Despite Hurricane Ida and Nicholas, affecting Louisiana and Texas, respectively, over the past few weeks, spot resin trading remained well off the active pace of the first half of 2021, reports the PlasticsExchange in its Market Update. Producers have been rebuilding resin stocks ever since the February freeze, and while some producers of both polyethylene (PE) and polypropylene (PP) remain on force majeure or have sales allocations in place, resin supplies have become more available, which has dampened spot buying activity. Spot resin prices have been easing and most PE and PP grades dropped another $0.02/lb this past week. Huge spot premiums have been eroding, as supply/demand fundamentals become more balanced. Historically, it is more typical for spot resin to transact around parity or at a discount to contracts.
PE contracts increased $0.41 to 0.43/lb since the beginning of 2021, and a total of $0.65 to 0.67/lb since the market bottomed in May 2020, including the last successful $0.05/lb increase implemented for July contracts. Producers were unable to push through another nickel in August; even though some limited production disruptions occurred because of recent gulf storms, it seems unlikely that the nickel increase will be secured in September, according to the PlasticsExchange.
Proposed PP margin-enhancing increase unlikely to succeed
PP contracts increased $0.57/lb in 2021, and a total of $0.885/lb since the market trough in May 2020. August PGP contracts were up $0.11/lb to $0.87/lb. With spot monomer prices coming under pressure, transacting in the $0.70s, but more recently in the lower $0.80s/lb, the PlasticsExchange expects September PGP contracts to slide a few cents. Monomer has been volatile, however, so this could change. PP producers will look to offset this PGP decline with another attempt at a $0.03 to 0.05/lb margin-enhancing increase, though it seems unlikely that they will succeed at this time. PP purchases for imports slowed dramatically over the past couple of months, as importer incentives have been greatly reduced by higher international resin prices and massive increases in ocean freight, which can equate to around $0.35/lb in terms of resin.
Further, importers have been hit by significant delays, as well as costly demurrage, port, and drayage fees, which have greatly eroded margins. Some delayed shipments continue to sail toward US shores, so material is still being offloaded at ports, but demand for new shipments has slowed substantially.
PE inventories reach record high
Both PE and PP producers have enjoyed extraordinary margins since the market took off in February, and their incentive has been to produce as many pellets as possible. In the meantime, international PE prices have been well below pricing in the Americas, which has significantly crimped US PE exports, contributing to a massive expansion in collective upstream resin inventories. This includes a nearly 100 million pound rise in August, bringing PE supplies to an all-time record high just shy of 5.9 billion pounds. PP inventories have also recovered dramatically to more than 1.6 billion pounds, which is the highest since last May, prior to producers purging inventories through export markets during the tail-end of COVID quarantine.
Domestic PE and PP demand has been very strong, particularly the last five months. Some of this was in response to increased consumer demand and reshoring efforts, with more product being made in the United States for domestic consumption rather than being imported from overseas. However, the PlasticsExchange believes that another driver of demand, particularly over the last couple of months, comes from processors procuring additional volumes to help pad on-hand inventory as a hedge against possible supply-chain disruptions during this hurricane season. Some of this demand may have been borrowed against future orders. Now that resin supplies are more plentiful, and the PE export market is running well below year-ago levels, continued pressure in spot pricing can lead to some contract price erosion in Q4, writes the PlasticsExchange. PP demand remains strong but is also susceptible to a market correction as forward PGP monomer costs are shown at increasing discounts from prompt levels. If the monomer market were to decline, some of the producer margin-enhancing PP increases could also start to peel off.
There are still potential issues ahead as we are in the midst of an active hurricane season and we have seen two disruptive storms already impact resin production. We advise overall caution in general to the resin markets, but stay tuned to market developments as changes can happen quickly.
PE spot prices relax
PE trading saw average volumes change hands the week of Sept. 13, as domestic spot prices shifted back to the downside following just over two weeks of stability. Nicholas took out one high-density (HD) PE unit in Texas because of widespread power outages, having seemingly no impact on the somewhat bearish market sentiment. HDPE Injection, 7 and 20 melts, are still difficult to procure, keeping the strongest premium out of all PE grades. But like HDPE Blow, Injection material is also starting to show a bit more. Spot high-molecular-weight Film prices have shed about a dozen cents from the top. Low-density (LD) PE and linear-low-density (LLD) PE film grades were also seen easing as supplies improved. PE producers have also lifted force majeures in recent weeks, but at least four companies still have them in place. PE prices probably will continue to soften and buyers will continue to negotiate for relatively smaller quantities anticipating lower prices ahead.
Spot PP prices tack downward
Spot PP prices came down amid slower activity, moderate to weaker demand, and growing inventories. A good flow of homo-polymer PP railcars were offered, hitting the full range from fractional melts up to melt blown material of 1500 melt. Co-polymer PP resins were also well represented. Resellers were seen offloading inventories, but the jump in PGP caused PP producers to hold fairly firm on their spot pricing, which kept PP from falling further, while patient buyers took a step back. Although upstream PP inventories could be considered ample, if not robust, producers have not necessarily offered their full availability of materials, still holding some back as a precaution during the hurricane season, which also comes amid a lack of imports to fall back on as a rescue valve. A handful of PP makers remain on force majeure, as well.
Read the full Market Update, including updates on PGP pricing and energy futures, on the PlasticsExchange website.