Spot resin trading continued to improve the week of March 6, reports the PlasticsExchange (Chicago) in its Market Update. Transacted volumes were quite healthy, while spot prices, which have been soaring, eased back a penny across all polyethylene (PE) and polypropylene (PP) commodity grades.
Although the flow of fresh railcars remained sporadic, resellers have become more liberal in offering material into the secondary market, providing relatively good liquidity. PE and PP producers have secured sizable increases so far in 2017 and are seeking to advance contract prices further in March. While momentum is still bullish and fundamentals can potentially support another increase, a sudden sell-off in crude oil might sap some of the market’s enthusiasm, especially PE export demand, which has already been languishing.
|Image courtesy Cool Design/|
PE buyers that have been holding back purchases reappeared to procure material as their inventories began to run low. Despite the very real possibility that March contracts could see another increase take hold, some resin suppliers with uncommitted inventory got spooked by a nearly 10% drop in crude oil prices and its potential to shake market sentiment. The PlasticsExchange noted several weeks ago that there seemed to be unexpected resin production issues on top of planned maintenance. “We felt this because of the quick dime break in ethylene monomer amid healthy PE margins, which was further backed by the lack of spot material, even while the incremental export arb was largely closed,” writes the PlasticsExchange in its update.
Preliminary reports support these thoughts, as February PE reactor rates fell to the mid-80% level, generating the lowest resin production in 28 months. And indeed, PE exports were almost 500 million lb less than the record level achieved in December 2016, and ran 15% below the trailing 12-month average. Domestic demand was only average in February and led to the third consecutive drawdown in producer stocks, beginning March with the lowest upstream PE inventory since February 2013. A $0.11/lb increase over two months can be hard to swallow, but the likelihood of the March $0.06/lb taking hold is growing, according to the PlasticsExchange. PE producers are well capitalized and, with very light inventory on hand, are easily in a position to manage a poor demand month in exchange for another price increase.
PP trading was lackluster, as demand continued to disappoint. Although resin contracts again will increase in March, adding to the $0.165/lb already implemented in January/February, packaged spot availability remains relatively good and surprisingly well-discounted to general contract levels. Certain resins are, however, hard to come by, and chasing those prime railcars would be an expensive endeavor. Rapidly rising propylene monomer costs have encouraged PP producers to revert back to the practice of tying price increases to the rise in PGP monomer. Based on current spot PGP levels and its historic relationship to contracts, another cost-push price increase on the order of $0.06 to 0.09/lb can be seen this month, according to the PlasticsExchange.
PP reactors ran around 90% in February, producing an average amount of resin compared with the trailing 12 months. Domestic demand languished around 5% below average; however, exports really took it on the chin. They fell to their lowest level in a full year, back to approximately 25 million lb, a more traditional figure. All in, after three months of sharp draw downs, producers built close to 90 million lb of inventory, somewhat replenishing coffers, but still began March about 10% below the 12-month average.
Read the full Market Update on the PlasticsExchange website.