Spot resin trading activity improved the first full week of October. Prices for polyethylene (PE) fell 2 to 3 cents and polypropylene (PP) came off at least a nickel, triggering better demand and stronger completed volumes, reports the PlasticsExchange in its Market Update.
While there were fewer deeply discounted offers than at the end of September, a broader range of grades were available at lower prices, which seemed to leak a bit during the latter part of the week. Some processors that typically tap the spot market for both PE and PP supplies were pleased with the cheaper materials and picked away with purchase orders, albeit only as needed rather than really restocking. However, many other processors remained on the sidelines, opting to work down on-hand inventories built up during the summer as a physical hedge against potential hurricane-related disruptions.
Hurricanes Ida and Nicholas did cause some production issues in late August and early September, but they were relatively benign, especially taking into account considerable collective producer inventories that have been growing since March. While producer direct export programs continued to provide a strong base of export sales, incremental exports through traditional broker channels had been minimal through the summer. In the meantime, resin reactor rates remained robust, so as the inventory rebuild became untenable, some material needed to purge. These channels only began to be utilized at higher volumes in the later part of September, as producers reduced export offering prices substantially to move a greater volume of material. The PlasticsExchange believes this trend will continue.
PE producers successfully implemented $0.41 to 0.43/lb price increases since the start of 2021. However, the last two attempts at an additional $0.05/lb failed to develop in August and September. A third attempt at a nickel increase is in place for October, although current spot levels make it extremely doubtful that the increase will take hold. While it is entirely possible that October PE contracts roll steady once again, an official price decrease could also be warranted after such a long series of increases and considering that discounted domestic shipments have now become more prevalent, according to the PlasticsExchange.
PP contracts are up $0.57/lb January through August, which consists of $0.385/lb for monomer and $0.185/lb of net margin increases. PP contracts were down $0.03/lb in September, commensurate with the decline in PGP contract prices. The last couple of margin-enhancement attempts also fell on deaf ears and the renewed attempt in October seems very unlikely to succeed. In fact, given the slide in spot PGP monomer, the PlasticsExchange currently expects a large single-digit drop in October PP contracts that could grow to double digits. But there is still plenty of time for monomer to move around before contracts are negotiated.
Analysts are seeing spot pricing discounts for generic prime and wide-spec PP resins that exceed the slide in spot monomer. While some margin erosion can also be justified, the major indices ultimately could be generous to producers and keep margin levels intact by only relieving October PP contracts in line with the drop in PGP costs. The PlasticsExchange notes that it was very bullish through the first seven months of the year, became neutral in August, and then bearish in September, long ago forecasting a 4Q decline, which could be quite steep. “Indeed, we are seeing the market unwinding, as expected,” writes the PlasticsExchange in its Market Update.
Both PE and PP prices are peeling off from record levels; they are not in relative freefall, although there may be more downside ahead. Countering this are concerns surrounding insufficient power in China, which has already begun to curtail petrochemical and resin production at certain plants. This could ease global supply concerns while already lifting Asian resin prices. Do note, however, that Asian resin prices have been significantly below North American levels, and as these regional prices are moving to close the gap, there is still some way to go before the arbitrage to Asia really opens up, according to the PlasticsExchange.
North American PE producers continue to enjoy a substantial cost advantage over the majority of their international resin-producing counterparts and have the ability to become as competitive as needed in international markets. However, some time is required to reopen these channels to more robust levels. The PlasticsExchange expects the import/export balance to shift, particularly in PE, as outgoing ocean freight is quite cheap compared to import ocean freight, and US producers have plenty of resin to send offshore. At some point, perhaps in the next few months, the resin clearinghouse anticipates that massive exports will develop to clear some or much of the burdensome inventory overhang.
Not only has the US resin market become accustomed to a much higher overall price level, but inflation concerns also have become prevalent, along with the feeling of scarcity brought about by supply chain disruptions in our industry and beyond. While all markets cycle, and a correction is currently at hand, at least in the spot market, an overall elevated price level is expected to remain for the foreseeable future.
As supply/demand becomes more balanced and, in some cases, even oversupplied, grades that had garnered the largest premiums could see the quickest erosion. As such high-density (HD) PE Injection and Blow Molding grades have started to unwind, as have PP block copolymers and random clarified resins. Though some PE grades still remain scarcely supplied, such as low-density (LD) and linear-low-density (LLD) PE for both Injection grades and Rotomolding resins.
Polyethylene trading volumes were below average the week of Oct. 4, as padded inventories and a loss of appetite for spot resin led to further price erosion. The broader range of grades that were made available and changed hands this week included HDPE Blow Mold and Injection, which had been the most difficult of the commodity grades to procure this year. It is worth noting that better availability for HD Blow and Injection has been eating away at the large premiums that have been in place since February. Film grades, which generally have been more abundant and easier to source, were more active, with LDPE Film changing hands the most alongside one-off deals for LLDPE Film and high-molecular-weight Film. Although PE spot prices have fallen due to more availability of supply, a few producers remain on force majeure, some PE units remain down in Louisiana following Hurricane Ida, and maintenance outages are still planned throughout Q4.
Spot PP resin prices had their deepest declines of the year, with a $0.06/lb drop caused by further improvement in availability, softer spot demand, and falling feedstock PGP prices, giving buyers a reason to push back non-urgent procurement needs. There were heavier offerings of packaged or ready-to-ship off-grade railcars, a handful of Generic Prime railcars, and a lot of imported Prime truckloads, both soon to be landed and ready to ship. There were also a few domestic Prime truckloads finally making their way into the market; it is worth noting, however, that those truckloads are mainly the most common grades of homo-polymer PP, while Prime domestic co-polymer PP was still very difficult to source, especially high impact and No Break. The PlasticsExchange expects PP prices to continue to decrease based on lower monomer costs and PP supply/demand fundamentals.
Read the full Market Update, including updates on PGP pricing and energy futures, on the PlasticsExchange website.