Weekly resin report: Bullish pricing signals getting louder

Spot resin trading, again, was slower than normal. The PlasticsExchange (Chicago) describes the overall mood of the resin market as cautious in its weekly market update. Ongoing bearish factors are starting to run out of steam, while potentially bullish signals are beginning to appear. On average, polyethylene (PE) and polypropylene (PP) prices steadied. While some other grades eased further, the bottom end of PE began to clean up, both in terms of price and availability. Despite sporadic volatility, there was little net change in upstream energy and feedstock costs, according to the PlasticsExchange. 

After a seven-month downward trend, which saw PE contract prices erode $0.15/ lb, the market seems to be consolidating and could be heading into a period of transition, note PlasticsExchange analysts. While PE contracts have decreased as much as $0.03/lb in February, some producers are showing resolve, officially lowering contracts by $0.02/lb, but still reportedly meeting competitive offers. In an attempt to stop the slide and eventually prop up prices, all major PE producers issued a $0.05/lb increase for March. However, as we have seen repeatedly, a price increase nomination does not translate with certainty into timely implementation.

Absent an unexpected and, unfortunately, usually tragic event before a PE downtrend reverses, fundamentals need to shift, which requires at least a month or two of flat pricing. In fact, for at least the last three years (then memories begin to fade), there has not been a single occasion where a price increase has immediately followed a price decrease. In this case, bucking that trend could be a tall order and producers would likely smile to see contracts simply hold steady in March.

While acknowledging some current reactor issues and the need to build inventory for some planned maintenance ahead, collective producer PE inventories swelled a massive 365 million lbs during January, the single largest monthly build in more than seven years. Overly abundant supplies caused prices to drop in excess of the $0.05 to 0.06/lb decrease for January/February contracts in the domestic spot and export markets. Still, change could be coming . . .

Although well-priced material is still available in Houston across all commodity grades, volumes have thinned out and sometimes there is just a supplier or two at the low level, reports the PlasticsExchange. If that is taken out, the next best price is already $0.02 to 0.03/lb higher.

Spot PP trading remains challenging from the resin supplier perspective. A wide range of prices co-exist in the marketplace, and off grade was recently discounted to prime. While a growing amount of supply is accumulating around the country—much of it imported prime—material is well spread out, making the market somewhat illiquid. This is contrary to market conditions of years past, when spot demand was served with a liquid supply of fresh shippable railcars. U.S. PP prices are well above the levels in most other international regions so exports have been minimal (1 to 3% of production) and are primarily limited to off grade. There is very little domestic prime available, even in Houston warehouses.

Despite notable resistance, producers seem intent on expanding margins again. PP contracts have become about as fragmented as supply, so there is variance among market participants as to the magnitude and timing of price increases. February is seen as the opportunity to implement the balance of the $0.06/lb margin-enhancing increase, note PlasticsExchange analysts. If fully secured, that would translate to a net $0.04/lb increase in resin prices for this young year, accounting for the January/February $0.02/lb decrease in PGP monomer costs.

Now into the second year of tight supply/demand dynamics, some processors continue to ease their expectations as they seek to supplement their insufficient contracted resin with spot material. Companies that once restricted their purchases to branded prime are warming to generic prime alternatives. The stigma that imported resins are of lower quality are fading away, as new world-class reactors are built in the Middle East and Asia. Railcar-only buyers are willing to take in gaylords and (gasp!) sometimes even 25-kg bags. And what is that, off grade, you say? Sure send it in, as long as it's good color and melt flow consistent.

Read the full Market Update on the PlasticsExchange website.