Bipolar best describes spot resin trading of late, as activity slowed significantly the week of Dec. 5 from the rapid rate of the previous week, reports the PlasticsExchange (Chicago) in its Market Update. Offers remained heavy through mid-week and then started to dry up. This triggered the first uptick in spot pricing—albeit just a half cent—across the full slate of polyethylene (PE) and polypropylene (PP) grades in more than two months. December could be a tricky month: There have been occasions when material was aggressively discounted through the end of the year, and other times when the month’s main business concluded early, with spot material very hard to source. It is starting to feel that after a strong down-leg, the commodity resin markets could be finding a bottom and that December could be a transition month this year, suggests the PlasticsExchange.
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The PE market quieted down last week, and transacted volumes were only about average. Processors remained bearish and dropped their bid prices further, but the flow of offers began to slow and suppliers generally stopped chasing orders at levels deemed unreasonable. Perhaps some resellers were feeling exposed, having already sold too much resin short. By the end of the week, it seemed that PE prices could have bottomed, at least in the spot market. It is still too early to make a firm call, but, at a minimum, sentiment has shifted to at least neutral.
Spot PE notched a $0.005/lb gain this past week, but it still has a long way to go before it closes the gap to contracts, which are still at a large premium. November PE contracts decreased $0.03/lb, and while an additional decline of $0.02/lb or so makes sense, producers might play coy for another couple of weeks, lean on export channels, talk up the rally in crude and try to hold domestic contracts steady in December.
Despite the strength of the U.S. dollar, ultra-aggressive resin pricing has helped to keep export volumes high. It is estimated that nearly 850 million pounds of PE was sent offshore in November. If the figure holds, it would represent about 25% of total PE sales, which is an astounding, rarely seen number. It appears that December could also be setting up for another monster month for exports, as Houston warehouses are still mostly full and the rail lines are congested (which, incidentally, is also causing packaging delays and logistics issues).
PP trading was good, but off the pace of the previous week. While pricing remained super sharp, and relatively large volumes of off-grade PP for export transacted in the high $0.30/lb range, pockets of supply have been thinning out. Packaged prime PP commanded more than a nickel premium and not all grades were represented. There were still deeply discounted off-grade railcars available to the domestic market, but the material has turned rougher and was not near-prime.
November PP contracts averaged down $0.06/lb, but December PP is uncertain. While resin contracts have again become well-correlated to monomer, and December PGP has some downside, the break in PP prices already feels exhausted. Producers dramatically cut PP operating rates in November and picked up the pace of exports; this has gone a long way toward eliminating the burdensome resin overhang and rebalancing supply and demand dynamics. In addition, both the quantity and quality of fresh spot railcars has recently diminished, which is evidence that this trend of reduced production has continued in December.
Processors have limited their PP purchases, anticipating still lower prices ahead, but the practice has likely gone on too long. After such a large decline in resin prices, the PlasticsExchange feels that additional downside is limited, or even at zero, while the chance for upside to prices is growing. Given current market fundamentals, analysts advise replenishing inventories at these compelling levels, as higher PP prices are expected in the first quarter of 2017.
Read the full Market Update on the PlasticsExchange website.