and natural gas prices widened.
AdAccording to the analysis, higher global feedstock costs resulting from geopolitical conflict are being partially offset by alternative production methods in China. This dynamic is capping the potential for sustained price increases in the polyethylene market.
Balanced Risk Profile
Citi now views the risk-and-reward profile for both stocks as balanced. The bank acknowledged positives, including ongoing cost-saving initiatives, strong cash generation, and a modestly constructive outlook for MDI at Dow and oxyfuels at LyondellBasell. However, the primary risk remains potential margin erosion if oil prices were to decline.
Reflecting broader sector pressures, Citi also lowered its estimates for Westlake Chemical. The bank cited lower polyethylene and PVC prices combined with higher energy and diesel costs, forecasting a sequential EBITDA decline of approximately $250 million for the company.
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