Resin trading activity stayed in the slow lane during the second half of July. There was a better flow of domestic supply, which was met by sporadic demand surges; spot prices were mixed as July came to a close, reports the PlasticsExchange in its Market Update.
Spot polyethylene (PE) grades held steady to a penny higher, while polypropylene (PP) grades slipped a couple of cents. Completed volumes and performance at the PlasticsExchange trading desk ran well above year-ago levels but only tallied around its 2021 average. Although activity has slowed, resin is still priced at historically lofty levels and remains in the vicinity of the records established during the first half of the year. Sentiment is shifting, however, as production and inventories have made great strides toward recovery. While numerous producers remain on force majeure and/or allocation, more demand is being satisfied by contracts, which is generating fewer urgent spot orders while other supply options also become available. This has brought meaningful resistance to high asking prices and, in many cases, suppliers have acquiesced by easing pricing to complete transactions.
Producers had nominated an average $0.05/lb price increase for July PE contracts, but even as the month has essentially ended, contracts have not been fully settled. Some participants believe contracts should roll flat; others believe the increase will take hold. We can envision a rare split result, with still scarce high-density (HD) PE resins taking the increase while low-density (LD) and linear-low-density (LLD) PE grades, which seem more balanced, roll flat, writes the PlasticsExchange. If the increase does not fully confirm for July, producers will take another swing at it in August. In case another major supply issue arises, another nickel rise is already nominated. PP contracts rose $0.02/lb in line with the rise in propylene contracts, but the $0.05/lb margin enhancer was pushed off for another attempt in August.
Resin imports stall
Resin imports, which have served as a relief valve for buyers, have hit the brakes. July saw a severe slowdown in new US orders for overseas resins that have yet to ship. The soaring cost of ocean freight and logistics delays have gotten out of hand, severely crimping traders’ incentives for more imports. Some shipping lanes have surpassed $15K/container (more than $0.30/lb), along with extended transit times, long port delays, and massive demurrage fees. Asian resin suppliers and ocean freight brokers clearly felt the sting and were seen lowering asking prices and freight rates late in the month trying to lure buyers back to deal. However, those caught up with late deliveries have generally opted to wait until the logistics mess clears before diving back in with another round of orders. They are also waiting to see if better domestic resin availability develops.
Despite resistance to price and a shifting in buyer sentiment, the fact remains that spot material in the United States is still very hard to come by and not readily available across the full slate of commodity grades, let alone specific brands, according to the PlasticsExchange. Producers are working toward rebuilding stockpiles, and industry data has shown significant recovery in collective producer inventories. PP has risen back above pre-February storm levels, and another large monthly build could vault PE inventories into record territory. The rebuilding of inventory also comes partly as a buffer to counter the potential of production disruptions from both upcoming planned maintenance and the chance of unplanned outages.
Resin production margins remain phenomenal, so incentives are to run reactors hard. However, the stockpiling of pellets cannot go on forever as storage and supply/demand/price fundamentals have their limits. Indeed, the PlasticsExchange has seen producers become more aggressive, with railcar demurrage policies urging quicker turnaround of these valuable rolling storage units. Absent additional production issues, at some point producers will need to heavily ramp up exports again. However, the visibility of high-volume incremental export sales and associated pricing could be detrimental to elevated and coveted domestic pricing. There is a delicate balance to navigate; in the meantime, inventories for some materials are beginning to bulge.
PE production recovering, but prices remain high
PE trading remained healthy the last half of July. While production has been recovering and upstream inventories are swelling, overall spot resin continued to be snugly supplied, keeping prices buoyed near record levels, according to the resin clearinghouse.
Spot PE prices finished the week of July 26 steady to higher; based on grade, they were flat to up $0.04/lb during the month of July. Meanwhile, supplier efforts to extend contract price increases into July for an eighth consecutive month are now expected to run into early August. PE contract prices for July were seemingly on their way to a flat settlement, but negotiations have intensified as some grades reached new highs in the spot market.
Overall PE supplies are still on the road to full recovery and susceptible to additional disruptions, including a tragic incident that occurred last month. One producer was forced to shut PE and olefins production at its Texas facility following a leak at a nearby acetic acid unit, which sadly left two people dead and 30 workers hospitalized. The PE unit was expected to restart within the week. Another producer’s HDPE unit in Texas went down earlier in the month and is possibly down until September. On top of that, at least four PE producers are still on force majeure and/or sale allocation programs.
HDPE Blow Mold and Injection grades were still the tightest materials, commanded the largest premiums, and supported the $0.05/lb increase that was on the table for July. Better improvement was observed in LDPE and LLDPE film grade supplies and their spot prices did not advance much during the month, complicating PE price increase negotiations, notes the PlasticsExchange. This could be a good case for a split increase, as PE grades do not all dance to the same beat. If the July price initiative does not go through, producers will still be pushing for their nickel increase on all commodity grades for August contracts. PE contracts had relentlessly increased 11 of the past 13 months — October and November being the exceptions — rising some $0.60/lb along the way because of limited availability, strong buyer demand, and premium spot levels.
PP gave back a penny this week for both homo- and co-polymer grades alongside slower than usual trading. With monomer costs on the rise again, spot PGP is back above $0.80/lb. A long series of margin-enhancing increases taking hold during this bull run has contract prices trekking higher toward the spot levels that have been established for nearly six months. Overall PP supply availability remains relatively snug, but as production improves, an increasing number of processors are satisfying their demand needs through their direct producer contracts, reports the PlasticsExchange. High volumes of PP have been imported to help fill the gap in domestic supplies, and together this has reduced the intensity of spot demand, resulting in price consolidation as the floor price rises while the top of the market trims back a bit.
Force majeure relief may be on the way
At least seven PP producers still have a force majeure or allocation in place, but more relief may be on the way, according to the PlasticsExchange. One resin producer said it plans to partially end its force majeure on PP from a Texas facility around the start of August. However, that supplier let it be known that exiting force majeure will not “open the door to unlimited supply” and it would need additional time to rebuild inventories to reasonable levels, especially during hurricane season.
Another supplier is also looking to bring back full PP production at its Louisiana facility after a lightning strike took the entire complex offline earlier in the month. The producer is operating one of two PP lines and has no definitive restart date for its other unit. PP producers will also revisit the $0.05/lb margin-enhancing price increases in August. The July PP contract price rose $0.02/lb, following the July PGP contract price increase of the same size, which ultimately settled at $0.76/lb. Sellers were pushing for July contract increases of $0.03 to 0.05/lb, in addition to the change in July PGP.
Elevated PE and PP pricing has been prevalent for almost six months, and at times the market gets tired and buyers scatter, but then return without receiving much price relief. These higher resin prices have had plenty of time to work their way downstream, yet consumer demand still remains strong and the rally endures. PlasticsExchange analysts view this as a cautious time, and the resin clearinghouse said that it has somewhat reduced its market-making inventories. Aside from another series of disruptions that could come, there seems to be little upside compared to the chance for a downside move developing. Still, we are entering the thick of hurricane season, which is when the entire US Gulf refining and petrochemical infrastructure is especially prone to production and logistics issues. It has been a quiet hurricane season so far, but the strongest three months still lie ahead.