By Avi Salzman
As rising interest rates interest rates pummel the housing market, the ripple effects are spreading far and wide. The price of lumber, for instance, is down some 60% this year as home builders retreat. Some less visible components of houses are also taking big hits.
Consider PVC piping, a simple but versatile piece of equipment that is used for plumbing and other home projects. The average spot price of PVC is down 86% quarter over quarter, according to the energy research firm and investment bank Tudor, Pickering Holt & Co., cutting deeply into the profitability of companies that sell it.
PVC is made from ethylene, a petroleum product, and some oil producers have a big market share in producing it. For instance, Occidental Petroleum's (ticker: OXY) Oxychem division is one of the three largest suppliers of PVC and a material called vinyl chloride monomer that is the key ingredient in PVC, the company says.
Other petroleum-based products are also struggling as the economy slows. The price of polyethylene, which is the most widely used plastic and is found in plastic bottles and bags, is down 24% in the latest quarter. Polypropylene, used in everything from food storage containers to vehicle parts, has fallen 32%.
Tudor Pickering analyst Matt Portillo lowered his estimates for Occidental's adjusted earnings last week because of the weakness in PVC pricing. Portillo writes that PVC pricing is in "absolute free fall."
Occidental is one of the most versatile energy companies in the United States, with significant chemicals and pipelines businesses, and a nascent carbon capture division. Chemicals is a particularly important area for the company, given that it can provide steady profits even when oil and gas prices are low. In the latest quarter, chemicals made up 25% of Occidental's adjusted income. The Oxychem unit stayed profitable even at the height of the pandemic, when the oil and gas division was losing billions of dollars.
Occidental's stock is up 112% this year, and Warren Buffett's Berkshire Hathaway $(BRK.B)$. has been scooping up shares. It now owns more than 20% of the company. But Portillo expects weakness ahead. He rates the shares at Hold with a $58 price target. Shares were trading around $66 on Tuesday.
Write to Avi Salzman at avi.salzman@barrons.com
(END) Dow Jones Newswires
October 05, 2022 08:37 ET (12:37 GMT)
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